Q1 2020 Earnings Call
Dr Pepper, Vice President of Investor Relations Mr. Tyson Feely Mr. Sealy. Please go ahead.
Thank you Hello, everyone. Thanks for joining.
Earlier. This afternoon, we issued our press release for the first quarter of 2020.
I need a copy you can get one on our website carry Dr Pepper dotcom and investors section.
Consistent with previous quarters today, we'll be discussing our performance on an adjusted basis, excluding items affecting comparability.
The company believes that the adjusted basis provides investors with additional insight into our business and operating performance trends.
Well the exclusion of items affecting comparability is not in accordance with gap.
We believe that the adjusted basis provides meaningful comparisons in an appropriate pieces for discussion of our performance.
Details of the excluded items aren't included it in a reconciliation tables included in our press release, and our 10-Q, which will be filed later this week.
Due to the inability to predict the amount and timing of certain impacts outside of the company's control, we do not reconciled our guidance.
Sure with me today to discuss our first quarter 2020 results are GDP, chairman and CEO, Bob Gamgort, our CFO. It was on don't Miss Yoga.
And our Chief Corporate Affairs Officer Lately Maria Sceppaguercio.
Finally, our discussion. This afternoon may include forward looking statements, which are subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially.
The company undertakes no obligation to update these statements based on subsequent events.
Detailed discussion of these risks and uncertainties is contained in the company's filings with as easy with that I'll hand, it over to Bob.
Thanks, Tyson, let me start by expressing my sincere hope that everyone dialed in its safe and healthy.
Thank you all for joining us this afternoon.
As you can see from our Q1 results we started the year in a strong manner.
Financial delivery very much in line with our long term targets and with continued strong free cash flow and de leveraging.
We expanded market share across the majority of our portfolio.
Believed that we were just getting started.
As we began to introduce our best lineup of innovation yet.
The continued underlying shrinkage of our business is reflected in the results. We reported today. It's cobot 19 had only a modest impact on us in the first quarter.
What was home will take you through some of the relevant highlights from the first quarter that carry over into the full year, but I wonder we acknowledge that Q1 represents a very different environment than the one we're operating in today.
Therefore, I want to focus my comments on the second quarter and beyond.
Addressing a number of topics that I believe our most relevant to our investors.
This moment.
Specifically, we will discuss how consumer behavior has recently shifted.
Sure our assumptions for how we believe that will evolve going forward.
Explain how those shifts have impacted our portfolio positively and negatively.
Well do there's through the lens of both product categories and retail channels.
You are the critical steps, we've taken to date to navigate this unusual situation.
And how we're managing the business and channel mix to ensure continued success in the short term.
And in the long term.
And finally, we will provide a more granular view on financial expectations by segment for the next quarter.
And update you on our outlook for earnings cash generation and de leveraging for the full year.
GDP has a remarkably flexible and resilient business model.
And our organization is executing very well in this unpredictable and challenging environment.
We believe our discussion today will shed new light on how our original merger thesis.
Which delivered exceptional value in its first seven quarters.
He is more relevant now than ever.
Before getting into that discussion, let me start by thanking our 26000 employees for their extraordinary efforts that are enabling us to restock store shelves with a central products.
I also want to thank the new frontline in North America from healthcare workers to logistics providers to employees at retail <unk>.
Who are out there every day, helping us all through this difficult time.
Early in the crisis, we refocused the organization under a new set of priorities called one KDP.
The K represents keeping our employee safe and healthy.
The deep represents delivering for Arkansas customers and consumers.
And the piece stands for providing for our community.
We could build this entire call with discussion of the wide ranging steps we've taken to protect our employees.
From increased sanitation, physical separation, new health screenings, making our own hand, sanitizers en masse, one supplies got low.
Providing enhanced incentives to our front line and increased benefits to all employees.
Similarly, we could elaborate on are fueling to frontline initiative, which is providing curate commercial brewers and hot and cold beverages to hundreds of hospitals and tens of thousands of healthcare workers, who are working tirelessly to help those in their communities.
If you're interested in learning more about these and other programs you can find details on our website.
However, given that this is an earnings call.
I'm going to focus the remainder of the discussion on the D. In one KDP.
How we're delivering for our customers and consumers as that drives our topline and mix.
I will then turn it over to Ozon to review all the levers we have available to manage cost.
Order to drive strong profitability and cash flow.
As the majority of the country began operating under stayed home restrictions in March we saw immediate behavioral changes among consumers consumers.
Continue to see what may be blasting shifts and what consumers are buying and where they're shopping.
We are only about six weeks into this crisis, but we're gathering more and more insights as we progress.
This is an incredibly complex in evolving landscape.
Which is best visualize as a matrix.
With product categories on one access and retail channels on the other.
We are actively managing the intersections within that matrix between product categories and channels.
Prioritizing resources to deliver what consumers want.
While focusing on the highest ROI opportunities and navigating the differential growth and profit mix impacts of each.
We think about product categories as falling into one of three buckets.
Those that were purchased under an initial stock up mindset, primarily in March and are no longer growing and in some cases declining.
