Q2 2020 Keurig Dr Pepper Inc Earnings Call
[music].
This conference call is being recorded and there will be a question and answer session at the end up the cool.
I would now like to introduce documents Dr. Pepper's cheap corporate Affairs Officer, Mr., you Skip a garcia, let's get Butterfield. Please go ahead.
Thank you and good morning, everyone. Thanks for joining us here with me today to discuss our second quarter 2020 results or KDP, Chairman and CEO, Bob Gamgort, our CFO with aren't domicile glue and senior director of Investor Relations, Steve Alexander.
Sitting in for see the sitting in today for tracing Sealy, our vice President of Investor Relations, which home on baby Judy as he and his wife just welcome their second daughter into the family earlier this week.
Best wishes go out to all of them.
I'll now hand, it over to Steve to cover a few comments.
Thanks, Maria and Hello, everyone.
This morning, we issued to press releases the personnel that we had entered into a long time franchise agreement for poor shelter and the second was our Q2 press release.
A copy of either release, you can get one on our website a cure Dr Pepper dot com and Investor section.
Consistent with previous quarters today, we will be discussing outperformance on 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.
While the exclusion of items affecting comparability is not in accordance with gap. We believe that the adjusted basis provides meaningful comparisons and an appropriate basis for discussion of our performance.
Details would be excluded items are included in the reconciliation tables included in our press release, and our 10-Q, which will be filed later today.
Do you did the ability to predict the amount and timing of certain impacts outside of the company's control, we did not reconciled our guidance.
Finally, our discussion. This morning May include forward looking statements, which are subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 1990 far.
These statements are subject to a number of risk and uncertainties that could cause actual results could differ materially in the company undertakes no obligation to update these statements are based on subsequent events.
A detailed discussion of these risks and uncertainties is contained in the company's filings with the FCC.
With that I'll hand, it over to Bob.
Thanks, Steve and good morning, everyone.
Let me start by expressing my sincere hope that everyone dialed in continues to be safe and healthy.
Your families are well.
Kb P., we have worked extraordinarily hard since the onset of to cope with 19 crisis to protect the health and safety of our employee.
Particularly though frontline employees and our supply chain it out in the trade, who played a central role and ensuring our products are available for consumers customers.
Entity the rely on them.
The results. We reported this morning are a testament to the dedication and commitment of our team and I can't think Kt P. employees enough for all that they are doing day in day out.
As you know the environment in which we are operating continues to be extremely volatile.
Cobra cases spiking again.
Forcing some regions into a second phase of shutdown.
All of which impacts consumer mobility and beverage consumption behavior.
Katy pay was performing exceptionally well before the crisis.
We have delivered well for all stakeholders during the crisis.
Evidenced by the results were discussing today and we fully expect to emerge as it even stronger company when we get to the other side.
Until there was a widely available vaccine or treatment, we believe the macro environment will be bumpy and uncertain.
Requiring us to continue to be focused flexible and responsive.
Two years ago. This month, we completed the merger the created Curie Dr Pepper.
Which at that time, we described as the new challenger in the beverage industry.
With the integration complete we believe we have created a modern beverage company.
With a broad Richie portfolio hot and cold beverages.
<unk> diversified route to market network provides unmatched reach and efficiency.
And with highly unique ecosystems in our coffee business and DSD network.
Leverage partnerships and technology to create value.
Equally important we have built the culture that emphasizes excellence in execution and delivery.
The cobot crisis is by no means a windfall for KDP.
We have been required to focus resources on the areas of our business that are aligned with changing consumer trends.
She is at home coffee multipack cold beverages large form at retail and E commerce.
The offset significant weakness in away from home coffee on premise beverage consumption and convenience stores.
The impact of these mixed changes on margin are significant.
She has required us to deliver volume and revenue growth.
Tightly controlling the cost side of our Pinedale and still investing in our future.
Our executional capabilities have certainly been tested by the crisis.
And we're proud of how we performed to date.
In the two years since the merger we have exceeded our merger commitments for net sales growth of 2% to 3% and adjusted diluted EPS growth of 15% to 17%.
In fact in the quarter since our merger close adjusted diluted EPS has grown at an average annual rate of 20%.
In the second quarter, which we believe will be the most challenging environment, we face this year.
Constant currency net sales advanced nearly 3%.
Constant currency adjusted operating income grew 11%.
And adjusted diluted EPS was up 10%.
Further we have reduced our management leverage ratio to Fourx.
As compared to the six ex ratio at the time of the merger.
Osama will take you through a more detailed review of our financial results by segment and a few minutes.
[noise] to bring the concept of a modern beverage company to life, Let me separate performance highlights from the latest quarter.
The strength of our differentiated on portfolio is unprecedented.
The first company to combine hot and cold beverages that scale.
Including the leading positions in single serve coffee flavored csds premium water juices and mixers.
Our coal portfolio was very strong in the quarter as we gain market share of total liquid refreshment beverages.
With gains in the majority of the category segments in which we compete.
