Q3 2020 Keurig Dr Pepper Inc Earnings Call
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I would now like to introduce your Dr. Pepper's Vice President of Investor Relations Mr. Tyson Sealy Mr. Silly. Please go ahead.
Thank you Hello, everyone. Thanks for joining US earlier. This morning, we issued our press release for the third quarter 2020, if you need a copy you can get one on a website that carried Dr. Pepper dot com in the investors section concession.
Consistent with previous quarters today, we will 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, while the exclusion of items affecting comparability is not in accordance with GAAP, we believe that the adjusted pro forma.
Basis provides meaningful comparisons in an appropriate basis for discussion of our performance details of excluded items are included in the reconciliation tables included in our press release, and our 10-Q, which will be filed later today.
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 shortly.
Excuse me virtually today to discuss our third quarter 2020 results or QIDP, chairman and CEO, Bob Gamgort our CFO.
I'm talking about the Oakley, our Chief Corporate Affairs Officer Maria Sceppaguercio.
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 1995 Beast.
These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially and the company undertakes no obligation to update these statements based upon subsequent events.
Detailed discussion of these risks and uncertainties is contained in the Companys filings with the FCC with that I'll hand, it over to Bob.
Thanks, Jason and good morning, everyone I hope everyone participating on this call continues to be well.
In the last few the last few months have been extremely volatile given the cold the crisis.
While consumer mobility has increased and the economy has opened up somewhat the coming month are likely to remain unpredictable as rates of infection in North America appear to be on the right.
As well discuss today, Katy P. continues to navigate well through the pandemic by anticipating and adjusting to trends in consumer behavior, driving brands categories and channels with growth potential in order to offset other areas that are challenged.
As we've said over the past seven months the pandemic does not represent a short term windfall for us so.
This is a day to day mix management effort across both channels and products, which is enabled by the flexibility of our business model and the outstanding execution capabilities of our team.
We monitor consumer mobility trends on a near daily basis to adjust our product mix channel focus and production planning and continue to view this metric as a reliable leading indicator for running our business.
Most of all we continue to be thankful to our team members, who have driven the results we reported today.
And the work our organization has done to give back to our communities when they are in need.
[noise] Osama take you through the specifics of our third quarter results in a few minutes. However, I will tell you that in summary, they were outstanding.
Nearly 6% revenue growth.
16% adjusted operating income growth and 22% adjusted diluted EPS growth.
With continued de leveraging.
We gain market share of total liquid refreshment beverages and over 90% of our retail base.
Driven by gains in the majority of category segments in which we compete.
With a number of highlights worth mentioning such as the 1.4 share point increase in Csds driven by growth in the great majority of our CSD brands.
Strength in the Snapple brand, which delivered a one and a half a share point increase in ready to drink tea and nearly a one share point increase in juice drinks.
And core being the fastest growing premium water brand over the quarter.
Our beverage concentrate segment saw substantial quarter over quarter improvement, that's restaurants experienced improved traffic.
In single serve coffee, we delivered 10% growth in at home consumption.
Driven by increases in both household penetration and an elevated attachment rate.
Which was partially offset during the quarter by our away from home coffee business, which continues to be negatively impacted by persistently low return to work trends in large offices, which is our area strength.
And the timing of some partner shipments.
In the fourth quarter, we expect total pod shipments to return to their more normalized mid to high single digit growth rate, despite our expectations that weakness in the away from home channel will continue.
Finally, the exceptional growth in brewer sales in advance of the fourth quarter.
Thanks to the enthusiasm retailers have procured in the holiday season, which is upcoming.
So with one quarter to go our guidance for this year remains intact.
Now at the high end of what we said we would accomplish in 2020, which means that we continue to meet or exceed the long term merger targets, we communicated over two years ago.
Before I turn it over to it was on I'd like to take a few minutes to put our quarterly results and several pieces of news that we communicated this week.
To a longer term strategic context.
All supporting the evolution of KDP to a modern beverage company.
We focus much of our past earnings call content on how we are expanding the consumer reach of our brand portfolio, which.
Which is a critical driver of long term profitable growth.
That conversation typically focuses on new brands in M&A.
But it's very important to point out that the broad share growth we've experienced on existing brands both.
Both before and during the pandemic.
Has been driven by increased household penetration in both our hot and cold portfolio.
We expect we'll stick going forward.
This is the result of impactful innovation and renovation as well as strong marketing programming, that's attracting new consumers.
Into our brands.
Growth in existing brands provides the foundation upon which to add new ones.
We continue to pursue opportunities to fill white space in our portfolio through a national partnerships.
Such as our recent agreement with polar and smaller Beth.
Such as investments that we've made last year and a shock energy drink with Lance Collins, our recently announced don't quit adult nutrition protein drink with Jake Seinfeld.