Those that continued to be purchase for ongoing in home consumption.
Many of which are expandable in nature.
There's potential for some of these categories to continue to grow at elevated levels post crisis.
As consumers find or rediscover a role for them in the new world.
Finally, there there are categories that are as relevant to consumers current needs.
It had been negatively impacted by this crisis.
Some of which will return to the previous growth levels. After the crisis abates.
Others that may not fully recover.
Let's look at the recent IR right data to illustrate what we're talking about here.
And remember these data cover primarily in home consumption and large C stores.
I'll discuss away from home channels and their impact on categories a mix in a few minutes.
In two weeks of March ending 322.
Which represents the early days of the crisis in North America.
Growth of total liquid refreshment beverages, or LR be spiked to 30.2%.
With all categories growing above average as consumers prepared for an extended stay at home.
If we dig further into these data we see that the real outsized performance. During those weeks was driven by consumer stocking up on categories, such as mainstream water and sports drinks.
Since then ellerby has softened considerably.
Rolling 5% in the latest four weeks and declining slightly in the late this week.
As the one time purchase of some of those same categories, such as water and sports drinks are not being repeated.
However, beneath the total performance of L.R. B.
There are areas of ongoing strength.
Presenting categories of products experiencing expandable consumption and ongoing replenishment as I discussed earlier.
For example, Csds remain very strong.
Growing nearly 10% in the latest four weeks.
Categories like juices, and mixers also continued to demonstrate strength.
Not surprisingly in home coffee consumption has also been very strong.
Due to the expansion of work from home and the inability to visit coffee shops.
With single serve coffee accelerating from 9% in the most recent 13 weeks to 21% in the latest for.
The majority of our portfolio has exposure to the bucket of expandable consumption and ongoing replenishment.
While less of our portfolio is exposed to onetime stock up off trend categories.
We certainly have mixed challenges to manage.
And strengthen our csds juice, Apple sauce, and mixers has been partially offset by softness in bi and snapple.
Which had been impacted by both weaker category trends nationally and the fact that they are highly developed in the northeast region of the U.S. and area very hard hit by the virus to date.
Our focus has been to drive growth and opportunity categories.
Order to offset the drag in others.
Our single serve coffee business is showing very strong growth.
It has the potential to enhance its relevance and consumers' lives well into the future.
The IR right data indicate not only accelerating category growth as I mentioned earlier.
Also with increase.
Average retail price per pod, yes, you heard that correctly.
This is in part.
Due to the growth in premium brands, which are outpacing that value brands.
It seems that when consumers are moving their away from home coffee consumption to in home, they're also bringing their favorite coffee shop brands with them.
Single serve coffee category growth is being driven by a combination of the long term trend.
Of growing household penetration.
Combined with an increase in consumption per existing brewer.
Something we haven't seen before.
We know this from our connected Brewer panel and network of approximately 10000 Internet connected Brewers that has been providing point of consumption data for three years.
As we look to a future in which a recession seems to be a near certainty.
We also see further opportunity for the curing system to expand.
Consumer shift more of their coffee preparation in home.
A study completed by I ride over the last few weeks indicated that 27% of consumers are making coffee at home more often than before the crisis.
And two thirds say that behavior will continue even when restrictions and.
We also know that csds are remarkably resilient to a recession.
And we have a wide range of pricing pack size and promotion tactics to ensure our continued relevance.
Consumers become more value sensitive in the future.
Let me turn from product categories.
Retail channels to give you our perspective on the other side of the beverage industry matrix that I described upfront.
Growth has been driven primarily by large retail outlets, namely grocery club in mass.
As consumers have increased stock up occasions at the expense of impulse and fill it vacation.
As a result ecommerce has exploded.
While C stores and small outlets have been weaker.
Similar to the discussion of how we're managing mix across product categories.
We're also actively managing mitt mix across retail channels and customers.
Our company owned DSD system half has performed remarkably well.
Enabling us to reach and restock growth customers.
While our highly developed ecommerce capability has enabled growth across our full beverage portfolio in this increasingly important channel.
Our supply chain is also pivoted significantly to provide the right formats and sizes.
Liver on these growth opportunities.
As well as securing raw materials and packaging to keep our products flowing.
Not surprisingly the most significant drag on our overall performance has been our fountain and foodservice business on the cold side.
And our office coffee business on the hot side.
The impact of the crisis on restaurants has been well documented.
And while the work from home trend has helped our at home business.
Has negatively impacted our off these coffee business.
All of the discussion to this point has been about the macro trends in the industry and our exposure to them through our portfolio and route to market coverage.
However, the quality of execution determines our ultimate success.
Effective mix management requires bold moves and rapid and align decision making.
Industry players, who are used to operating with predictable demand and relatively small fluctuations in volume are now required to manage of volatile mix of categories moving at double digit rate changes versus year ago, both positive and negative in order to land on a good outcome.
Since the crisis, we have implemented a new management, Kate would mirror daily executive team meetings and sales and operations planning meetings.
Enabling real time decisions.
And ensuring organizational focus on clear priorities.