Specifically in Csds, we gained 1.2 share points and moved to the number to see us put CSD player in a number of key grocery customers driven by broad based core brand strength.
Strong in market execution, and innovation, such as Dr Pepper, and cream soda and Canada dry bulk.
In fact, Dr Pepper and cream soda is the best performing innovation and the CSD category. So far this year.
The Dr. Pepper brand has now delivered 17 consecutive quarters of growth at retail.
Canada dry has done the same for 13 consecutive years.
What's important for our longer term outlook. However is the fact that our share expansion of Csds has been heavily driven by a double digit increase in new households, purchasing many of our brands.
We're confident that we will be able to retain a portion of these new household once we emerged from this crisis.
In the hot portfolio, we have a commanding leadership position up single serve coffee.
With the come combination of owned license and partner brands.
The curate brand is ranked by consumers is one of the most relevant brands in the country.
Not just in CPG, but among all brands.
In the second quarter, our coffee systems segment, good pod volume, 9.5% and Brewer volume 11.6%.
And that's on top of 19% growth in a year ago period.
Primarily reflecting new household entering the system.
These results reflect significant growth in coffee consumption at home.
Partially offset by all the by the away from home channel, particularly our large office coffee business and to a lesser extent, our hospitality business, which were down significantly in the quarter.
Our share of K Cup pots manufactured by KDP held steady at 82%.
And retail pricing for the category increased by 2% as promotional activity lessened and mix shifted towards premium brands.
Further share trends for our portfolio of owned and licensed brands also improved.
We've previously discussed our seven distinct routes to market at some length and today I think it's relevant to highlight DSD and E commerce using examples that their contributions in the second quarter to also illustrate our long term strategy.
Our DSD network has served us very well during this crisis by enabling the highest levels of flexibility speed and delivery.
We have been able to pivot on a granular basis at both the products skew and local marketplace level to react to changes in demand using near real time data that simply not available in other distribution system.
We see opportunity to continue to invest to improve our DSD system and look forward to sharing more with you on this topic in the future.
As you've seen across many categories ecommerce has been the real star this year.
The cobot crisis has accelerated consumer adoption of E commerce for food and beverage and we see no evidence of this trend slowing when the crisis abate.
If you recall at the time of the merger, we emphasize Curexcell first mover advantage in the space dating back to the launch of cured dotcom 16 years ago.
And how we plan to leverage that competency across our four full portfolio.
Today, we believe we're the leader in E commerce in food and beverage if not FMCG.
Ecommerce now represents more than 10% of KDP total retail sales and it continues to expand rapidly.
While our online business is weighted towards Brewers and K Cup pods. We also have a strong presence on the cold side, especially with by core Mott's and Dr. Pepper.
Upfront I mentioned the concept of ecosystems in our DSD and coffee business.
Let me explain that important concept further.
Demonstrate its power in the most recent quarter end for the future.
And announced several exciting developments.
Our DSD network, which gives us national reach in the ability to be in retail on a daily basis is an attractive asset to start up we're expanding beverage company.
Well, we've stated that we have no interest in renting out our system as a distributor.
We're willing to partner with beverage brands that bill White space in our portfolio through a range of structures.
Recent examples include our long term partnership with the known for the heavy on brand.
Our investment with a path to ownership in eight shock smart energy.
And our licensing agreement with Peets coffee for ready to drink beverages.
This morning, we announced a long term franchise agreement with polar beverages for their polar Seltzer brand.
Polar Seltzer is the third largest branded flavored sparkling water in the U.S., despite being available in less than 35% of the country.
The brand is also the highest velocity sparkling water were distributed.
We currently have a longstanding and successful franchise agreement with polar beverages to distribute KDP brands.
Throughout their network in new England, and we're excited to announce a similar arrangement for their flagship brand to be in our system and expanded geography.
We look forward to rapidly scaling polar to national distribution.
We've also made a seed investment with a path to ownership and don't quit.
Clean label meal replacement protein drink line created by Jake Steinfeld of body by Jake.
You'll hear more about this partnership and don't quit as the brand launches in a couple of weeks.
Our coffee ecosystem is built on innovation technology and partnership.
Well common in the technology space this structure doesn't exist anywhere else and CPG.
That means when a consumer makes the conversion from brewing coffee by the pot the coffee by the Cup.
Our branded partners, our retail partners and we all benefit.
Which puts us on the same page with regard to ensuring the cure ecosystem remains healthy and growing.
In March we were scheduled to unveil our Curie innovation pipeline and latest growth strategy.
During an investor meeting in Texas.
While cobot required that meeting to be cancelled and the conversation. Since then has been dominated by the crisis. We have maintained internal focus on progressing our pipeline for launches in the third and fourth quarters and strengthening the cure ecosystem to the benefit of all stakeholders.
Our lineup of Kate do a Brewers launched in late 2019 performed exceptionally well in the quarter.
And our case one brewer introduced earlier this year is off to a good start.
In August we are launching the case Supreme and case, you print plus.
