Dr Pepper Snapple Group Management Discusses Q4 2012 Results - Earnings Call Transcript

Feb.13.13 | About: Dr Pepper (DPS)

Dr Pepper Snapple Group (NYSE:DPS)

Q4 2012 Earnings Call

February 13, 2013 11:00 am ET

Executives

Carolyn Ross - Vice President of Investor Relations

Larry D. Young - Chief Executive Officer, President, Director, Member of Special Award Committee and Member of Capital Transaction Committee

Martin M. Ellen - Chief Financial Officer and Executive Vice President

Analysts

Judy E. Hong - Goldman Sachs Group Inc., Research Division

Stephen Powers - Sanford C. Bernstein & Co., LLC., Research Division

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Kevin M. Grundy - Morgan Stanley, Research Division

Kaumil S. Gajrawala - UBS Investment Bank, Research Division

Mark D. Swartzberg - Stifel, Nicolaus & Co., Inc., Research Division

Operator

Good morning, and welcome to Dr Pepper Snapple Group's Fourth Quarter and Full Year 2012 Earnings Conference Call. [Operator Instructions] 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.

Carolyn Ross

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.

Larry D. Young

Thanks, Carolyn, and good morning, everyone. As I'm sure you read in this morning's press release, we had a solid finish to 2012, a year marked with economic uncertainty and cautious consumer spending. And today, we announced a 12% increase to our quarterly dividend to $0.38 per share, our fifth increase since becoming a public company, further demonstrating our commitment to return our excess cash, free cash to our shareholders over time.

Before I review results for the quarter, let me recap some of our wins in 2012. Our team once again persevered in a highly competitive environment and executed against our very focused strategy.

We increased distribution and availability on our key brands and packages, with CSDs ACV up 0.5 in grocery and up 0.2 in convenience.

In grocery, Mott's juice posted a gain of 1.8 points, and Snapple gained 4.3 points. And while shelf space remains tight, our Snapple 16-ounce glass package gained 6.7 points in the convenience channel.

We also increased our trial and sampling occasions, with just over 45,000 new fountain availabilities and 14,000 net new cold drink equipment placements, giving more consumers the opportunity to enjoy our flavorful brands when they are away from home.

We invested behind our well-loved brands, with market investments up $21 million, or 5%, versus 2011. And our marketing team continues to raise the bar, ensuring that our program not only builds awareness and brand equity, but also drives consumer purchases.

With a full year support behind Dr Pepper TEN, the Dr Pepper trademark grew dollar share by 0.2 in Nielsen channels. Dr Pepper TEN now holds a 0.3 share of the CSD category, and more importantly, has brought new and lapsed consumers back to the category.

Through its first year of launch, over 55% of Dr Pepper TEN's volume was incremental to the CSD category, and it grew Dr Pepper trademark household penetration by 3 million households. Based on this early success, we introduced TEN versions of 7UP, Sunkist, A&W, Canada Dry and RC in select test markets, and I'll talk about those results in just a few moments.

We launched Snapple Diet Half 'n Half Lemonade Iced Tea, and it quickly became the fourth fastest selling product in the Snapple portfolio. And we continue to engage our consumers in new and innovative ways.

Our Core 5 Facebook credits program was the first of its kind in the marketplace, and we made every consumer of our Core 5 20-ounce bottles a winner by placing Facebook credits under the caps, which they can redeem for music, games and more.

We partnered with America's Got Talent, the #1-rated summer show, and gave our consumers a chance to win a VIP trip to see the talent finale. And we owned the college football season, giving deserving students a chance to win $100,000 in tuition to make their college dreams come true.

Rapid Continuous Improvement is becoming the foundation of how we operate, and I'm pleased with the level of engagement we're seeing among our employees. Since launching RCI, over 3,000 of our people have participated in over 200 kaizen events, and we've identified over $116 million of annualized cash productivity.

And finally, we returned $684 million to our shareholders in 2012, with $400 million in share repurchase and $284 million in dividends.