These efforts are paying off.
Indicated by the latest ire I share data.
We increased our share of total beverages over the past 13 and four weeks.
Within total beverages, we've expanded our share of CSD significantly.
Growing 1.4 share points in the latest four weeks.
And we posted share gains in key categories, such as premium water ready to drink T juice drinks shelf stable juices and energy in the most recent periods.
In the coffee business the share of pots manufactured by KDP has held steady at approximately 82% of dollars as total growth accelerated.
And we showed share gains in key owned and licensed brands, such as Green Mountain and the original Donut shop.
With that clarity on revenue and mix, let me now turn it over to Ozon to pick up the story from here.
Thanks, Bob and good afternoon, everyone.
Since our press release for Wise, you see continue to want to walk past four months.
Touch quickly on of our results for the first quarter before shifting to a discussion on some more relevant items since the end where demand has changed significantly.
It's a high level. This first quarter was another very good one for us.
Letting the strength of the business from the quarter.
As then as these small net benefit of Colby 19 in the final leaks both the quarter.
Excluding the impact of foreign exchange net sales increased 4.5%.
We see growth from all four segments and particular strength in packaged beverages.
We believe that adjusted diluted EPS growth.
16% in the corridor.
Fueled by the growth in adjusted operating income.
A little bit effective tax rate and low but intend as expense due time out of the two continued de leveraging.
Cash flow in the core that well the strong at $464 million.
Facing into an adjusted free cash flow conversion rate of nearly 115%.
Do they do spike that by $42 million.
And the V. paid $107 million off structure payables.
And we ended the quarter, we almost $200 million all unrestricted cash on the.
In terms on evidence our bank debt to adjusted EBIT Studies show.
We refer to as a lot of money instrument never the today show improved to 4.2 times versus 4.5 times at the end of 2019.
This improvement was driven by lower outstanding debt balances and continued growth in adjusted EBITDA.
Including the inclusion of certain penman it.
Sedation expenses, which were not previously recognized in the calculation of adjusted EBITDA.
I would like to take a moment to provide more information on this change.
As part of our detailed financial review if this strategic these financing we recently completed.
That's her mind that certain components awful lot of important amortization expense.
Not that reflected in the calculation of adjusted EBITDA.
This represented approximately $170 million into trailing 12 months.
As a result, we have updated the calculation accordingly, starting in quarter one.
The uptake grow approximated two parts of the change in our money it's been leverage ratio.
Let me be cleared on two things first.
First this change does not create at one time impact, but rather it is permanent and I'll stick all periods.
Second I have described before that we take a very conservative approach in calculating our money spend leverage ratio.
And this change does not affect that stands at all.
We still excludes menu items, that's a lot bank loan covenants are lowering the calculation.
And this item that we are not including was immediately and oversight.
Let me know touch briefly on liquidity.
As announced previously.
We computed as strategic refinancing earlier this month that extended our debt maturities and enhance our liquidity profile.
The refinancing included the issuance or $1.5 billion off senior notes and the these financing and the doubling of about $750 million 364 days credit facility to $1.5 billion all bought RV capacity.
This is strategic refinancing provides additional liquidity to a level that we believe exceeds our potential needs even in the event unfair protracted downturn.
Clearly it was as long as stuff to the yet.
But as both Bob and I have indicated.
Environment today is entirely different then the one that the open they did in for most of these first quarter.
Yes.
Let me talk about other priorities to continue to be competitive in the marketplace and flotek profits and cash flow.
Four buckets to discuss.
First we are going to be competitive in the marketplace and ensuring we have did I products in the right places. So that we can continue to deliver the products consumers want and drive share gains as we have across the majority to awful lot of categories in the most recent periods.
Clearly this is strategy is working for us based on the numbers, Bob just walk you through.
Second is top line discipline.
As you would expect in times like this.
Hey, we're pacing for could probably isn't as well that chasing unprofitable one girl in order to protect profits.
This may seem like an obvious concept it takes discipline and staying close to the Taylor.
And the consumer to understand what products to emphasize and which ones are not critical in the environment. We are in.
Huh.
I don't being smart on top line they said.
<unk> cost levels in the piano that are using to ensure bottom line building that.
For example, marketing investments.
I would be viewed our marketing strategy and you continue to reduce expense in Ah, yes, there is not justified in recurrent consumer and vitamin.
As do the opening of the economy occurs we will do you deploy marketing resources when we believe it is appropriate.
And then the return on investment is great.
Travel and entertainment and discretionary spending on two other cost levers that we had to using.
This time, we have eliminated all discretionary spending and we'll assess these costs on a go forward basis.
Fourth and finally is maximizing cash flow Capex is one of the most important audience or cash spend.
We continue to support the business is necessary Capex investment.
But we expect some projects to be Dave.
In some cases these will be discretionary delays because the project isn't the strategy or doesn't support growth and in other cases that I'd delays due to kabi 19 impact on suppliers and vendors.
Given all of this we have confidence in l. on targets, which I really speak to moment today.
We have a unique business model.
Broad portfolio of brands and seven distinct route to markets.
