Dr Pepper Snapple Group's CEO Discusses Q4 2010 Results - Earnings Call Transcript

Feb.17.11 | About: Dr Pepper (DPS)

Dr Pepper Snapple Group (NYSE:DPS)

Q4 2010 Earnings Call

February 17, 2011 11:00 am ET

Executives

Aly Noormohamed - Senior Vice President of Investor Relations

Martin Ellen - Chief Financial Officer

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

Analysts

Judy Hong - Goldman Sachs Group Inc.

John Faucher - JP Morgan Chase & Co

Mark Swartzberg - Stifel, Nicolaus & Co., Inc.

Christine Farkas - BofA Merrill Lynch

Bill Leach - Neuberger Berman

Damian Witkowski - Gabelli & Company, Inc.

Andrew Kieley - Deutsche Bank AG

Caroline Levy - Credit Agricole Securities (NYSE:USA) Inc.

Stephen Powers

Operator

Good morning, and welcome to Dr Pepper Snapple Group's Fourth Quarter 2010 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce Mr. Aly Noormohamed, Senior Vice President, Finance. Sir, you may begin.

Aly Noormohamed

Thank you, Jackie, and good morning, everyone. Before we begin, I would like to direct your attention to the Safe Harbor statement and remind you that this conference call contains forward-looking statements, including statements concerning our future financial and operational performance. These forward-looking statements should also be considered in connection with cautionary statements and disclaimers contained in the Safe Harbor statement in this morning's earnings press release and our SEC filings. Our actual performance could differ materially from these statements, and we undertake no duty to update these forward-looking statements.

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

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

Larry Young

Thanks, Aly, and good morning, everyone. Before I share our goals and priorities for 2011, it's probably worth spending a few minutes recapping our 2010 achievements, as well as my views on the overall health of the economy and the consumer.

2010 marked the third and final year of our key foundational investments. We built efficient hub-and-spoke supply chain model, culminating the opening of our Victorville, California regional center. This plant added much-needed juice capacity in the West, which has enabled us to serve accounts faster and compete more effectively. We also made significant information technology upgrades, enabling better business decisions, and did it without any business interruption.

We standardized handhelds and SAP across our DSD business and earlier this month, we went live with our warehouse direct SAP upgrade. We're also making great progress in Mexico. I'm also thrilled with the capabilities we've added in revenue margin management, marketing return on investment and under Marty's leadership, Rapid Continuous Improvement.

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

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

While we continue to operate in a challenging macroeconomic environment, the positive trends I shared with you last quarter had continued. We're seeing sequential improvements in restaurant traffic, immediate consumption and consumer discretionary spending. In the fourth quarter, BCS volume grew 1%, lapping 4% growth in the prior year, with our key trademarks posting solid gains.

Dr Pepper grew 3%. Our Core 4 plus Crush grew 1%, Hawaiian Punch was up 3% and Snapple was up 4%. Mott's declined 6%, however, this was on the heels of 23% growth in the prior year.

For the full year, BCS volume grew 2%, also lapping 4% growth in the prior year. Trademark Dr Pepper grew volume 3%, lapping 2% growth in the prior year. The successful restage of Snapple continues to demonstrate our team's ability to both fix and profitably grow brands we inherited from our former parent.

AC distribution of our six-pack reached 86% in grocery, with 22 markets now over 90%. Share grew 240 basis points and profit per case is up double digits. And just as important, both consumers and retailers tell us they love the changes.

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

We also made significant progress against our cold drink expansion strategy, with 31,000 net new placements despite an unprecedented level of business closings. Our brand investments are paying off with brand equity scores of 320 basis points, lapping strong gains in 2009.

Increased distribution and availability, stepped up consumer communications and continued share gains have resulted in healthy per capita consumption increases, ranging from 0.2 servings to 1.4 servings across our key trademarks. Clearly, the investments we've made over the last three years are paying off.