And our recent investment in revive a complete your drink with Peets coffee.
With regard to the current brand we.
We consistently expanded household penetration you're in and out.
And 2020 is turning out to be an especially strong year for system adoption.
Rather than growing household penetration by 2 million households, which is consistent with our recent run rate.
We now expect to add approximately 3 million new households in 2020.
While attachment rates may move up and down and potentially back up again during another wave of the pandemic convey.
Converting new households into the curing system represents a long term annuity stream that indoors well into the future.
Well portfolio expansion has taken center stage since the merger. We've also been building our unique and valuable distribution platforms. Although.
Although we haven't discussed them until recently.
On our last earnings call, we quantified how important E commerce has become for us reps.
Representing more than 10% of total KDP sale and a larger portion of coffee sales.
Yesterday, we announced news regarding our direct store delivery system that is worth placing into a broader strategic concept context.
Since our merger we have invested in people technology and assets to improve the effect the effectiveness of our DSD network.
We've also focused on consolidating key independent distributor systems into our company owned DSD operations, where territories overlap in order to drive scale and efficiency.
Yesterday, we jointly announced with the Hoffman companies an agreement that provides KDP with long term sales and distribution for key brands, including Canada, dry sunkist, seven up and and W. Across 18 counties in New York, and New Jersey, reaching 17 million consumers.
This follows a string of DSD territory moves that acquisitions across the country over the past two years, including California, New York and the Midwest.
To be clear our objective is not to control every market with our trucks, but rather to ensure that each market in which we sell our brands has a competitive route to market, regardless of who owns the territory.
For example in late 2019, we partner with Hynek meant to facilitate their acquisition.
The subscale independent distributor in Virginia.
In Alabama, we agreed with our partner Buffalo rock to allow our brands to ride on the same truck with competitive brands in order to improve frequency and drop size across their system.
Whether we operate our trucks in the market, where we partner with a local player of scale.
Every one of these moves ensures better reach in stocks and merchandising for our brand portfolio, which builds our platform for long term growth.
Our strong end market performance. This year demonstrates the value of these system improvements and we believe we have significant opportunity remaining.
Important to a modern beverage company is a strong sustainability culture and continuously pushing forward to meet new and more aspirational goals.
Earlier this week, we announced that we have begun the transition of our snapple and core bottles to 100% recycled PE or our pet as is commonly called we.
We will continue to expand our pet across our portfolio going forward.
Finally, consistent with our goal to Bill KDP for the long term, we also announced changes earlier this week to our senior leadership team design.
Designed to further answer prove speed to market and placed decision, making closer to our consumers and our customers.
Two and a half years into our merger and with the benefit of learning what has worked so well during the pandemic. This is a decision made from strength and we're fortunate to have the talent on our leadership team to assume broader operating roles with increased levels of responsibility.
Let me now hand, it over to Ozon for more details on the quarter.
Thanks, Bob and good morning, everyone.
Continuing on an adjusted basis.
But do you still view about 10 12 months for the third quarter.
Mitch Elecsys release discusses in significant detail.
The fourth quarter was another good one for us as Bob discussed.
We believe that these struck the right balance while continuing to invest in areas such as innovation that.
Technology and sustainability.
Provide competitive advantage, while continuing to deliver on our financial commitments.
Constant currency net sales increased 5.8% leased.
Growth in three of our four segments led by packaged beverages and coffee steps combined the sequential improvement in beverage concentrates on.
Adjusted operating income increased 16.3% in the corridor.
Driven by strong revenue growth.
The beauty and merger synergies as well as a reduction in discretionary overhead expenses, including marketing.
These did I lose no touch to the offset by higher operating costs associated with increased consumer demand for our products and installation in logistics.
In the fourth quarter pretax operating expenses directly related to COVID-19 totaled $49 million and consistent with previous quarters, we are recognized as items affecting comparability.
These expenses.
Consisted of temporary and unusual compensation increases and incentives for front line employees as.
As then as incremental safety and soundness station expenses across our business.
Adjusted diluted EPS.
Hence 22% in the corner.
Fueled by growth in adjusted operating income.
We'll get into this expense as a result of continued de leveraging and then little bit effective tax rate.
Turning told about segment performance for the quarter.
In coffee systems constant currency net sales growth of 3.2% was driven by strong what are your mix growth.
6%.
Partially offset by a little bit in the pricing of 2.8%.
What do you expect for months reflected a 34% increase in blue with shipments incremental net sales from my profit.
And I and shipments of K Cup pods for at home consumption.
It becomes the offsetting these growth drivers were the continued drop off in the office coffee and hospitality businesses.
While the segment's operating margin declined slightly in the quarter due to primarily to mix, which includes the stronger blue with Petrobras constant currency adjusted operating income increased 1.6% to $373 million.