Now moving on to results. For the quarter, bottler case sales were flat on 2 percentage points of price and mix. Dr Pepper declined 1% as we cycled the national rollout of Dr Pepper TEN in the fourth quarter of 2011. Our Core 5 brands increased 3%, led by an 8% increase in Canada Dry and low single-digit increases in Sunkist and A&W. 7UP was flat and Sun Drop declined. Hawaiian Punch decreased 8%, while Mott's returned to growth, posting a 2% increase for the quarter. Snapple increased 1% in the quarter. However, sales were negatively impacted by Hurricane Sandy in the Northeast, Snapple's heartland, which we estimate negatively impacted Snapple's growth in the quarter by approximately 3%. All other brands increased 2% for the quarter, led by a 34% increase in Clamato and an 8% in Peñafiel, which were partially offset by declines in Welch's.

For the full year, bottler case sales declined 1% on 4 percentage points of price and mix. Dr Pepper was flat for the year as growth from Dr Pepper TEN and the fountain business was offset by declines on the base business. Our Core 5 brands were also flat for the year as gains in Canada Dry were offset by double-digit decline in Sun Drop and declines in 7UP and Sunkist. Hawaiian Punch decreased 17%, and Mott's declined 7% as both brands cycled price increases through the third quarter and the second quarter, respectively. Snapple grew 3% for the year, lapping 7% growth on new product and packaging innovation. All other brands were flat for the year.

On a currency neutral basis, our net sales increased 1% for the quarter, reflecting 2 percentage points of price mix, partially offset by lower volumes. Segment operating profit increased 5% for the quarter with revenue growth of favorable legal reserve comparison, ongoing productivity improvements and lower market investment, partially offset by planned labor and benefit increases and a $6 million increase in our LIFO inventory provision, primarily to the higher prices we had to pay for apples.

For the year, segment operating profit increased 3% as net sales growth of 2% and ongoing productivity improvements were partially offset by higher packaging and ingredient cost, planned increases in labor and benefits and a $21 million increase in marketing investments.

Core EPS was $0.82 for the quarter and $2.92 for the year, a 2% increase over 2011.

Now let's spend a few moments talking about our 2013 priorities and plans. It's no surprise consumers are becoming more health conscious every day. But when purchasing beverages, taste still reigns. That's why we created the TEN platform. It gives consumers the same great taste and mouthfeel of a regular soft drink but with only 10 calories per 12-ounce serving. Said another way, you can get both. It's imperative that we bring new and lapsed consumers and excitement back to the CSD category, so we're launching TEN versions of 7UP, Sunkist, A&W, Canada Dry and RC nationally this year. We believe these great-tasting products, together with strong marketing and in-store activity, will help reenergize the category.

We'll invest heavily behind this critical platform, which includes Dr Pepper TEN, with brand investments associated with TEN expected to exceed $30 million in 2013. And we'll engage consumers through all media channels with meaningful equity building communications.

We'll continue to focus investments to develop key low per cap markets behind brands, such as Dr Pepper, Canada Dry and Snapple.

Execution is the heart of this business. And through our third-party bottling partners and our own DSD, we will strive for excellence, gaining incremental displays, points of interruption, while ensuring that we always have the right product and the right package at the right price. Growing consumption in single serve remains key to our goal of growing per caps over the long term, and we will continue to increase fountain availabilities and make profitable cold drink equipment places -- placements, ensuring that consumers can enjoy our flavorful brands at work and at play.

We'll increase our focus on winning with Hispanics, capitalizing on their preference for flavor with strong national and local programming and a new feet on the street team dedicated solely to retail execution and local community involvement and activation. And as I said earlier, I'm pleased with our employees' engagement in RCI, and I'm very proud of our accomplishments to date. Marty will tell you more about the next phase in our RCI journey in just a few minutes.

I said earlier that we must reenergize the CSD category, and the TEN platform can do just that. In test markets, over 7% of the volume from the Core 4 and RC trademarks came from TEN, and 40% of TEN's dollar sales were incremental to the CSD category. I think you'll agree, those are compelling results.

We'll support this critical platform launch with a multiyear marketing program and strong activation in-store. Our media programming includes national and local TV, radio, online and out-of-home. Giving consumers the opportunity to taste these products is key, so we'll give away over 1 million cans across the country and have targeted couponing programs to stimulate trial. Our in-store merchandising and point-of-sale will be supported with shopper programs, and our breakthrough graphics will help consumers easily identify and understand the platform.

We know we have a winner here. What's required is patience, because changing consumption habits takes time. And TEN is not all we have going on. We're celebrating what makes each one of those a kind with Dr Pepper "/1" campaign, showcasing unique individuals and highlighting what makes them one of a kind. And for the first time, the campaign will feature both regular and Diet Dr Pepper.