Moving on to the results for the quarter. Net sales were up 4%, reflecting sales volume growth, positive pricing and deferred revenue recognition under the Pepsi-Coke license agreements. As a reminder, we lapped contract pack losses during the quarter. Segment operating profit on a currency neutral basis increased 2%, reflecting net sales growth, higher packaging, ingredient and transportation costs, and a $19 million increase in marketing. This brings the increase in our full-year margin investment to $36 million, slightly higher than our beginning of the year expectations and an $89 million, or 25% increase since 2008.

EPS for the quarter, excluding certain items, was $0.67, reflecting solid top line growth, higher market investments and below-the-line favorability in corporate and in Texas.

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

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

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

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

Sun Drop is, without a doubt, our big bet for 2011. Through an innovative, multi-year partnership with MTV network, we're introducing Sun Drop nationally, extending the brand beyond its strong Southeastern roots. Sun Drop targets the large and growing citrus segment, as well as millennials who are 25% of the population and have $500 billion in buying power.

We're thrilled that MTV Scratch Marketing Group is developing all aspects of Sun Drop's marketing program, ranging from new graphics to advertising and promotions. Sun Drop will be featured in some of MTV's hottest properties, including the 25th Anniversary Season of The Real World and will be sampled at key music events and college campuses.

Moving on to non-carbs. We'll continue to win the West with Mott's and Hawaiian Punch. We'll step up regional media support and drive increased usage with our Hispanic consumer.

At the beginning of the year, Punchie, the iconic Hawaiian Punch mascot, got a 21st century makeover, with a new computer-generated design that appeals to the drink's target audience. This is the first new graphics and merchandising update for Hawaiian Punch in 10 years. And kids will get to enjoy their favorite treat on the go, with the launch of a new multi-pack single-serve 10-ounce PET offering available in four flavors.

54% of all tea buyers purchase multi-serve packages, so we're launching Snapple Premium in a 64-ounce package. It will be available nationally in six flavors, with a $2.49 everyday retail price.

2011 will be a huge year for Mott's, as we support three innovation planks with strong national TV advertising. We're launching Mott's for Tots with the introduction of four new SKUs with nutritional benefits and new single-serve packaging. We'll continue to support Mott's Medleys with national media, coupons and sampling. And Mott's will enter the Vegetable Juice category in the U.S. with the introduction of Mott's Garden Blends, made with 100% vegetable juice. This product has been a huge hit in Canada, driving strong growth there.

Now let me turn the call over to Marty to walk you through some of our below-the-line items and 2011 guidance.

Martin Ellen

Thanks, Larry, and good morning, everyone. As you saw in our press release, we had a number of items impacting our results below segment operating profit.

In our corporate expenses, we recorded an $8 million curtailment gain as we terminated retiree medical coverage on certain U.S. plans. We also recorded $3 million of commodity-related mark-to-market gains as compared to gains of $6 million last year. On a full-year basis, we recorded a $1 million gain compared to mark-to-market gains last year of $18 million.

Also included in corporate expenses this year was $3 million of fees related to the Coke transaction, bringing Pepsi-Coke transaction fees to $11 million for the year. We continue to leverage our productivity office to fund certain opportunities. For the quarter, we spent $7 million on a variety of productivity improvements, bringing our full-year spend to $30 million.

Between our 2009 and 2010 investments, we expect to realize $33 million of cumulative savings in 2011, an $18 million increase over 2010. In December 2010, we offered to purchase a portion of our 6.82% notes due 2018. The purpose of this transaction was to proactively manage down our $1.2 billion 2018 maturity tower. Approximately 40% of the notes, or $476 million, were tendered. As a result, we recorded a $100 million loss on extinguishment.

In January 2011, we raised $500 million of five-year debt at a much lower coupon of 2.9%. Ongoing cash interest savings will be approximately $18 million a year.