As mentioned on our second quarter call, we had exactly about the upcoming launch of all like.
First clinic that little bit.
Demand for acuity rulers remains extremely strong heading into the holiday season in part driven by our new case Supremes platform.
We have decided to wait until 20 to anyone to launch the new clinics, it really to enable us to focus our marketing efforts in the balance of the year behind Keisuke, Tim and I'll, let existing blue line given the unprecedented demand.
Experiencing.
In packaged beverages constant currency net sales grew 10.7% due to strong volume mix growth of 11.4%.
Actually in the offset by slightly lower net pricing over 0.7%.
This performance reflected strong growth in both our company owned DSD and then how is the <unk> businesses.
In the corner.
Through both our customers and Noncarbonated brand portfolios due to increased at home consumption and continued market share growth, resulting from strong in market execution.
This growth was partially offset by a decline in the convenience and gas channels.
The decline moderated as compared to the second quarter of this year, that's consumer mobility improved.
Constant currency adjusted operating income increased 51.2% in the quarter to $304 million.
Hi, My name is reflecting the sales growth and discretionary spending reductions.
As Bob mentioned earlier.
Got to deal with the agreement announced yesterday David honeymoon.
It's real drive significant value creation for KDP over time.
The long currencies and distribution access put on key brands that we had a gain improved this transaction is being done through a unique asset light structure.
Specifically I think many selling these rights to a third party funded by Prudential capital.
Kb entered into a simultaneous transaction.
Third party to gain non could have access to the rights.
Well why did these ways of equal to structurally steel, including a straight up acquisition. Instead, we chose to use a third party and pay a small lending fees, giving that you already have a season distribution presence in the high there.
Isn't it any other assets from that transaction.
Yes on Mangement provides us with control of a lot of buttons for reach we can maximize the economics.
And it also provides scale to all that existing brands currently being distributed in the idea who our company owned DSD network and dedicated independent operators.
In beverage concentrates the experience and meaningful sequential quarterly improvement.
Specifically constant kind of isn't that say is versus either go declined a modest 2.2% thereafter.
Versus the double digit decline during the height of the sheltered in place detectives in quarter two.
This modest decline in quarter, three was due to little bit volume mix of 4.8%, partially offset by higher net price realization of 2.6%.
This sequential improvement reflected more than 18 decline in the fountain foodservice business as consumer mobility increased and that's what I'm trying to pick up.
Constant currency adjusted operating income increased 8.6% in the corner to $265 million, primarily reflecting low end discretionary spending.
And finally in Latin America beverages constant kind of this and that saves grew 0.7% and.
Reflecting strong pricing of 5.2%.
Partially offset by lower volume mix of 4.5% due to limited consumer and mobility in Mexico.
Operating income was flat to the U. They go period on a constant currency basis operating income increased 20% to $25 million in the quarter.
Due to the strong net sales growth as well as continued productivity and lower marketing expense.
The drivers were partially offset by the unfavorable impact of foreign currency transaction expense.
While the current environment has proven to pull it off of our brands. It has also made evident the importance of simplification.
To meet heightened demand and drive efficiency.
Continued to focus on production and delivery on the highest priority brands and products with great success through.
Through this process, we had performed a detailed review of the offerings in our system to any should we delivered on all our customers' needs. While also ensuring we are efficient.
This will continue to be a focus of ours going forward.
In terms of our ongoing productivity and merger synergies, we continue to focus and execute on these opportunities we remain committed to delivering our value capture commitments grew both productivity and merger synergies and fully expect to deliver our planned merger synergies over 600 million Boes.
By the end of 2021.
Now moving to cash flow and liquidity.
Free cash flow in the core dead was again strong at $525 million and our year to date free cash flow conversion rate was up it looks to me the 105%.
In the quarter, we reduced bank debt by $225 million and structural payables by $21 million and we ended the quarter with all that $190 million of under they stick with cash on hand.
Intends over leverage our bank debt to adjusted EBITDA ratio, which we refer to as our money spend leverage ratio improved to 3.8 times compared to 4.8 times at the end of the fourth quarter of 2019.
This improvement was driven by continued reductions in outstanding debt balances and continued growth in adjusted EBITDA.
Since the merger closed we have reduced our leverage ratio by over two full turns.
Turning now to Capex we.
We continue to support the business, if necessary capex investments to drive future growth and efficiency.
As we discussed last quarter, our new Spartanburg pork production facility has been delayed approximate the six months, resulting from equipment supplier delays and our new cold beverages production facility in southern cone is also delayed about three months for similar reasons.
Yes always expected both of these facilities to place whether they'd be contributors to a lot of business in 2021.
And our expectations regarding these minor delays have not changed.