Filling out our product range at the mid to higher end of our portfolio.
These new Brewers price from $139 to $189 feature our new industrial design and most importantly, our the first of our next generation of Brewers to include multi stream technology.
Which increases coffee extraction by using a new five prong needle system to deliver a more flavorable and aromatic caught.
These broad also offer greater consumer truck control over strength and temperature.
We intend to Cascade this technology to more of our broader light up overtime.
Additionally, in the third quarter, we are introducing a limited edition K. Many brewer created by the renowned home furnishings designer Jonathan Adler.
This bar represents the first step into a new platform procuring.
With limited edition and or custom design Brewers targeting consumers, who are attractive by kitchen style anesthetics.
Look for more to come on this topic in the near future.
Retailer interest for these new Brewers and across the entire cured brewer lineup for the upcoming holiday season is strong and followed a very successful mother's day, which experienced a noticeable ecommerce retail shift.
And our last earning call we discuss how we were using real time points of consumption data.
Through our curate connected panel of 10000 households to guide our decisions during the crisis.
Harnessing what is one of a kind technology and CPG, we've been able to navigate the volatility caused by cobot.
Making near real time decisions to drive strong in market execution.
We also made connected panel data available to all cured partners.
Today I'm pleased to report that our first smart brewer will be available for sale to consumers on cure dotcom between now and our next earnings call.
The K custom smart will deliver our most personnel wise flavorful coffee experience ever powered by our smartest technology.
This power represents the next step toward having connected and intelligent brewers across our line.
The K Cups, some smart is compatible with existing K Cup pod and has the capability to recognize the specific brand.
Variety and roast for any owned license or partner brand made by Curie.
Bruce to the specification of its master roaster to bring out the full flavor.
The K cups as Marc can be controlled from a smartphone set to turn on with your morning alarm improve your favorite Cup of coffee from bet.
You can also be customized to consumers favorite temperature brought preferences and can automatically reorder pods, having track how many of the consumer has brute since their last order.
More specifics will be available in the press release at the time of its official launch.
Finally earlier this month, we began selling mic cafe as a cure rig licensed brands in the U.S. across K Cup pods bags and canisters further emphasizing our ability to create win win partnerships across the portfolio.
We look forward to working with Mcdonald's to drive growth for the brand in the U.S. as we've done in our partnership with Mcafee in Canada, which began earlier this year.
Before I turn it over to Ozon I want to mentioned three important points regarding sustainability.
Again, while most of our conversation over the past four months is focused on the cobot crisis. We've also continued our progress toward delivering our sustainability commitments.
First we are fully on track to convert 100% of our K Cup pods to be recyclable by year end as of today, approximately 95% of the K Cup pots being produced our recyclable.
Second in the next quarter, we are targeting to introduce our first PE bottles made with 100% post consumer resin.
As you'll recall, we are committed to using 30% post consumer recycled material by the end of 2025 and this is an important first step toward realizing that goal.
We also recently announced our founding sponsorship and position as the largest funder of the recycling partnerships polypropylene coalition.
This industry collaboration is designed to increase and improve the recovery and recycling polypropylene.
The plastic using K Cup pot.
And many other food and consumer products.
We have already begun using post consumer resin in the production of our cure Brewers.
Finally, we have received the good news that our Spartanburg, South Carolina production facility for K Cup pods will be LEED certified making it the largest LEED certified production facility in North America, and the second largest lead facility of any kind.
With that let me handed over to Ozon.
Thanks, Bob and good morning, everyone.
Briefly review our test what amounts for the second quarter.
Which our intense release provides insignificant detail.
Second quarter that was another good one put us on a constant currency basis net sales increased 2.9%.
This growth in three of our core segments.
Hi, Thanks beverages and coffee systems.
Hello, this wrong in the corner.
On a constant currency basis, adjusted operating income increased 11.1% in the quarter driven by revenue growth productivity and merger synergies as in as a significant reduction in discretionary spending.
As Bob noted.
He believed that we had was struck the right well on continuing to invest in audio such as innovation technology and sustainability to net for wide competitive advantage.
Funded in part by reduced marketing, giving the low return on investments in the quarter ended I might take the low that's relevant entertainment expenses, giving Billy mutations in travel.
These did I was partially offset by negative segment mix information Clienttell could 18 calls some say said this increase consumer demands and certain costs related to 19 that you are not treated as items affecting comparability.
Let me pause here for a moment to discuss these quite 19 costs in the second quarter pre tax operating expenses directly related to quote 90 totaled $75 million.
Both of these $63 million good nickel organized as items affecting comparability.
And consistent all 10 put out an unusual compensation increases.
And incentives or front line employees as Vince incremental safety and soundness station expenses across our business.
The bonds all the Cobiz 19 related costs in the corner, which totaled $12 million consisted all inventory write downs and best that expense and have not been treated as items affecting comparability. Therefore, they are included in our adjusted results.
Adjusted diluted EPS bonds or sense in the quarter.