We continue to be heavily into all that integration and synergy boats, which means we have deep understanding of our cost structure.
This concludes our productivity programs.
This gives us great confidence in the levers we have to control those costs.
Which brings us to guidance.
Intends off the floor, yet you have confidence you know <unk> ability to deliver adjusted EPS growth all 13% to 15%.
Given our ability to control cost numbers in the organization that I just spoke about.
You also have confidence in about a deliberate agent targets and continue to expect our management never the today show to be between 3.5 times and 3.8 times at the end of the yes.
Given the uncertainty and by the ability if the current economy and consumer environment.
We expect net sales growth will likely be at no and a lot 3% to 4% range on a constant currency basis.
Why is the path to achieve these kind of gets in certain that bid. This and then what we originally planned yeah I'm confident in our ability to execute.
And then leave at on a lot commitments.
And finally coin 19 is likely to have a large impact in the second quarter.
You know this may make modeling all Oh, what segment did pickup so let me give you some incremental false.
In coffee.
We would expect net seems to be up mid single digits as <unk> increased consumption. We are seeing you know what that's home business outweighs the pictures from a lot away from home business.
In packaged beverages, we would expect net sales to be about flat.
As continued Oh pets, one month in serving categories such as C. As these and juice in large format that we pay them.
It's not just the offset by softness in other categories, such as premium water and continued weakness in the convenience and gas channels.
Beverage concentrate net sales will be significantly impacted.
Bio and fountain foodservice business, which continues to be a did that due to the weakness going on and hospitality environment.
Until the economy stuff to open up and consumers gain confidence returning to public right.
As such net sales for the segment are unlikely to be down in the mid teens in the second quarter.
Net income beverages net sales will be about flat on a constant currency basis.
Reflecting modest impact from call it 90.
On any posted basis quoting exchanged sensation is expected to have a significant unfavorable impact any color that and as it is though we expect reported net sales for this segment to also be down in the mid teens.
We though loss. These puts and takes you would expect total kb Pete constant currency net sales to be a bodes well in the second quarter.
Yes, let let me turn back to Bob for some closing remarks.
Thanks.
Well, we're very pleased with our Q1 performance, which followed a strong 2019, we recognize the need to make bold changes to win in this very different environment and we continue to pivot accordingly.
As we looked at a future we don't have a better crystal ball than anyone else.
Built our plans on the assumption that the second quarter will reflect the most severe impact of home sheltering.
Followed by a gradual reopening of the economy starting in Q3.
With offices in schools first.
We followed by restaurants, and travel and still later lab large gatherings and events most likely want a combination of testing treatment and vaccines are available.
We expect consumer spending to be a pair for a longer period of time.
The shift towards a value mindset elevating in home consumption of food and beverage.
We're also developing our game plan for how to market and create demand for our brands and this new environment.
Both the consumer and the retail landscape will show lasting change.
The most important takeaway from this conversation as evidenced by our comments on this call is the Optionality, we have to successfully navigate in this changing environment due to the broad beverage portfolio, we manage combined with our diverse and flexible selling and distribution system.
Finally, we would not have been able to deliver the Q1 results we share today.
Nor have the confidence our guidance we provided.
For the loyalty dedication and professionalism of our team.
Our frontline employees are executing exceptionally well at retail and keeping our plants safe and running.
All to ensure our customers and consumers have the products they need during this crisis.
Our team is demonstrating KDP at its very best.
With that we'll turn it over to the operator for your questions.
You asked a question you any depressed star one on your telephone to withdraw your question press the pound key please standby well we come out to Kennedy roster.
Your first question is from brands.
Hey, good afternoon, everyone, Hi, Brian right.
Just two questions for me what is <unk> speaking about the low one Q2 Q.
I think one of the questions were getting quite a bit. This evening, it's just seemed like.
Previously that there were some sales that would have been pulled into Q2 out of one Q. So.
We're going to a a reduction or deceleration sequentially just what changed.
Since there so maybe I'll start with that and then.
Sure. So as we said on the call then I'll pause. After this part to make sure that I'm answering your question did you had in mind.
When you think about the first quarters, we said we had modest impact of on our topline sales from the consumer behavior related to the shelter at home.
It really impacted us in our DSD segment, because you see an immediate reflection of south.
In that segment and and that shows up in PB as as our overall segment interestingly in coffee, we started to see consumer behavior [noise].
Begin to pick up but we get the immediate hit from the away from home segment, because that's the office coffee piece that we shipped directly and so we see the negative about him immediately we also see the negative fairly quickly of the fountain foodservice business as well. So that's what explains Q wants a very solid performance with a little bit of.
Upside on the revenue almost all in the PB business with some negative in the rest of our business. We take a look about Q2 and Ozon gave you. Some some very clear specifics on how we see the shaking out we see growth in coffee driven by away from home I mean by at home offset by away from home.
We see this pluses and minuses that I talked about and these are massive swings in categories and retailers delivering flat NPV and then the area, where the fountain foodservice business really hits US is in our BC segment. So that those all out assuming really rough Q2 for the industry.