Dr Pepper once again will be the proud sponsor of ACMAs, featuring Luke Bryan, and we'll give consumers a chance to win a trip to Las Vegas to walk the red carpet with him. The program will feature the entire trademark and will help drive incremental displays at retail.

We'll connect with the Hispanic consumer through our partnership with Lucha Libre, a popular wrestling association with strong Mexican heritage.

Our Core 5 Facebook credits programs was a success last year, driving above-category growth on regular 20-ounce bottles and adding more than 4 million new fans across our brands' Facebook pages. So we're repeating the program in 2013 but making it even easier for consumers to redeem their credits with new mobile functionality.

We're driving our Diet portfolio, too, with a national FSI drop and merchandising kits, featuring our better-for-you products. Speaking of better-for-you, our real Ginger Canada Dry ads will be airing in the first half, helping to drive continued gains on the trademark.

Capitalizing on the success of Snapple Diet Half 'n Half, we're launching a regular version nationally and integrating it with our "Win nothing instantly!" under the cap promotion that gives consumers the chance to win no rent or no bills.

And we'll continue to drive distribution and availability of our allied brands, such as Vita Coco and Fiji, which are leaders in their category, allowing us to compete in adjacent and growing categories. Combined, these 2 brands grew 21% in 2012, and there's still plenty of runway there.

I'm sure you can see why I'm excited about 2013. Now let me turn the call over to Marty to walk you through some of our financial results and our 2013 guidance.

Martin M. Ellen

Thanks, Larry, and good morning, everyone. With respect to financial results, reported net sales for the fourth quarter were up approximately 2 points, with price and mix up roughly 1 point each, while foreign currency added just less than 1 point. This was partially offset by a 1 point decline in sales volumes, with third-party bottlers purchasing less concentrate ahead of our January 1 price increase than they did last year, and the effect of lapping certain favorable trade accrual adjustments in our Package Beverages segment last year.

Reported gross margins were up 50 basis points, increasing from 58.7% last year to 59.2% this year. Net pricing increased gross margins by approximately 20 basis points, and ongoing RCI productivity benefits improved gross margins by about 40 basis points.

With regard to mark-to-market accounting for commodities, we recorded a $1 million unrealized mark-to-market loss in the quarter, all of this in SG&A. This compares to a $7 million unrealized mark-to-market loss last year with approximately $8 million in cost of goods, offset by a $1 million gain in SG&A. The net effect of these items improved reported gross margins by approximately 50 basis points.

The higher cost of apples, which we highlighted on our third quarter update, together with an increase in our year-end inventory of apples so we can meet future customer demand, required us to record an $11 million LIFO charge in the quarter. This compares to a $5 million charge in the prior year, resulting in a year-over-year reduction in gross margins of approximately 40 basis points. Lower volumes further reduced gross margins by another 20 basis points.

Reported SG&A, excluding depreciation, increased by $2 million for the quarter. Planned increases in field sales and service resources were offset by a favorable legal provision comparison. Marketing investments were lower by $6 million as we cycled the Dr Pepper TEN launch last year.

Moving below the operating line. Depreciation expense for the quarter declined by $2 million, and reported operating income increased by $21 million from $271 million in the prior year to $292 million this year. Net interest expense was $30 million, or $2 million above last year. Our effective tax rate for the quarter was 35.4%. This was better than our previous expectation as we captured some additional state tax benefits.

Moving on to cash flow. For the year, cash from operating activities was $458 million, including the $531 million of taxes we paid earlier in the year on the Pepsi and Coke licensing agreements. Capital spending was $193 million, down $22 million from last year. This brings free cash flow adjusted for the taxes paid on the Pepsi and Coke licensing agreements to $796 million, a net income of $629 million, providing strong testament to our early RCI win. More specifically, RCI enabled us to achieve a 5-day improvement in our cash conversion cycle for the year. And trade working capital, defined as trade receivables, inventories and trade payables, was a $63 million source of cash for the year compared to a $56 million use of cash last year.

We remain very committed to returning excess cash to our shareholders over time, as we further demonstrated this morning with our announcement of a 12% increase to our quarterly dividend rate. For the year, our total distributions to shareholders were $684 million with $400 million in share repurchases and $284 million in dividends.