Fueled by the growth in adjusted operating income and an increase in non operating income in the corner.
These growth could I was your plants you the offset by increased interest expense due to lapping benefit open interest rate swap into you. They go period and they hired effective tax rate due to lapping favorable discrete tax items in the u. They go period.
Turning to hold that segment at four months for the corner.
Being coffee systems constant currency net sales growth of 5.8% was driven by strong volume mix Gulf, though 8.3%, partially offset by Logan that pricing over 2.5%.
When it makes performance reflected higher purchases on K Cup pause and Bruce for its home consumption.
Yes, you that offset by a significant drop off in the office coffee and what's become duty businesses.
Based on currency adjusted operating income increased 10% in the quarter to $363 million.
In packaged beverages constant currency net sales grew 6.3% due to strong volume mix growth, all 6.6%, partially offset by modest in November that pricing over 0.3%.
This performance reflected increased at home consumption and market share growth due to strong and marketing execution enabled by excellent supply chain management, an exceptional collaboration across all of something teams during the crisis.
This growth was partially offset by a decline in the convenience and gas channels due to limited consumer mobility.
Constant currency adjusted operating income increased 41.6% in the quarter to $206 million to $9 million.
In beverages concentrates constant currency net sales declined 16.2% due to a significant drop off in new fountain foodservice business.
Reserves that surrounds and hospitality and little bit of net price realization of 4.8%.
The low mid high single related I knew of adjustments to prior year to customer incentives, partially offset by customer they concentrate pricing that we took in January.
Importantly, as the second core that progress.
So improving month over month trends in this business and those trends have continued into July.
Based on currency adjusted operating income decreased 9.3 person in the core that too too on the $22 million.
And finally in Latin America beverages constant currency net sales grew 1.4%.
Reflecting strong pricing those 6.1 person punchy, the offset by a little bit volume mix, so 4.7% due to limited consumer mobility in Mexico.
Constant currency adjusted operating income increased 30% to $23 million in the quarter due to continued productivity and little that marketing expense.
While the current environment has proven departmental father Brown.
It has also made evident the impact on importance of simplification.
To me heightened demand and drive efficiency during the crisis, we focus our production and delivery on the highest priority products. These great success through this process. We have performed a detailed review all the openings in our system to a should we delivered on our customers' needs lightly.
During the road efficient.
We will continue to focus on this is the best practice company, although these crisis and going forward.
In terms of our ongoing productivity and merger synergies, we continue to execute on these opportunities I capacity and the current environment. We are delaying certain plans by new cop two projects due to Cobiz 19, really could safety concerns and in other cases.
You got affinities in certain projects to offset these days.
We remain committed to delivering how and why do you come to a commitments, who book productivity and merger synergies and fully expect to deliver that a lot of planned merger synergies all $600 million finally and booked 2021.
Now moving to cash flow and liquidity.
The cash though in the corner that was a strong as for $524 million translating into an adjusted free cash flow conversion rate of approximate 112%.
In the corner, they do spines debt by $274 million and structural payables by $78 million and we ended the quarter to be almost $150 million open unrestricted cash on hand.
In terms of leverage our bank debt to adjusted EBIT that Asia, which we refer to as our management leverage ratio improved to four times compared to 4.5 times at the end of 2019.
This improvement was driven by continued reductions in outstanding debt balances and continuous growth in adjusted EBITDA.
Since the merger close we have reduced I've never the today show by two full terms.
Turning now to Capex.
Continues to support the business if necessary capex investment, but some projects will be delayed primarily due to cobiz 19.
For example, our new Spartanburg pulp production facility is delayed approximately six months, resulting from equipment top layer delays and our new cold beverages production facility. In Allentown is also delayed about three months for similar reasons, we have always expected wolf.
These facilities to kind of gravity be contributors to our business in 2021, and these minor delays do not see if he comes to change our expectations.
Which brings us to a lot of guidance.
In terms of full yet we continue to have confidence in our ability to manage through what is likely to be bumpy, though in the second.
Much as we have done to date.
I'll, Oh, Newport, adjusted diluted EPS growth remains unchanged at 13% to 15%.
This outlook reflects our expectation for.
Constant currency net sales growth in the range of 3% to 4%.
Continues a strong money spent on discretionary costs across the business, while maintaining investment in information technology and sustainability.
Expected higher marketing investment in the second how old the year.
Relative to the second quarter.
Moving to expectations for the environment in reach consumers that TV to marketing and marketing return on investment improves.
It's important to note that if we experienced astelit 18 growth no other categories in the second though.
We will likely increase our brand investment to drive mid to long term growth.
While still delivering our adjusted EPS guidance for 2020.
We also have confidence in our de leveraging kind of gets and continue to expect a lot of management never the today show it to be between 3.5 times and 3.8 times at the end, though the year.
And at this time, if you'd like you asked a question. Please press star followed by the number one on your telephone keypad again. This Darling Brady question, well pause for a moment to compile the Q1 day roster.