Which brings us to a lot of guidance.
We continue to have confidence in our ability to manage through what is likely to be a bumpy, though in the balance of the year.
Much as we have done to date.
Our outlook for the full year adjusted diluted EPS growth remains unchanged at 13% to 15%.
This then you get a likely at the high end of this range. This outlook reflects our expectation for.
Constant currency net sales growth at the high end or do they have 3% to 4%.
Continued the strong management of discretionary costs across the business, while maintaining investment in innovation technology and sustainability.
Expected higher marketing investment in the fourth quarter of the year.
Relative to the shore corner, giving the expectation for them and letterman and meet consumer receptivity to marketing and marketing return on investment continues to improve.
It is important to note that we plan to reinvest any orders did you have any view may generate into fourth quarter into incremental investment to further drive top line growth in wireless.
While it's still the vetting, our adjusted EPS guidance for 2020.
We also have confidence in our d. that managing targets and now expect our management leverage ratio to be in the middle of our 3.5 times to 3.8 times range at the end of the year.
With that let me now turn the call back to the operator for your questions.
At this time if anybody has a question. Please press star one on your telephone keypad again that would be star one on your telephone keypad. Your first question comes from Bonnie Herzog from Goldman Sachs. Your line is open.
Okay.
A question. This morning is I guess I wanted to drill down a little bit more on your first shipment volumes, which were obviously much better than anyone would have expected in the quarter. So I was trying to understand yes.
How much of that will be reverse next quarter essentially how much of your your broader volumes in Q3 really reflected a pull forward in demand from Q4.
Bob maybe you could touch on this but you know for instance are you already seeing a step down in Brazil orders during October versus the year ago period, and then in terms of innovation you.
You did call out that you're now shifting some of this to next year, but I just really wanted to verify that there are no plans for any more poor innovation in 2020. Thank you yeah.
Yeah, good morning, Bonnie.
First is on brewer shipments as we've talked about over the past couple of years.
Brewer shipments, especially quarter to quarter, our great measurement of what's going on with household penetration.
What I would suggest is that every third quarter.
Has shipments built into it that are for the holiday season, and what you're seeing is a little bit of a pull forward. This year, meaning some of those holiday shipments it would've gone in October November going into the third quarter because.
Because the pandemic retailers are trying to get ahead of everything.
The most important thing to take away from that is the confidence that retailers have insured for holiday gifting in part driven by the innovation and the strong marketing support that we have in place and the feedback that we're getting on all of the Brewers that we've introduced in the past year or so but especially.
The case Supreme and the case Supreme plus which is really the featured item for this holiday.
Have them leaning forward and really in a position to push cure for the holidays.
The single most important metric we gave you on this call though.
He is our outlook on household penetration because as we've said before shipments can be up and down in a quarter there somewhat useful to look over a longer period of time.
But the most important metric we talked about today was the fact that we believe that instead of our typical run rate of 2 million households, being added into the care system in the year, we expect that now to be 3 million and as we said before attachment rates move up and down shipments move from quarter to quarter, it's kind of interesting during the quarter, but it really doesn't mean.
Much over the long haul, but an additional million households is something that stays in the system for a very long time.
The question about.
The balance of the quarter and what we're seeing here I think we're in a position where we've now given visibility on household penetration. We gave you an indication of how we see pod volume growth.
Delivering in the fourth quarter, which shows that that that is now smoothing out and we've also been really clear that our guidance is that the.
Hi, Andrew our latest estimates are at the high end of our guidance for the year and they were going to reinvest everything else back into marketing and innovation and so there is no new innovation being a launched.
In the fourth quarter, because we have a huge lineup on our our cold side as well as our hot side that we are now implementing in the fourth quarter.
But the investments that we can make to get a head start on 2021 or just how should we think are the right thing to do to ensure that we get off to a good start next year as well and remember we committed to a three year.
Our target of total.
Total shareholder return that goes all the way back to 2018 and ends in 2021, and so as we're confident and in finishing out 2020 strong we are shifting our sites to 2021 to make sure thats a good year as well so thanks for this question.
Thank you.
Yes.
And your next question will come from Kevin Grundy from Jefferies. Your line is open.
Hi, Congrats on the quarter was going I was hoping we could drill down a little bit on on margins a remarkably good for for beverage concentrate in packaged beverages, both multi year highs.
Of course, I understand that synergies contributed there can you talk about marketing levels in the quarter, how thats good year over year and the other key drivers that drove strong margin performance.
And then longer term you kind of touched on this a little bit but the company has done a fantastic job in terms of synergy realization, which you will complete by the end of next year, maybe talk a little bit about productivity longer term and if that's something you will kind of formalize and put out a new program at the appropriate time for the street. So thanks for that.