Before I review our 2013 guidance, let me take a moment to provide you with an update on RCI. 2 years ago, we began the journey towards creating a sustainable, continuous improvement foundation across the entire organization. The core of this operating model is rooted in the methodologies of Lean and Six Sigma, with a relentless focus on eliminating waste in every process while constantly providing value to our customers and consumers.

And as Larry already shared, we've had some great wins during the early phases of this journey with improvements not only in our operational metrics and financial results, but more importantly, with improved customer service levels. For the past 2 years, we focused on getting the organization engaged. Through kaizen events, we've introduced our people to the concepts, tools and resources of RCI. And through these events, they've learned first-hand that breakthrough change is possible and it can be accomplished rapidly.

As we progress to the next phase of our RCI journey, we are now beginning to embed our RCI management process. Led by a practice we're calling goal deployment and supported by a data-driven, analytical and very team-oriented problem-solving structure, which we're calling the corrective action process, we will cultivate a lean mindset in our senior leaders and the entire organization while aligning the business around a common set of metrics.

Heavy emphasis in 2013 will be placed on the core activities within DSD: warehousing, delivery, merchandising, cold drink and certain field marketing activities. We'll continue with a host of other activities around the company as well.

While we don't spend much time discussing our results in Mexico, we're proud of the results they've achieved. You only have to look at the operating margin trends of our LAB segment over the last few years to get a sense of the value RCI has brought to them.

And finally, with the $116 million of cash productivity already achieved, I remain confident that we'll achieve at least $150 million of cash productivity over the first 3 years.

Now moving on to 2013 full year guidance. The macroeconomic environment remains challenging, with tax increases and higher health care costs weighing on consumer discretionary spending. Against this backdrop, we remain focused on executing our strategy to build our brands, drive execution excellence and continue to develop our RCI capabilities.

We believe our 2013 plans should enable us to grow net sales approximately 3%. On a total company basis, we expect combined price and mix to be up about 2% to 2.5%, the majority of which is mix but also includes some carryover pricing from 2012, as well as our January 1 concentrate price increase. Sales volume growth is expected to be 0.5 to 1 point, with greater contribution from our non-carb portfolio.

Moving on to cost of goods. Considering our hedged positions and current market prices for our unhedged positions, we expect packaging and ingredients to increase total cost of goods by approximately 2% on a constant volume mix basis. Almost half of this increase is due to the higher cost of apples, while the remainder is primarily PET, corn and paperboard.

While diesel rates are expected to be slightly lower in 2013, this savings is more than offset by higher lane rates from our common carriers and a regulatory change in Mexico, which lowered the amount of weight that is allowed per load. Altogether, these changes are expected to add approximately $6 million to our cost base in 2013.

Higher field labor costs, including health and welfare, will increase total people-related cost by approximately 2.5%, or $25 million. Productivity benefits from RCI will offset a portion of these increases.

And as we've said, bringing consumers back to CSDs with great-tasting, healthier options is not only critical to us but also to the industry and our retailers. So brand investments associated with the TEN platform launch are expected to be in excess of $30 million in 2013 and are above the expected contribution of these brands in the year. The TEN platform may be our most strategically important innovation, so we're prepared to invest in it heavily even though this will slow our earnings growth in 2013.

Moving below segment operating profit. Our net interest expense will be around 4.4% on our $2.7 billion of debt, and our full year tax rate is expected to be approximately 37%. We expect capital spending to be approximately 3.5% of net sales, and we expect to repurchase approximately $375 million to $400 million of our common stock in 2013, subject to market condition. For the full year, we expect core earnings per share to be in the $3.04 to $3.12 range.

Before I turn the call back over to Larry, let me highlight a couple of phasing items that will help you update your models. First, our cost of goods increases will be fairly consistent across the year with slightly higher impacts in the first and the third quarters. Second, the transportation and field sales cost increases will be spread evenly across the year.

And finally, the incremental marketing investments will be front-half loaded to support the Core 4 and RC TEN launch.

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

Larry D. Young

Thanks, Marty. Before we open the lines for questions, let me leave you with these thoughts. As we move into 2013, nothing is more important than bringing new and lapsed consumers back to the CSD category. We know we have a winning proposition with our TEN platform. And with strong marketing plans and retail activation in place, we're confident it can help to reinvigorate the category over time.

We're consistently executing against our focused strategy, ensuring that we close distribution and availability gaps, making our products top of mind and close at hand for consumers. We remain focused on driving profitable volume and delivering value to our consumers while continuing to invest wisely behind our well-loved brands for the long term.