Our first question will come from the line at the Bonnie Herzog with Goldman Sachs. Please go ahead.
Alright. Thank you good morning, everyone I bombing.
Hi, I wanted just ask overall you know your your business has done quite well in the at home economy now that we're all experiencing right now so just hoping you could talk a little bit more about how you expect your business will perform maybe in a more normalized environment, Yes, I guess I'm wondering if you.
See any risk at all in possible pullback in demand for your products TBS consumers returned to some of their pre covered routines.
It just really how do you think about this and how how sticky do you expect your business to be adds as maybe thanks returned to normal thing, yes sure. Bonnie. This is a great question something we think about a lot I I think if we step back at 100000 feet and then I'll have drilled down deeper into your points.
Yeah, we look at there are companies that fall into roughly three buckets. There were those that may not be there have been doing well prior to the pandemic and they're doing really well during the pandemic because suddenly something was off trend became on trend and it would cause you to say whats going to happen when things turn to normal which is where you're going there's another set of companies that were doing really well pro.
Prior to when are struggling in this environment and in that case, you kind of half the hope for a return to a future that looks a lot like the path.
We're very unique situation here that I think theyre very few companies in this situation that is we are performing very very well.
Prior to the crisis. So we set a number type we don't see this at all as a windfall for us.
We've been able to perform very well since the crisis, but we've had worked really hard to do that I think you'll see from the comments that we made earlier did it is quite a mix management exercise, where we've had a push some areas of our business really hard.
But I'll remind you there are areas of our business that are large and profitable.
That have taken a significant hit in this crisis that we've had to offset and if things were to return more to normal we get the bounce back on those immediately.
But we don't expect the future we don't expect it to continue the way it is indefinitely, but we also don't think that the futures go look exactly like the past and so we have the the tools and the leavers to pool to be able to create a company that does even better in the future and and that that's reflective of all.
Of the innovation that we continue and invest in and we're continuing to watch and we're getting great retailers receptivity on all of that as well because they are bullish about that future as well so.
We're confident where we aren't we continue to be confident how we will deliver till the end of the year as we talked about in our guidance and our commentary, but we're not planning on a future the returns back to normal if it did it would actually be good for us.
We're planning on future, that's going to look quite different and we're navigating the company to be even stronger and stay ahead of the game.
Okay that makes sense. Thank you very much okay. Thank you.
Your next question comes from the line ability Chappell with Suntrust.
Thanks, Good morning, I Bill money.
Just to get into the kind of the Brewer household penetration and is there any way to kind of gauge.
So how much this sticks and then you know I know, we don't talk about attachment rate anymore, but certainly the attachment rate is going to a new higher level any kind of idea where that isn't where that's a sustainable level I mean, I imagine a lot of us.
Dusting off our churn machines and using all the time, but a certain amount people had never use them before and we'll start using them on a regular basis. So just kind of any any sense on how the whole platforms changed over the past three four months yeah.
And remember we have really good insight into this internally because we have this household panel 10000 homes.
When we can see minute by minute consumption and so we've been able to track the attachment rate change.
From the very beginning of the of the crisis and we don't we haven't talked about attachment rate in the past because as we said when do you guys have tried to model that it's really steady. So the whole game is really about household penetration and we've also said that volume growth in the category is a good proxy for household penetration.
Because attachment rate is is even we're getting to benefits right now, we're getting new people coming into the system and to answer your question.
That sticks and we've seen that for years now the when somebody decides to move from brewing coffee by the pot to bring coffee by the Cup.
We're in the case that we have right now people, who weren't making coffee at home, making it at home now using it cured machine that's incredibly sticky with a dropout rate from the system is it is very very low.
The attachment rate as we look forward. Our belief is we'll capture some of that increase attachment rate going forward, because people, who weren't making coffee at home or we're making it at a lower frequency recognize that a it's easy to do that the quality has improved dramatically over the past couple of years. So for those that had a perception quality there now.
Getting a first hand experience that the quality is better and you heard from our innovation pipeline that will continue to to go up I.
And I think third part of his Theres, a significant cost benefit to making coffee at home I think a lot of people.
If you look at the the researcher we do but also social media and articles that are written or a lot of people, saying I really like this I. Yeah. This is easier than I thought and and I'm saving a lot of money on top of it. So we don't model going forward that we're going to keep all of that attachment rate, but we know well keep some of it but the household penetration gains.
We're very confident we keep the great great majority of that.
That's great and just one follow up on that have you seen any real change to or trade under private label or lower priced brands as we've been in a cause a recession or is it just come too early to tell or or see yeah. I'll talk about both of them. The cold side of business no. We're seeing actually pricing on average up as promotions.
Less than we're seeing no move away from.
From brands to private label in fact, a in many cases, you're seeing larger brands benefit and clearly we benefited significantly from a share of total liquid refreshment beverage and then we gained as I said on in the prepared remarks, 1.2 share points and CSD. So the brands and our brands in particular are doing very well in this environment.