We see ourselves coming in around flat total and then obviously improving from there based on the but based on our outlook for the full year. So does that get get it the question or was there more clarity I can no no no no I think though I think the relative to maybe were external expectations were it's really the fall off in beverage concentrates into Q.
Sure that is gonna be severe and probably is again just thinking at an enterprise level is what lot of what drives the sequential change so that that's helpful.
And then just one other one and related the beverage concentrate and the fountain foodservice Pete.
Can you remind us.
How big that is pretty percentage of the segment and then also.
Recollection is that geographically, it's a little bit more skewed to the Dr. Pepper Heartland market. So as we're beginning to kind of quite model out beyond two Q and do scenarios beyond that I'm. If you could just give us a little help their geographically where you're more exposed in U.S. Thank you sure.
If you if you look at the Fountain Foodservice segment.
As we described it in our 2018 Investor day right. After we announced a merger we talked about that being 20% of the legacy Dps business.
So it's a it's a smaller portion of the total business. All combined it is a significant portion of the BC segment and that's why you see the impact there and the numbers that are coming out of restaurants, which are widely available.
Explain the magnitude of the decline combined with that exposure to our portfolio. So that's really not a surprise, we do see it improving as the year goes on we are from a geographic standpoint, we're now really national and coverage. The legacy was that it was in Dr. Pepper's Heartland.
In a in.
The south and southeast.
But not anymore, we really have national coverage remember Dr. Pepper is the most widely available.
Carbonated soft drink in restaurants.
And so as a result, we by definition have national coverage, we see that do geographic skews based on the degree of the consumer impact.
But we're going to we're going to perform like the the country and total on average.
So just tracking QSR traffic in general is probably the best way to kind of look at it from the outside.
Absolutely and were very heavily exposed to the QSR segment and no. There's some signs of that improving with drive-thrus and and we hope with a gradual reopening of the com economy, that's going to pick up but again.
Our estimation is the biggest hit will be in Q2, and I think we modeled a very significant hit an all of our numbers to make sure that we're able to pressure test RPL to deliver on on EPS and cash.
Okay. Thank Bob procedural it okay.
Your next question is from Lauren Lieberman.
Great. Thank you.
I just wanted to talk a little bit about grew or trends.
Because I know this quarter there was a difficult comparisons but also you had mentioned in the release supply from Asia, and some thoughts about shipment shifting from first quarter to later in the years. So.
I guess, one what are you seeing in terms of brewer.
Sell through from retail so think with people at home monitoring how to occurring to start and when the crisis hitting the only thing that coffee at home. So.
What do you think on that front, one that you'd be doing to shift your marketing specifically for Brewers.
You as you look forward and then third and anything you can share in innovation plans I'm going against that you know how we all got together in March we would've heard a bit about attenborough renovation plans for this year, maybe that shifted a bit.
I'm, just given the environment, but would love to hear any update there there is like thanks sure.
The maybe just the overall the coffee business in the at home portion is performing remarkably well and I'll reiterate something I said earlier because it is it is notable we're seeing a significant uptick.
In consumption per machine and as I said, that's something we haven't seen a long time.
And we have that connected network about 10000 Internet connected Brewers the allows real time basis, what's happening.
And it was really striking to see the tick up happen in the first couple of days and it has remained at elevated levels. So we're getting growth off of existing machines because of that behavior and where some people have you say what happens in the future when it all normalizes, it's a lot of indication that that's going to stick at a higher level then history.
There's a lot of noise and our ability to read what's going on with household penetration.
And remember were six weeks into this.
And there is great demand for Brewers.
And there is.
Some other indicators that you can look like search.
Arms for coffee makers and curing in particular being elevated.
The biggest shift is where consumers are buying their brewers more has moved online than before.
We're seeing good growth in mass channels, but remember the entire specialty channel, where we sold a considerable number brewers has been largely shutdown. So the demand for the kids for Brewers. Among consumers is very high they've had to alter where they're able to buy them and as a consequence, weve altered our marketing vehicles to move more online and mortara.
To where the consumers searching.
We'll see how that shakes out over the over the coming months as consumers nowhere to get the machines, it's easier for them to buy with regard to the supply chain side of it yes, theres been some some minor disruptions, but nothing that has gotten in the way of selling any brewers regionally. We were the whole crisis started off in China.
And so we were happy to be diversified outside of China, We've seen the crisis move into other Asian markets as we'd actually shifted a little bit of production back to China, and so again, we've got a lot of Optionality now that weve spread our are.
Production base to be able to react to that and make sure that we are able to supply the brewers and people one and your point about innovation is.
Absolutely right. When we were supposed to get together for analyst day in February we're going to show you. The rest of the lineup for the year not only for Brewers before beverage portfolio total, which we believe was a very very strong.
Lineup of innovation, we did talk you about the newest brewer that had just been launched which was the case slim.
Hundred dollars price point reservoir Brewer.
Very different and upgraded industrial design.
It was an indication of where we were going with our innovation.
Thank you about that on our next call because from an innovation perspective, we will still be launching our renovation in the third and fourth quarter of this year.