RCI fundamentals are becoming the foundation of this organization, building a long-term sustainable operating platform that will continue to deliver tangible financial savings.

And finally, we remain committed to returning excess free cash to our shareholders over time as evidenced by our 12% dividend increase announcement today.

Operator, we are ready for our first question.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from Judy Hong with Goldman Sachs.

Judy E. Hong - Goldman Sachs Group Inc., Research Division

So I guess I just wanted to get a little bit more color in terms of the marketing spending increase behind the TEN platform in 2013. So is the excess of $30 million incremental to what you're kind of spending on your other brands? Or is there some shift in terms of your spending? And then I guess sort of the broader question, as I think about the product, you clearly talked about this being a long-term platform that needs some time to build. So just curious how you sort of think about the phasing of this marketing spending and why you feel so confident that spending this sort of step-up in spending in 2013 is the right strategy for the platform?

Larry D. Young

Yes, the $30 million is incremental, Judy. I mean we're getting behind this. I mean, everybody has probably even seen today some of the headlines from the CSPI. I mean, these threats against our industry are not going to go away. We're not going to sit back and let it bring our volumes down and affect us. We're behind this. The $30 million, like I said earlier, will be across local, national, radio. It will be on the social networks. We'll have a lot of outdoor, a lot of in-home. We're going to go after it aggressively, stay behind it, and it will phase pretty well through the year. You'll see the media start probably around March, first part of March. You're going to have a lot higher spend in the first half. And then as it rolls out and we get the execution, if we need to spend more, we'll be looking at it and stand behind it because we are truly committed to it.

Martin M. Ellen

Judy, let me add one more factor, and I tried to emphasize it in my script. That is that our commitment goes to the extent of creating, in essence, an operating loss on these brands in 2013. That's what I said. And as I said, we're prepared -- we're so serious about this that we're prepared to, as I said, slow the trajectory in what maybe would have been high single-digit EPS growth in 2013 to about 5.5, if you use the midpoint of our range.

Judy E. Hong - Goldman Sachs Group Inc., Research Division

Yes, okay. I understand the math. I'm just curious as to is this sort of a onetime rebasing of your marketing spending? Or if these issues persist, do you sort of need this kind of an ongoing multiyear investment that limits your earnings growth to kind of this mid-single digit in 2013?

Martin M. Ellen

No. Right now, we see it as a 1-year event. Now we're going to have to see how the brands perform in the marketplace. But this is clearly a onetime step-up. We would not expect to continue to do this, at least right now, beyond 2013.

Operator

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

Stephen Powers - Sanford C. Bernstein & Co., LLC., Research Division

I guess building on the TEN question, is it -- obviously, it's an interesting innovation, but the platform represents a good number of new SKUs and adds complexity to the supply chain. You'll probably have to displace a number of new products -- a number of existing products on the store shelf. So how confident are you -- what gives you that confidence that the TEN products will find support from independent bottlers and retailers?

Larry D. Young

Steve, I think the biggest thing that's helping us with this, the stores that we have put out so far, we went in, we've got incremental space. It's one of the requirements. Our consumers have been asking for something better-for-you. Our customers have been asking for it, we've come in with something. We've taken it into them. They are looking the results. I mean, I can just tell you, some of the results we've seen early, some of the first ones out of the bat. We had a large convenient chain and a large grocery chain go first. And they're looking at the first 4 weeks that they were in. 71% of TEN sales are incremental to the LRB category. 91% of the TEN sales were incremental to the CSD category. When you take numbers like this back out to your bottling partners and our guys in the field and other customers, it's not that hard of a sale. I've been in the trade a lot the last few weeks and I'll tell you what, I'm very, very pleased with the execution that I've seen in our team, and our bottling partners have been able to execute out there. So it tells us, whenever I get reports like this back from major retailers, that we've got something here that they're excited about. And we're not getting rid of any products, we're not doing that. I mean, our supply chain is very nimble. The things we've been able to do with RCI, you've been on a couple of projects, these guys can produce anything when the customer needs it, and we ship it.

Stephen Powers - Sanford C. Bernstein & Co., LLC., Research Division

Yes. No, I was thinking more on the display side. I just figured, I don't see retailers giving more aisle space to CSDs. So as you're adding new SKUs in size, they've got to be coming from somewhere.