On the coffee outside of the business, you're actually seeing a skew towards more premium brands in this environment and I believe thats because people trade off from making our purchasing coffee outside of the home to making it at home they want to take their brands with them and the coffee shop brands that they can get now in our system.
Skewed towards the premium end. So that's that's very bullish and the other point. That's that's worth emphasizing is that the cost of pods today in general whether it's at the premium mid price or the value or entry level price point or all down significantly versus where they were 345 years ago.
And that's intentional that was part of our strategy that we talked about we set off with the ambition of lowering the price upon the increased household penetration.
Attachment rate and that's exactly what we're seeing so I would've thought actually that given the some of the financial strain.
You might see some trade down which I would emphasize we're okay with because we produced the great majority of private label as well.
But we're actually seeing the reverse right now and although I can't predict anything in the future. It makes sense to me with the change in behavior from out of home.
Great. Thank you so much of the color okay. Thanks Bye.
Your next question comes in a minor Bryan Spillane with Bank of America.
Hey, guys. Good morning, it's actually peak double on for Brian. Thanks, very much for taking my question IP.
Good morning.
No, but Bob and I was on just just wanted to dig in a little bit on a beverage concentrate obviously, Bobby kind of mentioned it seems like you're through the worst of it or through the trough in July trends, improving but also just wanted to touch on into your your concentrate volumes were pretty significantly behind.
Bottle or cases in the first half I think it's something like 350 basis points, just how should we think about catch up there in the second half a year and I have polyp as well Yeah. Let me let me start and then those I feel free to jump at the end. If you have something you want to add to that the the beefy areas where.
You see the fountain foodservice business.
Got servicing restaurants, and clearly that's been impaired, but it's improved throughout the quarter.
And so I think that the gap that you're talking about between shipments, sometimes and and concentrate shipments and Bob bottle or case sales.
That happens from quarter to quarter, So it's always a catch up.
But we are seeing great improvement in the in the FFF business throughout the quarter.
Due to rebound in restaurants, and I'd emphasize that were particularly strong in QSR and in fact, we are the Dr. Pepper brand is the number one most available.
CSD in QSR.
And so as the drive through business seems to be improving in particular, that's that's very bullish for us going forward, but you're seeing in the BC segment the hit.
They came from restaurants shutting down, especially in the early part of the quarter I was on anything to add to BC.
No I mean.
Actually you probably the only points I mean, there there's always a GAAP and non between LLS shipments to all our distributors and bought doesn't that shipments so that he kindness and as Bob said holdings and always within the timeframe catches up.
Got it now that that's helpful. Maybe it was on just a quick one you detailed some of the cobot costs for two Q.
We should be expecting kind of in the back half a year that that you called out at this point.
Well I mean, the maybe I can use this opportunity to explain that it based on the FX as well.
And as you have heard in alive to Kathy must first of all the costs you excluded from adjusted results are unique and temporary impacts resulting from the crisis.
So they are not normal ongoing coastal business and this is consistent I'll, let alone a turn sand into mental access or did not end onetime costs. So I mean these costs are usually and not only defined as these <unk>. If you kind of expenses could provide a temporary to financial incentives to something.
<unk> employees, which represented more than 70% off the costs and the bonds kodak's onto that it measures.
Let me on that too to click picked employee health and safety, including obvious enhance benefits for them and their families and we also said that wrote a portion approximated $12 million all acquired related expenses that we did not at that can be kept our adjusted results that.
First and foremost the health and the they'll being say field employees come as no bid one.
<unk>, depending on new cases, and depending on how many pandemic, it's going to evolve we will adjust the olin programs, including me, having said that we also believe core Kid, who was the highest in terms of encoding.
The corporate expenses, obviously time, he's going to show wants and what will be the I'll repeat but that's how about expectations at this point in time.
Great. Thanks very much.
Your next question will come from the line of Robert Ottenstein with Evercore ISI.
Hi. This is actually you talk in general on for Robert They want to taking my question learning.
So you mentioned in your partner.
Could you talk about what gets you.
And how does lead to a month and how you're thinking about it sounds.
Yes, so we're just giving you a teaser on that today and there will be appropriate press release from them because we're investing in this in this business.
In the next couple of weeks, because it's already keyed up to go for a for sale in August it's going to be available on right now it's about 2500 retail outlets and growing traditional retailers as you might imagine as well as E commerce.
Excite what's exciting for us big White space in our portfolio protein drinks.
We don't want to launch a me too protein drink out there and so this when we think is highly unique as Tony its targeted to a a baby boomer population, which is growing in underserved in this space and we think that all the new entries are going for a much younger population.
We saw this is very unique with a very unique person behind the who speaks to that group uniquely the structure is unique.
In the marketplace, but not for us it's very similar to the deal that we did with a shock where we put a relatively modest seed investment upfront.
We help them with this business. Although this business will initially go through our DSD network. It will go through warehouse direct.
And as it proves itself out we will put it in our DSD network, where its appropriate.