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

Full year cash provided by operating activities was over $2.5 billion. This included $1.6 billion of one-time, nonrefundable cash payments from the Pepsi-Coke licensing agreement. Ignoring those payments, we still had a very strong cash flow performance.

We continued our focus on driving trade working capital improvements, reducing our cash conversion cycle by 8.5 days to 38 days, a $70 million benefit to free cash flow. We still have lots of room to improve in this area, and I'm confident that RCI will be an important contributor.

For the year, capital spending totaled $246 million, down $71 million from last year, as we completed key supply chain and IT projects while continuing our investments in cold drink equipment.

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

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

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

For the full year, we expect diluted earnings per share to be in the range of $2.70 to $2.78. This reflects healthy top line growth, a very challenging input cost environment with rising packaging ingredients and fuel costs, continued strong management in the middle of the P&L and continued investment in our brands, people and RCI to support the long-term health of the business.

Below the segment operating profit line, corporate costs will be increased by $18 million in 2011, primarily driven by increased ABA fees and higher stock-based compensation costs, partially offset by the absence of the Pepsi-Coke transaction fees and the post-retirement planned gains we recorded in 2010.

Our interest expense will represent a rate of about 4.5% on our approximately $2.6 billion of debt, as we benefit from a low rate environment on our floating rate positions and the benefits of the December 2010 tender offer.

Our full-year tax rate is expected to be approximately 35%, which is lower than our normal 37% to 38% tax rate, as the tax ability of the Pepsi-Coke proceeds drives an $18 million one-time tax benefit.

In terms of cash flow, we remain focused on increasing our free cash flow yield as a means of enhancing our return to our shareholders. We will continue to drive improvements in our cash conversion cycle, targeting at least a three-day improvement in 2011. And we expect capital spending to be approximately 4.5% of net sales.

Partially offsetting free cash flow growth in 2011 will be approximately $90 million of income tax payments related to the Pepsi-Coke licensing agreements. We expect to repurchase approximately $400 million to $500 million of our common stock in 2011, subject to market conditions.

With respect to packaging and ingredients, given our hedged positions and current spot prices for our unhedged positions, we expect packaging and ingredients to increase total cost of goods by 6% to 7% on a constant volume mix basis. More than half of this increase is expected to come from higher apple and other juice concentrates and to a lesser extent, aluminum.

We're also seeing higher transportation costs, both in terms of fuel cost for our company-owned fleet, as well as higher lane rates from our common carriers. This is expected to add $20 million to $30 million to our cost base in 2011.

While we will continue to drive productivity across our entire cost base, we will do so with an eye to also making the appropriate long-term investments to sustain and grow the health of our brand and this business.

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

Second, I'm thrilled with the progress we're making behind Rapid Continuous Improvement. It's gaining momentum across the organization, and we're already seeing some of the financial benefits in terms of inventory reductions, capital avoidance and cost reduction. But more important is the engagement of our organization from the top down. In fact, Larry and I will be on an improvement project in a few weeks with some of our business unit sales teams. The goal is to improve selling productivity.

Every executive leader in the company is actively participating, and we are supported now with about 25 highly trained continuous improvement managers. We're well on our way to achieving our three-year goal of $150 million in productivity savings.

Our 2011 guidance includes a number of other considerations as well. As I already mentioned, incremental deferred revenue amortization from the Pepsi-Coke will add $27 million to net sales and segment operating profit. The absence of Victorville start-up expenses and Williamson strike costs will benefit our cost of goods comparison by $27 million.

On a comparable basis, corporate expenses will increase by a net $18 million due to higher spending behind ABA initiatives, our Let's Play program, a community partnership to get kids active, higher stock-based compensation costs and the absence of Pepsi-Coke transaction fees and the post-retirement planned gains.

Finally, foreign currencies are expected to be only of slight benefit to net sales and profit growth for the year. With that, let me turn the call back to Larry.

Larry Young

Thanks, Marty. Before we open the lines for questions, let me leave you with a few thoughts. We entered 2011 stronger than ever. We've invested in our supply chain, our information technology systems and our people, and most importantly, in our brands.