Okay, and then just lastly pieces on on marketing everything you're doing in terms of.
You know marketing differently.
Got it.
We've moved even more online because that's where the consumer is going to find brewers.
Commerce has been real growth engine not only on the coffee type of business, but on the total beverage side of our business. We've always talked about at the time of the merger that because of the curing legacy not only in selling within E commerce, but having our own direct to consumer.
Commerce site that we were well developed probably head of everyone on E commerce that serving us well on that curing side as well as the total beverage side. So I think that that move online, which has accelerated dramatically in the past six weeks again, a lot of that is going to stick into the future and therefore, our marketing will continue to evolve it will always be a combination.
Of mass vehicles and targeted vehicles.
As more and more Brewers shift online, it's very attractive for us the target to a consumer who is raised his or her and it is interested in buying.
Coffee maker to be able target them with the right message right at the time of sale.
Thanks, so much sure.
Your next question is from Peter ground.
Hey, good afternoon, everyone Hi.
Hi, So I just kind of wanted to follow up on Brian's question.
But more around Q2 coffee guidance or mid single digit growth.
No back in March you mentioned that most of the benefited from the stock comp would really occurred in Q2. So just a mid single digit guidance reflect that benefit and then.
You mentioned pod pricing is actually in positive territory and with some of these category changes likely permanent how should we be thinking about pricing for pods through the balance of 2020 and beyond. Thanks, Yes first of all the coffee is not stock up coffee is concern is elevated consumption and again, we know that bill.
As we have access to our connector brewers through our household panels. So that's the.
Conversation, we had earlier when you look at elevated growth in a number beverage categories. We had to make the conclusion, which of these were onetime stock up which of these are ongoing consumption, which of these are really categories will be off trend and coffee is clearly in the category of being elevated consumption. So this is not a stock up behavior.
But rather a shift in fundamental behavior.
It's on there the mid single digit that we're talking about here is there is a representation of a significantly higher growth on that.
On the at home side of our business driving that offset by an office coffee business that has plummeted very similar trends you've seen in the restaurant business.
The net of that is that we come out nicely ahead, because we have both sides of the a of the equation covered.
But it but theres no.
No no mistake that the office coffee shutdown or slowdown has certainly been an offset to the explosive growth. We're seeing at home. So that's the way we take a look at a at at that coffee and total getting a lot of this behavior in the in home side will stick.
If we think that there's a recession coming we will absolutely see more consumption moving in home, especially as people have discovered how easy it is.
To make coffee at home and that's part of what's driving the pricing trend that we talked about as people move from purchasing coffee out of home to in home, they're bringing the premium brands with them. So the IRI or Nielsen numbers that you can see over the past month or so show premium brands growing at a faster price than value brands.
[music].
You see great improvement trends in our owned and licensed portfolios. That's a positive contributor to pricing and then you're seeing more of the category being purchased.
Full price not waiting for a deal on all combined that's that's leading to a and elevated price within pod I've no idea how to forecast that for the rest of the year, what I would say is we've talked before.
We have great line of sight to the pricing that we charged to our partners.
And that doesn't change in this environment.
As it if price impact like you're seeing right now does have a good profit contribution to our owned and licensed portfolio, but doesn't have an impact on long term pricing agreements, we have with our partners.
Thank you.
Yeah.
Your next question is from Bonnie Herzog.
Thank you good afternoon, everyone.
I wanted to circle back with a question on your guidance I guess, a and wanting to reconcile something you had said last quarter about the first half you'd originally guide that first test sales and Dps growth would be tempered.
Given several factors such as higher investments similar productivity on synergies. So could you guys touched on how much of that you shifted in the quarter such as maybe pushing out investments are pulling forward. Some of the savings just trying to kind of thanks to that and then I guess I'm trying to get a sense as you again how confident.
Our that you're going to be able to hit your guidance, especially if things don't recover for a while in light of the recession branch I guess I'm thinking about it in the context downtrading pressures, increasing especially in your pod business. You know just can you touch on why is in your guidance as it relates to that.
Yeah.
First quarter results. So we delivered our reflective of everything that we said on the last call term. So the sequence of timing impacts and I won't go through all those I think it's well documented in the earnings release.
And nicely covered by owes on on the call.
No big surprises the first quarter other than we outperformed.
We could talk about where that performance came from a third for number of factors.
I would suggest that for Q2 and on.
That guidance that we gave back the.
At the end the fourth quarter.
It doesn't even matter anymore, it's a completely new world and it's a complete reset of our plans than any other company operating in this environment isn't looking at its aoki anymore. They have completely zero base their budgets and they look at the new World and that's how we've thought about it and so while we assume some gradual recovery beginning in Q3 those are the words we use.
We have pressure tested RPL to be able to deliver in the priority that goes on talked about which is being competitive in the marketplace continuing to gain share protection of cash in earnings.
In that order and we have every confidence in our ability to do so otherwise we would not continue to reiterate that.
Okay. Thank you.
Your next question is from Steve powers.
Yes, Hi can hear me.