And it's got to Prenegotiated path to ownership. So we have the option to buy it at a point in time in the future. If we choose at a multiple that makes sense and so it's the combination of all of those things. The has as excited as we said we did the shock deal we would like to do more of these we see this as again part of this ecosystem that weve.
Traded well, we can create these win win structures help entrepreneurs and startup companies get up and running and by an option on them for the future and get rewarded for the help that we're able to provide to make them successful so more to come on that.
Perfect. Thank you.
Your next question comes from the line as Kevin Grundy with Jefferies.
Hey, good morning, everyone and Kevin.
Good morning, and congrats on a great first after so far thank you.
Yes, So Bob question going on M&A, which is going to become an increasingly I think for investors a bigger part of the story, particularly as you sort of look out to next year.
Can you talk a little bit about the M&A philosophy, maybe share some of the governor's around areas of interest fully understand you don't want to front run anything that you're potentially looking at.
Looking out we totally get that but maybe put some governors around where where the where the board and where you're going to be looking and maybe even just comment.
Some increasing discussion about another company in the beverage base looking in non alcohol that is looking in the hard sell through category. Maybe you can comment on the company's openness to moving outside of nine alcohol as well and that'll do it for me. Thanks, Yeah.
We look at white space in our portfolio and we could define white space very broadly and again I don't don't want to tip, our hand in any any way on that front, but just like you heard us talk about energy in the past with a shock. We just talked about don't quit in protein I'm just using those examples of though there are relatively small to point that were very clear.
As to where we have white space in our portfolio.
I think we're very creative thinking through how do we access that white space in a way that's a win win meaning we don't want to just be a distributor we said that multiple times and so when you look at the arrangement that we have with Abbvie on which was a space that we couldn't access on our own.
And then you look at the deal that we announced sitting on polar which is very significant.
Because it's a big category rapid growth white space, we could try to invented ourselves.
We could try to acquire somebody in that space, but look polar is a family owned business is a great brand, it's not for sale and to be able to sit down with with them, who we've had a long and successful relationship with and come up with this win win scenario.
Says that we can move forward and these spaces without having to necessarily buy something out right and we get all the benefits from it and then if you take a look at polar they get the benefits of maintaining ownership from the Brandon and experiencing now will be a national brand for them.
With regard to specifically M&A, just a couple more things that we've talked about before that I would emphasize.
We are very wary of Oh acquisitions of highly developed businesses or rapidly growing businesses that have reached vessel that are at very high multiples. We've said this before we studied every one of these we cannot find one that has created value in the industry. It's happened within our own house right we've talked about.
Got it wrong by its good learning for the future, we love the brand, but but but the multiples don't make sense and so we're not going to fall into that trap and so we look at.
The possibility of filling or white space through the arrangements that we talked about earlier, which are seed investments long term partnerships franchise agreements. We also look at M&A, but I would tell you with off the table is going out there and.
And making a very large acquisition a huge multiple because the value always get written down.
In the in the future.
Got it thanks to the color good luck okay.
Thank you.
Your next question comes from the line, it's Peter Grom with JP Morgan.
Hey, good morning, everyone.
So just a couple of questions on that on net sales guidance. So first maybe a bit more housekeeping, but could you maybe break out what we should expect in terms of benefit from mid cafe, but also polar in the back half.
And then second I know the environment continues to evolve.
But as you mentioned Q2 is hopefully going to be the most difficult but.
So the extent that you are willing to share kind of what are the underlying assumptions embedded in the guidance for the back half from an operating standpoint do you expect to continued reopening reopening sequentially is it kind of based on where we are now just anything around that topic will be helpful. Thanks, Yeah, Yeah with regard to make cafe that was the.
Yeah.
In the beginning of the years that was always part of our 2020 guidance and I would say that everything is on track there so no new news.
Thats embedded in the guidance polar is something that will be up and going but it's really a benefit towards 2021, rather than 2020.
Both met cafe as well as polar their investments that are that are required in the first six months to a year. So the.
Almost no profit impact on either of those and again, we said that before I met cafe. So I look at those as much more about 2021.
Impact and the story.
The comes out of that is we are managing our way through the cobot crisis, really well and holding on the guidance and we're doing that with what we have already in hand, but we're continuing to invest in innovation and new partnerships and we talked about a lot of innovation today as well as these new partnerships, which really set us up for continued growth. This is not a short.
This is something that we will invest in over the long term.
Question about back half the year is really important because we're one of the few companies that have provided guidance and we do not think for a second we can't predict the future better than anyone else in if you look at the Feds comments yesterday and they have better access to the economy than we do in terms of the data they put a lot of caution out there on the second half. So I think the important thing for you to take.
Away from this is that we're not operating off of a single point forecasts, we tested our second half plans against a number of macro scenarios.
And despite the fact that we think is going to be bumpy and and volatile.
We feel like with that that testing that weve been able to put out there that we have confidence in our ability to continue deliver really strong revenue and EPS growth. So it's not just a matter of holding on to guidance I'd like to point out the people its guidance.