These investments are clearly paying off, with distribution, availability, brand equity, market share, operating effectiveness and organizational engagement all growing strongly. We laid out a strategy for this business and we have not deviated from it. As I have said before, there's plenty of runway in this business but it requires a relentless focus on execution. And I think we can all agree that we are winning.

Add to this very exciting momentum behind our RCI initiative, and we have all the ingredients to grow and enhance the returns of this business in 2011 and beyond. Operator, we're ready for our first question.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from Steve Powers of Bernstein.

Stephen Powers

I was wondering if you could just provide a little more commentary around the 6% to 7% COGs inflation and specifically, how much you were assuming you can offset? And what the source is about that offset in, how much price, how much productivity and what will be the net impact of mix?

Martin Ellen

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

Stephen Powers

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

Martin Ellen

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

Stephen Powers

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

Larry Young

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

Stephen Powers

Just one quick last one on the advertising expense next year. In line with sales, ahead of sales, slightly below?

Martin Ellen

Steve, our guidance for marketing, we'll be up a little bit in marketing, nowhere near the increases we've had in the past because we don't need to. We're seeing clear signs from our marketing ROI initiatives, and I think we've done a pretty good job of re-allocating spending that now looks like it was less effective than maybe we thought previously. As Larry said, we've got a pretty robust pipeline of innovation this year. And we've got, I would say, a fair amount of money behind those product launches. But we've been able to find, call it marketing productivity, call it improved marketing effectiveness, and the rest of our spend to make those allocations.

Operator

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

Judy Hong - Goldman Sachs Group Inc.

Larry, I wanted to just hold this pricing environment issue a little bit in CSDs. It seems like over the last few months, the commentary around sort of the pricing environment has kind of gotten worse. I think most of last year, I would think that a lot of the industry participants characterized the pricing environment as rational. It seems like now, there's kind of increased concern about that competitive activity heating up more, even in the face of higher costs. So I'm just wondering if you can just give us your perspective on what you think is going on. And as you look out over the next six to 12 months, what are some of the milestones that you're kind of looking for as to whether you would gain confidence in that pricing environment or there's more risk to that pricing environment?

Larry Young

Judy, I've really not seen the pricing heat up any. We continue to see very disciplined and rational pricing. We continue on our DSD business to take price opportunistically. On our beverage concentrate business, we took an increase there of single-digit pricing effective January 1. We've communicated all of our warehouse direct pricing, and we'll see the benefit of that in Q2. And as Marty mentioned earlier, it seems like it was a lot less resistance there on pricing. Our DSD, the price is moving up now, I'd say about 1%. So I've not really seen any issues out there of it getting more competitive. Price has been very rational. I think as we go through the year, I mean the one thing -- I don't think anybody really has the crystal ball to see where these commodities are going to go. They're kind of moving all over the place. But I think that makes it even more positive for a rational pricing and also the consumer coming back. We are just very excited about what we're seeing. The trends, our fountain food service is up, QSR is up, our single-serve and convenient and our 20-ounce. So we're looking at everything as it's very healthy out there right now.

Judy Hong - Goldman Sachs Group Inc.

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

Larry Young

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

Judy Hong - Goldman Sachs Group Inc.

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

Martin Ellen

Let me just comment on the numbers. I mean, fourth quarter, we're an open-market. We did not expect some blackout periods, so maybe we lost a little time there. But in terms of the macro view for next year, obviously, this year benefited because of the one-time payments we received for the licensing agreement. If you work through your models and expectations of cash for next year, so you have a view on our profitability. I reminded you in my prepared remarks, there's a $90 million tax payment incoming due, which you might not readily see in your models or numbers. You think about we're going to refinance some debt in December, but that presumably will be a refinancing. And be reminded that we have a fairly substantial $500 million tax payment in Q1 of 2012, that will, in essence, be the remainder of all the taxes we'll need to pay on that money. When you work through, it leaves us $500 million, $400 million to $500 million of free cash flow to acquire shares, which means we're not intending on levering the company specifically to do that. We're simply using it as an allocation of our free cash flow.