<unk> overhead base that includes all that all sales marketing and general administrative overheads why I see these off the base productivity programs and the merger synergies and it came in a in a very substantial monitor that helped us to reduce our lives.
Good old cost structure in that the SGN they know the.
We also include and categorize our appetite has been a promotion investments so whenever the return on investment in nothing entitlement in promotion didn't make sense and we also reduced the spend due to the quality of 19 environment. So you see it's a combination of the factors and the scenes and most steel.
On the positive side that helped us to drive and the sort of then expand to about a wide margin by 260 basis points, which is quite substantial so only productivities as we just spoke as well.
He affirmed the a lot and merger synergies how to get off $600 million.
To be they do that by end of 20 to 21 and the out exactly on that trajectory. We also have our base productivity programs that we have been running and executing very successfully so the productivity programs and a lot of laser focus and strong they literally have not changed and we are seeing quite old benefits of improving our margins has been as profit.
Our ability in the fourth quarter that Israel and as we spoke to the previously our base productivity programs in the merger synergies you continue into 2021, we have several programs is going is still focusing on our manufacturing footprint, our logistics footprint and include.
Your next question will come from Mickey Nik Modi from RBC capital markets. Your line is open.
Thanks, Stuart and good morning, everyone.
Just two quick questions if I could just on the always on maybe on a cold and related costs I'm, just starting to think and of course I'm not asking for 2021 guidance or anything but just wanted to understand how much of what you spent this year would you expect to spend this year do you think will be permanent that's kind of the first question. The second question I guess for you Bob as you know.
It's becoming increasingly clear at least in this environment and I suspect even as we move forward that the the purchase decision is going to increasingly migrate away from the traditional kind of brick and mortar and into the home right, whether it be E commerce or.
People, bringing more stuff at home because they are staying at home longer I mean that was certainly a trend we're even seeing before covance started. So you you occasionally have created a very advantaged business model with your go to market portfolio and so I'm just trying to.
Get a sense of how you're thinking of building on that competitive advantage as you as we move forward and what I would characterize as a more stay at home environment. Thanks. Sure. Go ahead, you want to kick this off yes, yes, good morning, Mick Nick and thanks for the question first of all let me give a little bit.
Further contracts with regards to the quality of 19 expenses that we have been adding back in fact, we've been consistent in Q1 quarter, two as well as in quarter. Three so the costs were excluded from adjusted results are unique and temporarily impacts resulting from the crisis. So they are not normal ongoing costs.
So business this is consistent with our long term.
Longstanding treatment or extraordinary and onetime costs here and these costs are clearly they're not only declined this week on expenses to provide temporary to financial incentives to our company and employees.
Which represented more than 80% of the costs that we had in that in that and the balance for the extraordinary measures would be under two protests employee health and safety, including enhanced benefits for them and their families. So.
As you have noted our run rate in Q3 was lower than Q2, and we do expect our cortez or run the to be substantially lower than quarter, three as well. Therefore by nature of this meeting and we never said these are sustained costs or incur.
These cost base in our profit and loss statement is the contrary and I think our quarterly trend is proving and they've done a twofold, we expect to see a substantially lower number.
With regard to your point about at home and how we're thinking about our portfolio and our go to market strategy on here I mean, we reference mobility data and it's something that we look at very carefully and we can get it down to a very granular level.
But at the highest level, we think about people spending time at home people spending time at work and then other and other as a whole host of recreation activities et cetera, and get more and more detailed on that well.
We've really built a portfolio that has the have the optionality to drive that at home business. It's not like we are a 100% at home business far from it you see the negative impacts on our fountain foodservice business you see the negative impacts on our away from home business. So we keep saying like if this was a windfall for us, but we do have the options to pivot towards that changing consumer.
And if it shifts to pivot back and I would point out before we get in the coffee, which is an obvious answer even on our coal portfolio. We have made significant shifts in where we focus our selling efforts and what we're selling and what you are seeing more is large outlets play.
Planned purchase and stock up are continuing to grow impulse, while improving sequentially is still down versus where it was before and we focus a lot of our effort on the coal side of our portfolio on multipack take compacts larger pack sizes for example.
And some of the growth that you're seeing even outside of our CSD business is because we've been able to shift over the past couple of months from businesses that were more heavily focused on single bottles into multipacks and it's helping drive drive growth in our business.
Obviously want to shift over to the coffee side. The Curie system was designed for at home consumption, and we said year in and year out that don't worry about attachment rate. All we're focused on it household penetration what we're seeing improvement in attachment rate of people spend more time at home.
But more importantly, we are seeing an acceleration in household penetration as I said a couple of times is really a lasting benefit and that as people think about their homes differently, both living at home as well as working from home. They are upgrading across the board and we are seeing a combination of new people coming into our system at a higher rate and we're also seeing upgrades.