For 13% to 15% EPS growth and 3% to 4% revenue growth for the year in a year that is is unprecedented in terms of its its challenges.
It's because we're working against a range and not a single point.
That's very helpful. Thank you best of luck alright. Thank you.
Your next question will come from the line at the Vivien Azer with Cowen.
Hi, Thank you good morning, good morning.
Hi, good morning.
Oh.
A little bit on your outlook for.
And the sparkling water category more broadly, it's certainly been outperforming.
Our water.
Considerably for a couple of years not more than a couple of years now so where do you feel the shared while burden going.
Going forward and are there any international benchmarks that you're using coupons.
Yeah, I don't Theres. Unfortunately in this category there is not an international about benchmark that's very helpful. I think.
What you're saying is that people up carbonated soft drinks I put that in the broad category people like bubbles and there are full calorie versions of them. There are lower no calorie versions of them using a variety of sweeteners and then there are unsweetened flavor varieties in there and we're seeing growth right now across all of them.
But the area that's really emerged in recent years and continues to be strong through the crisis has been this unflavored excuse me unsweetened flavored sparkling water I don't see any signs of that slowing down because it's representative of a shifting consumer preferences towards.
Healthier, but also just less flavor less weakness in general and we see that in a number of categories I.
I don't know how high is high but again when you're looking at the growth rates polar and the.
Past six months grew at like 25%.
You are seeing explosive growth and weak as I said before could have come out. This by acquisition, we could have come at it by trying to develop our own brand.
And we thought this was the best way to go. This is the highest velocity brand in the category. They have one challenge and that is there are only in about a third of the country. We can help them with that challenge and so we think taking that brand in partnership with them and making it national is the best way for us the leap frog in this category and end up in a leadership.
Position and I would also point out that we've got some other smaller positions in this category, Canada, dry and schweppes or in their kind of dropped by the way in the northeast quarter is a very strong brand in unsweetened flavored sparkling water, but we really are emphasizing kind of dry ginger ale credentials and you see the is.
Had 13 years of growth.
With a lot of innovation behind it and so that's always going to be the focus on Canada dry, we're not going to pivot that to a sparkling water brand.
And we made an acquisition last year that we didn't talk a lot about of limitless, which is more of a functional sparkling water and I would just say more to come on that one where we havent really put our game plan in play on that and we'll be happy to share that with you in the future.
And we think that like many large and growing categories. The best way to access them is through multiple place, but be clear. The polar plays our lead one and we couldn't be more excited to partner with with the fastest selling brand in that category.
Thank you.
Our final question, we'll then open the line of Sean keenly Bbs.
Hi, Good morning, I'm not sure a quick question for you on the I guess the strong broader number is there any kind of color you can Brian.
The cadence of that through the quarter led by month and could that number have actually been higher given the closure a lot of the traditional retail channels or the quarter.
Yes, very good question.
There that was that that has been strong and steady with no signs of slowing throughout the quarter. So it's not an issue like we saw in somebody other categories like fountain foodservice, where it was incredibly weak in April and we saw a recovery by July this has been strong from the start and persistently strong.
And we're happy to report.
In terms of your point, which is very true, which is a lot of the traditional brick and mortar retailers were impaired we saw a very significant shift to E commerce.
During the quarter and that's a combination of traditional ecommerce players.
Brick and mortar retailers that you referred to some of them did a fantastic job of pivoting to E com.
And then of course, we have cure dotcom and in the case of.
Our ecommerce capabilities, which I will point out again.
Ecommerce that represents more than 10% of our total company retail sales.
We have such strong capabilities, there that we were able to step in and actually fulfill shipments for ecommerce retailers, who weren't able to catch up with demand. So think about the pressure they were under in the early parts of this crisis our.
Our brewer sales could have been higher in the early stages. If they were able to fulfill so we actually stepped in and in a large number cases fulfilled on their behalf and were able to satisfy the consumer demand that that was there and continues to be there and then last point I'd make on this is nobody knew what mother's day was going to be like you at the.
Well as classic holidays, and where we think that what do we play in this one we had a very strong mother's day. He was an E commerce shift.
People shifted towards things that they could get through E. Com and also the were but were predictable reliable. They knew that they were safe in terms of people would like them and also there was a real shift towards more functional gifting I think you're going to see the same thing at Christmas whenever there is a situation like this and people are also feeling financial stress.
They tend to move away from gifting thats more extravagant to that which is more known and functional and the fact that we're going to be out there with a full lineup of breaux, our best lot. If we ever had and some really good innovation on top of it.
Is the reason why maybe I've said in my comments that retailer receptivity around our innovation pipeline and total lineup for the for Q3 Q4 has been remarkably strong.
Great. Thanks for the color best of luck alright. Thank you.
I will turn the call back over to management.
Thank you very much this is Steve the our teams around all day. If you have any questions. Please reach out to us and we'll follow up would you think so much for drilling today.
Ladies and gentlemen that will conclude today's call. Thank you all for joining and you may now disconnect.
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