Larry D. Young

Well, it comes from some places, yes. I mean, we've been really fortunate that where we've been cutting it in, we've not lost any of our space. There's been maybe a little bit come out of private label. One of the things that -- not only just ours, but working, speaking for the industry, we're going in, a lot of them saying, we think there needs to be an incremental space for everybody in the industry that has a better-for-you product. I mean, we were able to do it with waters and teas and all these other items that people thought in the beginning would come out of our CSDs. They didn't, and I think that's where we all have to go and say, let's get a section that's better-for-you.

Stephen Powers - Sanford C. Bernstein & Co., LLC., Research Division

Great. And just one other thing on pricing. Is there a difference between the pricing strategy you're employing on concentrate with your bottling partners versus the pricing you expect to see at the wholesale level? Because we've heard a number of rumblings of discontent regarding some of the concentrate price increases that you've pushed through early this year ahead of perceived wholesale prices. I just wanted to get your perspective on that and whether or not you thought that was at all a risk.

Larry D. Young

Well, I've not -- I don't think you'll ever find a bottler in the world that won't rumble if you raise it a 0.5%, but then that's kind of a given. I've not heard that much, and we have nothing to do with how our bottlers set pricing. So I think the good thing for us, where we don't have that much problem, is that we could pretty well show to our bottlers and to everybody that buys products from us, that whenever we increase it, we put it back into marketing, we put it back into activation. I mean, we're not sitting here and just putting it in the bank.

Stephen Powers - Sanford C. Bernstein & Co., LLC., Research Division

Okay. And then one last, I guess, maybe housekeeping thing. Marty, in the commodity outlook, I didn't hear you mention apple juice concentrate. Those prices have come down pretty considerably in the last couple of months. So what's your outlook there? What impact does it have? And to the extent you're going to benefit from that deflation, does it show up in margin or is it dealt back in price on the shelf?

Martin M. Ellen

You're right. Apple juice concentrate has come down recently. I've seen prices under $8 a gallon, at least as of a couple of weeks ago. I'll tell you, and we have bought some at lower prices, that's in our guidance going into '13. It looks like we've got about half of our juice concentrate already purchased. So to the extent prices soften up, we could take some advantage but not complete advantage. There are no plans right now to deal any of that back in price.

Operator

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

Bryan D. Spillane - BofA Merrill Lynch, Research Division

A couple of questions. First, I think relative to Dr Pepper TEN, I think it's a great idea just given all of the challenges that the industry is facing right now and especially the headwinds related to obesity. You have to step up to the plate and take a big swing, so I think it's a necessary action. A couple of questions relative to it are, first, is it going to be line priced with everything else or has there been any thought in terms of trying to price it differently, the rest of your portfolio?

Larry D. Young

No, on-shelf is line priced. As with any introduction of a new product, you'll probably see some harder pricing on display. But it will be -- basically, the plan is to have it pretty well line-priced out there. We don't want to pull a lot -- we want to have a lot of people sampling it, but we don't want to pull away from our core products.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

And then when you begin with the full -- as you launch nationally with a full set of packaging SKUs or will it be more focused on, let's say, single-serve 20-ounce? Just any -- will the packaging mix be any different than what you would see across the rest of your...

Larry D. Young

Well, you'll see basically 2-liter, 12-pack 20-ounce and then a 12-ounce -- sampling package.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Okay. And then, I guess an important, really important element, is that people try it for the first time and they like it. And so just making sure that you manage that people -- there's fresh product on the shelf, just what's the shelf life of the product and any thoughts just to making sure that you've got a fresh product out there for people to try?

Larry D. Young

Shelf life is the same as our other products, so that's not an issue. It runs the same as our diet products. And then as far as the sampling, I mean, as I mentioned earlier, the number of coupons we'll be dropping, the FSIs, lots 12-ounce out, over 1 million cans we're going to give away. We've talked about some of our SG&A being up with feet on the street. I mean, we're going to have people out there making sure that people have it at work, at play, that it's merchandised properly, that we've got that incremental space, and that it's always there when they come in to get it.

Operator

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

Kevin M. Grundy - Morgan Stanley, Research Division

So first, just to follow-on to the TEN platform and the line of questioning there. Did your guidance contemplate or leave some cushion for any sort of competitive response? You mentioned a couple of times, Larry, that promotions and coupons that naturally sort of accompany this sort of launch. And then, Marty, was there any sense that you could possibly pull forward some RCI savings to offset the step-up this year, kind understanding that it's kind of a more methodical approach that you're taking with RCI?