Judy Hong - Goldman Sachs Group Inc.

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

Martin Ellen

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

Judy Hong - Goldman Sachs Group Inc.

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

Larry Young

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

Operator

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

Christine Farkas - BofA Merrill Lynch

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

Larry Young

No. We haven't seen that much pressure because you take most of our retailers, I mean they have their store brands. They're under the same pressure we are. I mean, they've got the commodity costs coming in. They may not be buying as well as we do, we don't know. Some of them do, some of them don't. But they don't want to see that gap get too big on the index of their store brands to ours. So I think it's been very healthy out there. We always look every day, making sure that we still continue to give value. I mean, we have to have pricing to cover costs but we also want to make sure that we don't alienate the consumer. We will make sure that we have the right price points, the right packaging, the right mix and then making sure that we have that consumer involved in different types of promotions. So that's where we're putting a lot of focus.

Christine Farkas - BofA Merrill Lynch

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

Larry Young

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

Martin Ellen

Well, no. I think Larry hit on. And well, a smaller part of our cold drink place was our full-service vending, that's fairly easy. We measure throughput through the machines and if we're not getting the throughput, then we'll looking to replace the machine and not bind it. Coolers, it is simply taking the common single-serve packages, measuring the gains we're getting from the accounts, with respect -- it's not an exact science. But our finance people on the commercial side of the business look at this regularly. And I think it is impacting our view on capital effectiveness. And I think it's shaping in a positive way.

Christine Farkas - BofA Merrill Lynch

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

Larry Young

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

Christine Farkas - BofA Merrill Lynch

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

Martin Ellen

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

Operator

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

Mark Swartzberg - Stifel, Nicolaus & Co., Inc.

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

Martin Ellen

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

Larry Young

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

Mark Swartzberg - Stifel, Nicolaus & Co., Inc.

And what do you think about the effect either on your business or the juice category and generally, of this pricing on the volumes?

Larry Young

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

Mark Swartzberg - Stifel, Nicolaus & Co., Inc.

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

Martin Ellen

Mark, let me -- so let's break down the basket, 6% to 7% expected inflation overall, about a third. So let's say, take two points for juice. So now we're talking four to five for everything else. Our major dollars are in the categories of aluminum and PET and corn, aluminum being large. We've got reasonable cover, more so in the first half of the year. So we're comfortable with our cover. And if I knew where the prices were going as they say, I would probably not be on this conference call. I mean, it is about thinking about where we want to be relative to where we think others are hedged, so we try to stay cost competitive over the long term.

Mark Swartzberg - Stifel, Nicolaus & Co., Inc.

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

Martin Ellen

All right. I would say, look, the $150 million of productivity, roughly over three years, I would ascribe, half to income statement items and half to working capital and capital spending. Now that's not a precise number but that's a pretty good way for all of you to think about it. We've got some internal targets, and I haven't shared them on a -- sort of a micro quarter or annual basis yet, we're just getting started. I can give you anecdotes. We probably have, I think, about 75 projects that various people have identified. And I think they're interesting because they're not just costs. Now I'm going to have to help everybody remember that this is about growing your business, improving sales, that's why I wanted to talk about Larry and I being involved with one of our sales teams, and actually working with them to eliminate waste and improve sales. But on the cost side, as you know, anecdotally, I'm going to be in one of our plants in a couple of weeks. It's Aspers, Larry mentioned that. The reason Larry brought up that change over and the importance of that change over on Hawaiian Punch is because that's a precursor activity to our entire view of that product line and truthfully, our view that we can create a full system. The benefits for that plant is eliminating an entire outside warehouse, and I think the all-in cost on that project, warehousing and transportation, is $6 million. And that project, I would expect us to almost have completed. I'm going to be on that project in a couple of weeks in early March. And so we have lots of those opportunities. I've been reluctant so far to try to put a price tag on everything by quarter, by year for the 2011, because it'll start to distract the organization in our RCI initiatives. I think we are building something quite good here and I think, quite different.