Yes.
Right, Great, Hey, I guess I wanted to build a little bit on what you've already said it just dig further into visibility into the coffee system in pod demand over the balance of the year considering all the the cross channel volatility that you referenced.
Maybe just talk through how an earlier or Conversely, later returned to social mobility for like a better term might impact your planning on that coffee business.
Over the balance of your versus the slow recovery base case that you referred so just.
Trying to figure out how you.
How you how you toggled those plans going forward based on a lot of different outcomes. You know channel by channel. Steve are you just to clarify are you, saying what happens if the recovery is.
Faster is faster or conversely slower longer longer duration, yes, they talked about before when I used the term that we pressure tested RPL is we put a base case out there and and anybody in this environment.
Who is managing to a single number forecast.
Would be falling themselves because of the ranges are significant nobody's managed in a territory like this where we're seeing double double digit movement up and down across different segments. So everything that we've done internally is within a range and so we look at scenarios in which the to Bonnies question.
The recovery is slower and we look at other scenarios and what comes and faster and so how you have to toggle all of these things are.
We said before the at home consumption is benefiting from work from home, but we're getting hit very hard on our office coffee business.
As we get a recovery and people go back to work our office coffee business improved nicely and one of the things were fascinated with is how much of that at home business will stick and we believe that a good portion of that will stick and we've got a number reasons to two to believe that I quoted a couple earlier in the call. So I won't repeat those and so we think that that's a wind.
If it's extends lager again, weve pressure test ourselves otherwise, we wouldn't have the confidence that we put out there around the P.S. or the cash.
And so we would love will return to business as usual. This is not we're not a company who's got a onetime gain from this crisis, who that is gonna have to worry about what we do once things recover we would like everything to recover but weve evil, if we're able to toggle the mix elements of our portfolio very uniquely given the.
Portfolio that we manage as well as the cost elements of our portfolio that goes on talked about to be able to manage ourselves. The success almost any one of the scenarios that we described in occurs to me that I Didnt answer part of Bonnies question, which was about what do we think about downtrading or a recession on the on that carry business. We think we're set up really nicely.
For that first of all people trade from premium price away from home products food and beverage going to the coffee shops in home during the recession.
So we're a great value compared to that and also think about all the work that we've done to strategically lower price both on Brewers and pods you can get high quality pod now for around 30 cents, we're not concerned about.
Recession.
Its impact on your business, we think it's actually a net positive on that business if that were to occur.
Thanks that helps <unk> can I just ask one quick question different topic. So your smaller third party independent bottling partners I'm. Just curious any comments you have on how they are faring with a mix shift away from immediate consumption channels, which are obviously very profitable for them just you're just your confidence in their ability to wear.
There are the the.
Tough as part of this downturn through through to queue. Thanks, sure, we say very close with them and they are.
If the share growth numbers that I talked about earlier.
Our independent operator performance is embedded in those share numbers and so they're executing very well right now it's a challenge for them to manage like it is for for all of us, but we don't have any concern and their ability to weather the storm.
Great. Thanks, so much okay.
Your next question is from Kevin Grundy.
Hey, good evening, guys, sorry about that.
Hey, Bob I'm going to want to pick up on the on the coffee business and the working from home dynamic longer term so.
Clearly, it's a positive here wasn't March seems to be into April I guess, it's still a little bit murky I think for for some of us.
With the pantry loading going beyond coffee into other beverage categories, as well see where the dust settles, but I would like to sort of.
Drill down here is how positive this could be the working from home dynamic, which will be with us for a long period of time I think even beyond the recovery here with the virus.
And what sort of positive that could be for for your business. So the increase coffee usage is there with the 10000 Brewers that you have I guess, that's on surprising because people are spending more time at home, but then you're down to a trickle probably in the office space. So how should we think about that longer term and then just sort of like frame that context.
You talked about the 20% of the business and beverage concentrate that's on premise what percentage of the business in coffee is gonna be levered to.
Off premise channels as well I think that would kind of help us think about it and you share in that channel as well thanks for all that Bob Yes.
We would love for the economy to go back to normal people go back to work that we go back to delivering our our long term trends, where we talked about accelerate growth this year.
13% to 15% EPS, we'd like that world. So again I would reiterate that this is not one that we view as a as more desirable for for a number reasons I'm, having said that we're in a unique situation now we're able to satisfy consumers' needs.
Unique way in a moment in which they really need it and that is we're able to take care of all of their beverage their coffee needs in home, they're using our machines more frequently.
And we know that as that continues to happen in new people come into the system, which they are right now that that's going to be sticky and so there's a scenario as people go back to work, where they're more attached to their curing machine at home than ever before they are more people using cured machine at home than ever before.
And yet we're able to pick up the office coffee business as well. So we're very bullish as you can tell on the long term prospects of the entire gerrick system.
And that's why when you think about all these different scenarios that the questions or centering around today, what if the the.
Current crisis last longer what if the recoveries faster, we can navigate through any of the scenarios and come out in a good place on the carry business and when you look at the impact on our total company. That's why we're in a unique position. We've got a portfolio. The covers almost every beverage need we have routes to market. We've talked about now for two years, where we can cover any.