Martin M. Ellen

I'll start with that, and maybe Larry wants to comment with his view on competitive response to our TEN products. There's nothing to -- we're not going to pull anything forward. It's -- this is a process, some of you are closer to it than others. I've talked at length about it when I've been out meeting with both you folks and our buy-side shareholders. That's not what we want to do. I think the message today is, everybody knows we've worked hard on the supply chain and everybody can see the balance sheet results. Those are very visible and big contributors to our cash flow improvement. And there's a lot of attendant costs that will begin to come down that's associated with that. The message you ought to take away today is that the focus areas in DSD, which we're just beginning on, all the DSD operating functions, the warehousing functions, delivery functions, merchandising functions are going to get a lot of attention this year and that's where we have a lot of cost. But there's no -- look, we're going to spend heavily on TEN, as we said. It's going to be front-end loaded. It's going to be $30 million incremental. There's not anything we would care to want to do to try to offset that in the short run. We don't think that would be smart for the business in the long run.

Larry D. Young

Yes. And on the competitive front, Kevin, I think competitive activity is good for the category. Our partners out there, we've got Pepsi Next. We've also got Fanta and Sprite Select out there. I think the more activity we see in those lines as an industry, the better. We're all very competitive. We're used to fighting on the street. We get out there, we go after the activation. We go for the best taste, and the best man wins. So I look forward to competitive activity.

Kevin M. Grundy - Morgan Stanley, Research Division

And then 2 more quick ones, guys. Larry, what's your sense of the potential for additional pricing in '13? You had mentioned the 2% to 2.5% guidance, the majority of which is mix. Based on where we are today, what's your sense for incremental pricing above and beyond that?

Martin M. Ellen

We have -- let me comment. We have not really contemplated much, so our price and mix, as I said, Kevin, obviously, the concentrate price increase is already done. We have some carryover pricing from last year. Mix should be a positive factor. Just for everybody's benefit, remember that with respect to the TEN launch, in terms of mix impact on top line, those are going primarily to our DSD system as opposed to a year ago when Dr Pepper TEN went through the bottling system. So those are DSD cases at DSD rates per case and not concentrate cases. That's a big part of our mix. And we've been benefiting and expect to continue to benefit from mix in some of our non-carbs. We're doing very well in the water category, which includes Vita Coco, Neuro, also Fiji. And particularly within the coconut water category, the functional water category. We think those are going to be very positive contributors again. And actually, there's not a lot of what we would call law pricing in these numbers.

Larry D. Young

And we will, Kevin, taken opportunistic opportunities in the trade by channel and by package. If the market allows, we'll definitely be going after those. We look for those opportunities at all times.

Kevin M. Grundy - Morgan Stanley, Research Division

Okay, that's helpful. And one more, if I may. Your top line guidance now, and I don't know if you want to put a number on this, some of the weakness in non-carb has started to ease. What's sort of your expectation by CSD and in the non-carb portfolio for '13? What's sort of contemplated in your guidance?

Martin M. Ellen

In the guidance next year, in the non-carb portfolio, I would characterize as low- to mid-single digit for that portion of the portfolio. As far as I know, that's about 20% of our business.

Operator

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

Kaumil S. Gajrawala - UBS Investment Bank, Research Division

First question and just specific over the entire course of 2012, can you or are you able to delineate for us what your trends look like in your low per capita markets versus your more mature markets?

Larry D. Young

Our low per cap markets, we continue with our focus out there. We're going to more local marketing, more activation. We're seeing greater growth on our products out there. We're seeing pickup in availability. And so the plan is working very well, and we have no intention of changing that. They kind of are mixed. It's one that's hard to look at sometimes because we've got Dr Pepper coastal program. We've got those center of the U.S. with Snapple. But in all of our markets, we're very, very pleased with what we're seeing. You can look at the volumes, especially on Snapple, in the middle of the U.S. where it was weaker. I mean, we're seeing volumes up there in the high teens. Sunkist, we're seeing our Sunkist volumes coming up 7%, where in other parts of the country they were actually down. So it's kind of helping us bring that Sunkist number back. You heard us talk about winning the West with our juices and everything. Our winning the West volume was up 13.4%, and so all the indicators we have are saying that our strategy is right on track and that there's no reason we would deviate from it.