In Brewers have existing consumers and the minute drive growth in the short term, but it's a reconfirmation or re commitment that they are in the system for the long term.
The at away from home business, which is your offices.
He has been a negative and offer two points a perspective, if you look at traffic in large office, if it's down 60%.
So weve never quantified the size of our away from home business. Good even if it was very small negative 60% trend or even a modest business has a major impact on EPS here's the good news that really can only impact us now through.
February and then it becomes.
Actually a tailwind instead of a headwind so the risk of that which I know some people focus on pretty well cap we've already given you some visibility in the fourth quarter anyway.
And that really sets us up for strong at home and then the last point I would.
I would make on your overall conclusion, which is 100% right about where consumers are going is.
Our investment in E com and our capabilities in E. Com are paying off really well when we launched this new company in 2018, and we talked about E com and the legacy carry business and how we get applied across the portfolio I think most people were skeptical at best about what would he common beverage look like nobody skeptical about it anymore and it's an error.
We have that we're really focused on if you saw the management changes that we made this week embedded in that at a level below that is also an increased focus and commitment to E. Com, because we think thats really the future.
Very helpful guys. Thank you all right. Thanks.
[music].
Your next question will come from Peter Grom from JP Morgan Your line is open.
So I think theres kind of into view and the investment community that this so.
Bump in households was going to quickly drive an acceleration in organic revenue growth and when I look at the year to date performance in coffee.
It's pretty similar to last year, and there seems to be kind of a disconnect between that and penetration you mentioned and I know you just mentioned that a lot of this.
Yes, as being result, as a result, once they move away from home business cycle that February so is that kind of the right timeframe, where we should think about.
This higher penetration driving stronger organic organic revenue growth in copy and then.
How does the step up in households frame your view on what the business can grow longer term yes.
I think the longer term view is always the best way to view this business we talked about.
The in year in and year out household penetration increases the system the scene and there's been a lot of debate and a lot of analysis quarter by quarter and sometimes when you look at the IRI data month by month and it doesnt serve anybody really well, but when you step back and look at it you see this nice steady increase.
And one of the comments that we made on an Investor conference that we attended fairly recently was.
We did do expect household penetration to accelerate and Thats why we quantify that for you today to give you some perspective, but you kept the always remember that we're operating off of an installed base of already 30 million households in the U.S. and 3 million households in Canada.
So.
Even an additional million households, which is which is significant growth and profit generator for the long term you are putting that on top of an installed base of 30 million and so it's such a solid business right now thats not one that can be moved up or down.
Quickly by by any type of action, but it just speaks to longer term potential.
When we launched the business or the combined company in 2018, we put some information on our Investor day that is 100% relevant today as it was then and that is we believe that household penetration for the Curie system would go north of 50% over time.
At the rate that we're growing that's 10 years out before we even have a conversation of what happens beyond 50%. So youre looking at 10 years of solid growth and all the disproves is that as people think about spending time at home.
They just step up their interest in maturing system increased household penetration and the.
Dividends are the growth that you get that plays out over the next couple of years. So you know it's not an instant boost that you see and then my last point is you can look at the IRI data.
And see that we have been growing at home consumption by north of 10%.
Over the over the past six months or so.
On the on the latest period, it was plus 10% and that tells you what's going on in home. So if you look at that number and then you compare it to what you're seeing on some of the shipment numbers as we've been totally transparent that is 100% driven by and away from home business, which is primarily large offices, where we're seeing traffic.
Attendance might be the better word in large offices down 60%.
So again thats been a significant drain on us, but theres a limit to that because soon as we start hitting the month of March and we go into April that becomes all opportunity and not risk and it's really that simple to explain the disconnect between what you are seeing at home versus what you're seeing in total.
Thank you that is helpful.
Your next question comes from Peter Galbo. Your line is open.
Hey, good morning, Bob knows on thanks for taking the question.
Just two to quick kind of clarifying questions on beverage concentrate.
It looks like just given that the shipment volume versus bottler case by you guys reported.
It's been running the shipping lines and running 250 to 350 basis points below kind of the bottler case volume and understanding that there's obviously a food service component here, but just over time, how should we think about the cadence of that kind of correcting maybe maybe into fiscal 21, and then just the second part for beverage.
Concentrate had your and your guidance taking into account some of the.
Renewed lock down some major U.S. cities that have come out in the past couple of days. Thanks very much yeah. Peter your comment is right about the disconnect sometimes and the timing of it and it's really hard to forecast.
When they get a line, but your statement that overtime. The line is.
A 100% correct and so thats some of the nuances, we get quarter to quarter on beverage concentrates, but we don't we don't spend a lot of energy on that because we know over time, they align and and it's just difficult to try to predict that.