Operator

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

John Faucher - JP Morgan Chase & Co

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

Martin Ellen

I think there's a lot in that question. Let me just say in terms of what we've done recently. We raised some of our cover towards the end of the year going into the fall and Q4 because that's an important time of the year when you think about pricing. And so when we think about commodities and costs, we want to think about, well, what's the importance of that with respect to the competitive marketplace? And that's different, of course, in just thinking about commodities in the sense of certainty in your P&L. One could certainly hedge everything and at least for some period, give everybody certainty in cost, but not sure what kind of risk that would create to a business if not everybody else has done that and you wake up and find your cost disadvantage. You don't think we're necessarily adding that as your disadvantage, we think we're pretty much where everybody else is based on our sort of dissection of what others have said. And that's where we want. I mean, in terms of philosophically, that's where we want to be.

John Faucher - JP Morgan Chase & Co

And sort of any thoughts on sort of the back half then, to sort of the second part of that?

Martin Ellen

No, I don't think we have thoughts about where these costs might go. Obviously, relative to history, they're high. You can find periods of time in history when some of these costs had been as high. So it's really about continuing to roll our cover and take a view of when we think we ought to expand it. And I think we've had a pretty good track record so far, being able to do this reasonably well. It is a broad basket, and many of the costs are influenced by other factors. So I'll tell you, it's something we sit down and look at on a weekly basis. So we're updated on a weekly basis in terms of our view of these commodity markets, what's influencing them, from oil prices to weather to the dollar, and trying to make some judgments. But I wouldn't say we're trying to call markets. We're not trying to do that. We would never try to do that. And we're trying to look at that against what we see competitively in the marketplace a la pricing.

John Faucher - JP Morgan Chase & Co

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

Larry Young

Yes, and I think what you have to look at there on that, John, was whenever we did the Crush, there was only 40% distribution out there at the time. A lot of our independents had the Sunkist. We don't allow dual existence, and so we needed to find another route to market to get that out there at 100%. You can see some similarities on Sun Drop but it was only in the Southeast, and a very, very strong brand in the Southeast. I think when you look at what we've done with getting the partnership with MTV and then a three-year investment with them and ourselves, the plans that are put together, I'm very excited about the results and just -- I mean, Sun Drop has been out there in not quite a month, and we are way ahead of our expectations. The distribution is ahead of where we ever dreamed it would be. We're actually going to have to pull marketing, probably, forward to cover the execution that the guys have done, some of the best execution I've seen in a long-time.

Operator

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

Caroline Levy - Credit Agricole Securities (USA) Inc.

Your top line was very good in the fourth quarter relative to the difficult environment. On the margin side, even lacking some easy comps, margins were down in each division, if I'm not mistaken. And I'm just wondering if you could walk through in the three different divisions, concentrate, packaged beverages and Lat Am, what the big drivers of the lower margins were in the fourth quarter?

Martin Ellen

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

Caroline Levy - Credit Agricole Securities (USA) Inc.

Yes.

Martin Ellen

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

Caroline Levy - Credit Agricole Securities (USA) Inc.

And then Lat Am?

Martin Ellen

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

Caroline Levy - Credit Agricole Securities (USA) Inc.

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

Larry Young

That's correct.

Caroline Levy - Credit Agricole Securities (USA) Inc.

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

Larry Young

We would hope so.

Caroline Levy - Credit Agricole Securities (USA) Inc.

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

Larry Young

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

Caroline Levy - Credit Agricole Securities (USA) Inc.

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

Martin Ellen

Yes. Correct.