From a C store all the way through to E. Commerce, those seemed interesting it the thier theoretical level, you're seeing that all play out live right now in this environment and as it recovers which ever path recovery takes its not going to be a straight line.
We're very comfortable that we can navigate through that as well.
Thanks, I just to make some clear, though and maybe I missed this what percentage of the business in coffee is away from home. So it's 20% in on the legacy Dr. Pepper side all of that Burcon, how much on on the coffee side of the business and what's your share relative to the 80% plus that you speak to in the food channel Yeah.
You didn't miss because we never have disclose that and we're not planning that we've talked about 50% of our business, how the coffee side being in it and measured channels and that includes ecommerce specialty but also includes a away from home coffee.
And our share in that channel is significantly lower than our share in the home channel mean office coffee is a very fragmented business.
And although all of the both the the exposure to these different channels that you guys are asking about that's all embedded in the guidance that we've given you for the year and also for Q2, which is more granular guidance than we've ever getting before.
Okay. Thanks, Robert Buckley luck alright. Thanks.
Your next question is from Bill Chappell.
Hi, Thanks, good afternoon.
Just a couple of quick follow ups one.
I think I'm right in saying that the away from home and at home split before Green mountain win or cured when it's taken private the around 70 525.
Is there any reason to think that that's changed over the past few years and then secondly, just on the promotional kind of cost environment.
I mean can you get on gives an update of what you're doing over the next poor five months, we're hearing from a lot of food beverage companies of because the demand so strong.
Quickly pulling a lot of promotions, which presumably falls to the bottom line. So just trying to understand if that's the case and that's kind of factored into your guidance as well, yes. If you take a look at the latest IR Ryan Nielsen numbers I would not say that beverage demand in general is strong.
I'd say it is.
Elevated in pockets and its weekend other pockets. This is a tremendous mix management challenge for everybody in the industry.
Including us.
That's how you you see that playing out in the Q2 numbers that we've talked about before Fortunately csds, our remaining elevated and we're gaining share in that segment.
We're also gaining share to another a number of other segments.
Some of which are strong like juices and juice drinks and there are other categories that are not as strong so it's not a a it.
Situation were beverage is so strong everywhere that people are pulling promotions and so we're targeting our promotions to the right areas, where we think it's appropriate and there are other areas, where it doesn't make sense. So its if theres not a big macro conclusion, you can take out of that on the coffee side of the business. There is certainly elevated consumption.
And it is it is not a stock up it's an ongoing piece, we're continuing with with somewhat of our normal promotion schedule, but what you're seeing is the consumers also buying product at full price a day in a day out which is part of the recent along with the mix towards more premium brands that you're seeing pricing going up there. So I wouldn't take anything away any.
Big conclusions on the promotional environment for us at least in general I think it a lot of these categories.
Where you're seeing weak demand from consumers, you're actually going see more promotion going forward and take a look at the Nielsen and IRI.
Trends right now there are segments that are running negative for consisted period of time Theres a lot of incentive for players to promote in that environment.
We've got good exposure and we're managing it really tightly.
Got it on the breakout any reason to think that it's changed from when it was last disclose five years ago I don't know those numbers from five years ago haven't been there for five years, but.
But I don't really have a comment on that want to be honest.
Okay. Thank you.
Your next question is from Sean.
Great. Thanks to the question.
Touched on a hot pricing strategy, but India in the context of recession and consumers being more value sensitive.
You say about the risk that consumers, specifically returned a pot and copy, especially after the spending over long period of time at home.
It is I guess is household penetration at a point where that that risk is I guess no longer relevant.
Well, yes, so I think you there first of all we've got to a really establish household penetration base. The continues to grow at a steady rate year in your out I think it cut the second part of it is when you look at consumer behavior. During a recession. The first trade off they make is out of home food and beverage to in home food and beverage and if you.
Look at a price comparison of curie versus purchasing coffee from outside the home, it's a tremendous bargain.
But again the last time, there was a recession the price of pods were significantly higher than they are today.
So all of the work that we've done to get the price of pods down.
Serves as day in a day out at a prepares us really nicely to be recession rhesus resistant. Similarly, we've got the price of machines down in some cases in other cases, we've gone to more premium. So we're able to fill a wide range of consumer needs. There and we have machines that are below $100, we have machines itself.
Around $50. So the thought of a recession at a trade down I think is a debt benefit to us not a net risk as people move from consuming coffee out of home the in home and.
As we see right now in a situation where people are moving their their consumption and help not only are the drinking more coffee, they're actually tricky more premium coffee right now because they're filling that need for or the coffee shop occasion that they're not able to get.
Great. Thanks, the color if that's okay.
There are no further questions in queue at this time I'll turn the call that because we didnt.
Any closing remarks.
Thanks, everyone. This is Tyson thank you for joining us Tonight.
The IR team is around and available throughout the week in this evening, if he would like to follow up just reach out to myself or Steve and we'll get back to you. Thanks, everyone safe.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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