The biggest takeaway from the beverage concentrates segment is the fact that we've seen sequential improvement in restaurants, and I would point out that when you look at the KDP businesses in fountain foodservice, that's our that's our business that we talk about that services restaurants and hospitality.
It is heavily concentrated towards quick serve restaurants.
As we've talked about a number times Dr. Pepper brand is the most available brand in in quick serve restaurants.
And they have done a really good job of navigating towards drive through and take out and so even if there is a resurgence as we look at what may happen in the next couple of months.
We're really confident that that segment in particular will not only hang in there may actually do better all of Thats not in our forecast, but it may actually do better.
As.
Traditional sit down restaurants could become more challenged and people shift even more towards takeaway and drive through and so thats. The way that we're thinking about it going forward, but we were encouraged to see the at least the sequential rebound in that business and we're watching and partnering with those restaurant partners to try to help them grow their business and their.
Done an excellent job of navigating to the new world.
Your next question will come from Lauren Lieberman Your line is open.
Great. Thanks, good morning.
Well I wanted to talk a little bit about packaged beverages and the the share gains that you've seen I know in the script you talked about conditions.
Condition in Canada does the household penetration gains in particular, if you could these brands sticking.
But I was also curious about the degree to which some of the performance has benefited from some of your competitors narrowing SKU counts.
Alan Craig not particularly in flavors and flavors aren't really core to the other players so.
I was just wondering to what degree you think that and kind of can shortages maybe.
May be benefiting you guys Adam.
And then what you're doing beyond the innovation to try to hold onto those gains when the situation does ultimately normalize sure yep. Thanks.
Thanks for your question Lauren Good morning, Sean.
I.
I think there are a number of factors.
They are driving our performance and we've dug into that and we pull that apart to make sure that we understand that we can continue to drive those things that are working.
It is primarily driven by a combination of marketing.
Strength innovation, which on across our portfolio not just on our CSD brands with Dr Pepper, and cream and Canada dry bold, but weve introduced new buy items at a whole host of items across the board and Snapple for example, they're they're playing out really well and as I talked about on an earlier one of the earlier questions. We've also.
So shifted our brands into the right pack sizes and formats it into the right channels and that's not underperformance by anyone else. That's just us moving quickly towards the consumer and I have every confidence that if the consumer were to shift again, we'd get ahead of it and we'd move back over there. So the household penetration gains that we're seeing.
The great majority of our driven by marketing innovation and good execution on our part and it's not really driven by.
It's about can shortages or executional missteps by anyone else and so therefore, it's driving household penetration, which we believe will stick. The other subtle point that I would I would point out.
As you know a number of our brands the Dr Pepper brand in particular.
But but other brands are well a good portion of those are actually distributed manufactured and distributed by other independent companies.
And some of our some of our peers.
No that gets confusing we talk about but but those who really dig into the business I understand that and just as we're gaining from good execution on our end, we actually get hurt by performance on the other end when there are can shortages or difficulty getting the product out there and so strong is our results are theyre actually Pos.
Additives from our system being offset in some cases by negatives and other systems and.
So it's not all windfall if I keep saying. This is this is the results you are seeing or the net of positives and negatives and we've been able to move through it really quickly.
But it's not all positives that then become a headwind as you think about next year right. So.
So Bob I feel like I do understand the distribution network I know you do I'm talking about.
Okay, and so I, just actually had thought that adding that can track surely there might be some element of Dr. Pepper needing to be brand needing to be prioritized.
When it's menus that when the distribution manufacturing is through.
Large companies not not independence of that let's sort of what you're referring to and but.
But separately.
Also curious that you it was great in the script when you guys share detail on a lot of the optimization work that you've already that's been underway for some time right. It doesn't just start with the Heineken outflow rock announcements.
To what degree is that already starting to show up and that we're seeing it in terms of operating leverage I know, there's so many moving parts right now because of course, but.
Yes, I was just wondering how immediate those benefits can be it in terms of the better scale on your distribution assets. Yes, Let me go back before I answer that I go back to your point, though about the contractual pieces or whatever if.
If you look at social media and you look at some of the new stories that were popping up about shortages of some of our brands.
That's all you need to know is what's actually happening out in the marketplace and that's that's not coming from if you take a look at where thats coming from.
It speaks to the broader challenge in the industry that has been well documented. So my point again is this is not we're not there's no complaints we neighboring brought it up as an excuse but if you really think about now flipping it to next year.
I don't want anyone to take away from this is we are all positives next year they'll become negative this year that all become negative next year, it's a mix.
There are some things that will be more challenging to lap and 2021, but I have a long list of things that are negative this year that flipped to the positive as well and so it's a really important to understand this is a balance between the two and if we're not just.