Operator

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

Bill Leach - Neuberger Berman

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

Martin Ellen

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

Bill Leach - Neuberger Berman

And your expense guidance, you referred to $2.6 billion of debt but when I look at your balance sheet, I only see $2.1 billion of debt?

Martin Ellen

That's because it is the $500 million refinancing of the tender in January.

Bill Leach - Neuberger Berman

So we just use of 4.5% times $2.6 billion?

Martin Ellen

Correct.

Bill Leach - Neuberger Berman

And on the corporate expense guidance, so you're saying it'll be up $18 million year-to-year? Is that the bottom line?

Martin Ellen

For your purposes, that's the guidance.

Operator

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

Andrew Kieley - Deutsche Bank AG

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

Larry Young

Absolutely. We've shared our fountain foodservice has been doing very well, but we are just thrilled to death with the execution by our partners, our bottling partners out there. I mean, we're seeing very strong growth in the fourth quarter with Pepsi system up plus a little over 3%, Coke system up over 3%. So we're very, very happy with that. We're doing a lot on our low per cap areas where we're going in, and we've shared the plan with you guys where we're getting more fountain, we're getting more cold drink. We want to grow those per caps. That's where we're so confident on our growth long term. So as long as we can continue that great relationships with our partners, great promotional activity, we think the Dr Pepper brand will continue. I mean, this is eight years, that it's just continued to gain share and grow. So we're very bullish on it. We've got a test out there right now with Dr Pepper 10 that we're looking at. So what we're seeing in just the first month is just very exciting, very bullish. So we're going to use that. It's basically a 10-calorie Dr Pepper with a proprietary sweetener. And so we're very confident with what we can continue to do, and I'm very excited about what we're doing in the low per cap markets. The low per cap markets are really starting to pay off.

Andrew Kieley - Deutsche Bank AG

And I was actually asking about Dr Pepper 10. I mean, that seems like a pretty logical progression for the brand. Do you anticipate that will go national? Will that be in all the bottling territories?

Larry Young

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

Andrew Kieley - Deutsche Bank AG

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

Larry Young

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

Andrew Kieley - Deutsche Bank AG

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

Martin Ellen

We have just under $900 million. If you were referring to almost the $900 million that's remaining under the $2 billion, yes, we'll do $4 million to $5 million this year and then we'll consume that. And of course, probably at some point, ask our Board to expand the authorization because we intend to do this for the long term.

Operator

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

Damian Witkowski - Gabelli & Company, Inc.

So if you miss your top line projection, let's say you had three, do you think it's going to be due to volume or price miss?

Larry Young

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

Damian Witkowski - Gabelli & Company, Inc.

And you haven't seen it slow down even in the convenience general and the gas prices begin spiking...

Larry Young

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

Damian Witkowski - Gabelli & Company, Inc.

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

Larry Young

Well, we're not really setting a target on that but we're very bullish on the Mexico business down there. We've got a lot of innovation going in place. We have innovation behind Squirt, Crush, Peñafiel. We're doing some new packaging. We've got a new Clamato flavor. We're entering the light cola market, which is growing very quickly down there. And I think the biggest thing is Jim Johnston, our President of Beverage Concentrates in the Lat Am, is rightsizing the business. He's into RCI projects down there eliminating waste. We're optimizing the routes we installed. We're increasing distribution and availability. So we feel good about Mexico. Mexico can always be a challenging market down there, but we're still behind our Mexican business and we feel that we can grow down there.

Damian Witkowski - Gabelli & Company, Inc.

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

Martin Ellen

That's correct. The reason we have, we're going to buy back shares. And that's because we needed to -- remember, the debt we took out in December, we paid roughly $576 million to take out $476 billion. And so in essence, refinanced $500 million of that because it wasn't our intent to certainly de-lever sort of the disadvantage of the share repurchase program.

Damian Witkowski - Gabelli & Company, Inc.

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

Martin Ellen

It's small.

Larry Young

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

Operator

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

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