Kaumil S. Gajrawala - UBS Investment Bank, Research Division

Okay. And then second question, on convenience stores, which had been a big area of focus over the last couple of years, if you can talk about how your share trends in that channel and then -- and if you're willing, how things look quarter-to-date, particularly as payroll taxes expire and such.

Larry D. Young

I'll answer the first one. If I could answer the second one, I think we'd have a magic crystal ball here or something. What we saw in 2012, I mean, if you can kind of look at the Q4 volumes, the category was down 3 in convenient and gas. We were down 1.3, so we were the tallest midget. Full year volumes, the category was down 0.6. We were up 0.4. If you kind of look at the -- you guys have all seen the last 4 weeks, the category was down 3. We were up 0.9. And the great thing is we continue to get more distribution on our Snapple premium. Like I said a moment ago, our ACV was up 6.7 points. That's fantastic results. And we're holding space with our CSDs despite all the package and the new product innovation.

Operator

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

Mark D. Swartzberg - Stifel, Nicolaus & Co., Inc., Research Division

Two questions for you. Firstly, on free cash flow, Marty, can you give us some estimates for '13? Last year, when you adjust for the taxes was, as you said, nearly $800 million, the year prior to that was $500 million and change. So how are you thinking about free cash flow for this year?

Martin M. Ellen

Mark, I wish we could perpetuate the working capital improvements but, of course, we can't. So our view of free cash flow is really, for planning purposes, driven off our earnings number, which you can derive from the range we have given you. And maybe a little bit of upside to that number, there's still some harvesting we can do off the balance sheet. We've guided 3.5% for your modeling purposes and our purposes, 3.5% CapEx. We came in lower this year. So that may be a guidance, there could be some upside there, I'm not ready to predict it yet. And so maybe a little bit of upside to our net earnings number. We should -- our RCI is not over by any stretch of imagination so there may still be some other opportunities. We've given you the range of -- we ended this year with $260 million of cash. We could operate on a little less cash, so there's no magic to that number. We've guided $375 million to $400 million of share repurchases next year and, hopefully, we'll be at the higher end of that. But that is our range. You can sort of price out the full year rate dividend that's now at full year rate of $1.52, and everything works pretty well. I would not -- we just can't expect these kinds of $750 million, $800 million free cash flow years continuing.

Mark D. Swartzberg - Stifel, Nicolaus & Co., Inc., Research Division

Yes, it sounds like something in the 6s and the 6 to 7 ranges.

Martin M. Ellen

Yes, I would -- for your purposes, I would say in the $675 million to $700 million range may not be an unrealistic expectation.

Mark D. Swartzberg - Stifel, Nicolaus & Co., Inc., Research Division

Okay, that's great. Great. And then kind of a tougher question. But on the revenue targets, I believe, remain mid-single digits and I concur with Bryan said, with the TEN emphasis and the category needs more innovation. So it's good to see you guys, in a sense, really leading that. But I'm still trying to understand, how do these mid-single digit revenue targets govern the annual budgeting process, influencing spending decisions, like we've heard today? And at what point in any given year would you be up for reconsidering these revenue targets?

Martin M. Ellen

Mark, they're not -- I'm not sure I totally understand the question. As we said, we're guiding next year to 3% top line. These are built up business by business. There is -- our spending is planned based on what it is we want to do, what we think can be effective, including marketing and what marketing is effective, what's not effective. And they don't -- there's no issue in terms of causing us to either overplan our spending -- or even overspend for that matter. I mean, it's not -- it doesn't work that way.

Mark D. Swartzberg - Stifel, Nicolaus & Co., Inc., Research Division

But what I'm driving -- am I right, the target is mid-single, right, long term?

Martin M. Ellen

Well, look, right now, we've talked about 3% to 5% in the past And I think for the most part, given the economic environment, we've taken the 5% off the table for all practical purposes. We've talked about how we think about within that range, certainly gained 3%, or how we would get to 5% in a more robust economic environment. But for our planning purposes now, I think, given that the outside environment, given what we're doing internally, which we are really excited about, right now, we think approximately 3% is the number. And if things improve, yes, maybe it could go up, but we don't see the benefit of talking about that now.

Larry D. Young

I want to thank everyone for joining the call today and for your continued interest in the Dr Pepper Snapple Group. Thank you.

Operator

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

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