This isn't a weather report, we actually control the outcome in many cases and so a lot of the positives are driven by the fact that we got ahead of things quickly and we're able to pivot our business to do so and it's a flexible business model. We can pivot again next year.
To your point about the distribution pieces as we talked about in the script.
This partnership with Hynek win that we talked about today is by far the single biggest move that we've made in this optimization, but we also talked about there had been a string of smaller but very important moves that we've been putting in place over the past two years and so you're starting to see some of that effect in the strong performance in the marketplace and.
2020, but big moves like the one that we just talked about today as well as as.
Other partnerships with our independent distributors like the polar deal those.
Those are mainly 2021 and beyond and I would suggest that the investments that we're making in our.
Our distribution infrastructure is part of the conversation we'll have about what is KDP look like beyond 2021, and you can see clearly we believe distribution is a critical asset with a lot of upside okay.
Okay. That's super helpful. Thank you so much alright. Thanks.
Your next question comes from Bill Chappell.
Your line is open.
Thanks, Good morning.
Hey, Bob just help us understand.
I guess, we're just respond to the thought of on the Brewer side, you know the the thought that anybody who ever thought about getting a brewer now owns one because they've been working from home, we're staying from home and if they have even considered it's they bought it and so while it's great that you've had a jump from the normal 2 million to three.
Million households.
A big pull forward and it's going to be much less in future years, and more or less and less people.
So help us understand how you grow household penetration after such a big jump this year and and why that wouldn't be the case sure Bill good morning, and good to hear from you.
This morning.
Im smiling you can't see them, so I would because we cant remember when we.
Okay, GM private we actually had some dinners and some meetings at that time with with previous.
Kate GM investors and analyst and you know just to talk about the business and what we were thinking about doing over time, because we knew at some point it would be public again.
And household penetration at that point was round numbers, 15%.
And that was the exact same question, we got a 15% household penetration and people are using the words like saturation and we we talked at that time about we have.
Every indication household penetration over time will be north of 50%. There is no sign of slowing down or saturation and we talked about.
What were the barriers to entry. So we really believe the numbers that big why isn't it happening now and doesn't everybody know about your rig already.
And our answer to that point was we still have a lot of work to do in terms of marketing innovation price points features improving sustainability it.
So it's a long list of things that we have the benefit of working on every single day and then sometimes it just takes time.
And the number one reason why somebody moves to a curate machine is when they replace their their coffee maker that breaks.
And that just takes time and so I understand the concept we get this all the time, but we got that question.
Millions and millions of households ago, and I expect we'll continue to get that question going forward, but but again every indication is that we will be north of 50%. If we keep going on our game. That's 10 years out a strong growth and I think that this latest quarters, just yet one more quarter on top of many that.
See that that show that Thats, the right way to think about our business.
Okay. So you don't worry about I guess and meaningful or in line household increase household penetration increase next year.
I think it's the same trend going on the year after year I mean, if we will look at it in absolute numbers and how may that compare to 2020, I don't know yet because I don't know what the world's going to look like in 2021.
But the best way to look at those businesses over time.
And every time you lengthen the time period from a quarter to six months to a year beyond that the business makes total sense and it and it does exactly what we just described there are some quarter to quarter fluctuations a month month to month once but I as we look at 2021 solid innovation lots of interest in the business.
Great marketing plans still in front of us where we're not worried about lapping a 2020. We just think this is all part of the long term growth in the system.
Got it. Thank you and then on the pod said one quick question, what's the current promotional environment. Both from you and kind of the competitors and what are you expecting him I would think with such strong demand people could kind of dial back some of the the price cuts or discounting and couponing and I didn't know if you are seeing that or expect to see that you see it in the IR I number.
Where you see the average price going up and Thats been a combination of some reduction in promotion.
As well as a shift interestingly a shift towards more premium brands and we've talked about before I think as people move from coffee out of the home and home they take their favorite coffee shop brands with them, which tend to be priced higher.
Hard to say, what it's going to be in the fourth quarter. It really depends on what the the consumer dynamics arm behaviors are but I would expect overtime promotional levels will return more towards normal that's not something that we have we don't have lack of promotion baked into any of our plans, but in the short term if theres strong demand and there is some supply.
For a stock issues at retail.
If there's a another state.
Stay at home type behavior.
That's as you know they pull back on promotions across the board that's potential to happen.
Great. Thanks for the color okay.
This brings us to the end of our Q and a session today I turn the call back over to management for closing remarks.
Thank you and thank you everyone. This is tyson thanks for dialing in today I know, it's a very busy day for many of you.
The IR team is around so please feel free to reach out to myself or Steve So any follow ups. Thanks, everyone Bye.
Thanks, very well this will conclude today's conference call you may now disconnect.