Q4 2020 Keurig Dr Pepper Inc Earnings Call
Okay.
Good morning, ladies and gentlemen, and thank you for standing by welcome to the Keurig Doctor Pepper screenings call for the fourth quarter and full year of 2020. This conference call is being recorded and there will be a question and answer session at the end of the call I would now like to introduce keurig.
Doctor Pepper, Vice President of Investor Relations, Mr. Tyson Seely Mr. Seely. Please go ahead.
Thank you and Hello, everyone. Thanks for joining US earlier. This morning, we issued two press releases the first announcing that our board has approved a 25% increase in our quarterly dividend dividend.
From $62 75 per share on an annualized basis, beginning with the second quarter dividend announcement subject to official declaration by our part of directors.
As part of that announcement.
Also indicated the board has declared a regular quarterly dividend of 15 for the first quarter of 2021.
The second press release covers our fourth quarter and full year 2020 results. Both releases are available on our website at keurig, Dr. Pepper Dot com in the investors section.
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 basis provides meaningful comparisons and an appropriate basis for discussion of our performance.
Details of the excluded items are included in our reconciliation tables, including included in our press release, and our 10-K, which will be filed later today.
Due to the inability to predict them out and timing of certain impacts outside of the company's control, we do not reconcile our guidance.
Here with me virtually today to discuss our fourth quarter and full year 2020 results are <unk>, chairman and CEO, Bob <unk>, our CEO CFO boson, Duncan Ico Globe, and our Chief Corporate Affairs Officer.
Maria Skipper Garcia.
And finally, our discussion. This morning May include forward looking statements, which are subject to subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially and the company undertakes no obligation to update these statements based upon subsequent events a detailed discussion of these risks and uncertainties is contained in the company's filings with the SEC with that I'll hand.
It over to Bob.
Thanks, Tyson and good morning.
We're getting started I'd like to express my best wishes to everyone that you and your families are well.
It's hard to believe that we've all been operating under the pandemic for almost a year.
And while vaccines are providing hope for a return to normalcy later this year.
The spike in Covid cases in January followed by extreme weather in February suggest that 'twenty 'twenty, one will be another unpredictable year.
At the start of the pandemic, we put in place are one K D. P plan.
Which prioritize keeping our employees safe and healthy.
Delivering for our customers and consumers.
And providing for our communities.
These priorities have served us well.
Additionally, our success in navigating this crisis to date has been aided by using data and technology to leverage the breadth of our portfolio.
And the unique reach of our distribution network to effectively manage portfolio and channel mix.
In 2020, we delivered at or above the high end of the annual guidance, we established at the beginning of the year.
And the 2021 guidance, we are providing today.
Points to our confidence in achieving the three year merger commitments communicated in 2018.
Bite, the macro environment, becoming significantly more challenging since that time.
As you saw from our earlier announcement, we are increasing our dividend rate by 25%.
Starting in the second quarter of this year.
This reflects the line of sight, we have to continued strong free cash flow.
Which enables us to simultaneously increase our return of value to shareholders reach our deleveraging target by year end.
And then Beth and expanded production capacity innovation and technology.
In fact, our dividend payout ratio, even after the 25% increase announced today.
It means below 50% of free cash flow.
Finally, we are fully committed to deliver both T S R and ESG.
In 2020, we achieved nearly all of our aggressive sustainability goals.
And in 'twenty and 'twenty, one we have signed up for new and expanded ESG goals, including health and wellbeing and diversity and inclusion.
We will publish specifics for each and our corporate responsibility report in June.
All of this underpins our journey from two separate companies.
Two a combined new challenger in the beverage industry.
To a modern beverage company with an exciting future.
We look forward to sharing our long term vision and plans for Kt Pete.
When we conduct an investor day in the second half of this year.
Let me take a few minutes to step back and provide key highlights of our 2020 performance.
We delivered accelerated constant currency net sales growth of 5% in 2020.
With strong momentum exiting the year.
Driving that revenue growth were exceptionally strong in market results across the business.
In cold beverages, we gained market share and more than 90% of our retail base Inc.
<unk> market share growth in excess of one full point in CSD.
This was driven by double digit consumption growth of Dr Pepper and.
And Canada dry our largest CSD brands as well as a N W. Seven up Sunkist and square.
Dr. Pepper cream soda became the number one new flavor in the CSD category in 2020.
While Canada dry bold also performed exceptionally well.
Canada dry is now the only CSD brand to achieve volume and dollar growth for the past 14 consecutive years.
Strength in cold beverages extended well beyond CST with Katie P share growth and premium water ready to drink tea shelf stable fruit drinks and motts Apple juice in source.
As we discussed on previous earnings calls the pandemic required us to manage mix across channels beverage segments and even pack types.
To react to dramatic shifts in consumer shopping and consumption patterns.
This meant driving growth in multi packs in cans sold in large outlets and ecommerce to offset slowdowns in fountain, foodservice convenience and gas channels and as a result impulse packs.
Our speed and pivoting to these changes was enabled by new uses of data and technology.
Distantly strong in market execution, leveraging our highly developed e-commerce capability, and a flexible and resilient supply chain team.
Our coffee business also had a strong year consumer purchases of Keurig manufactured K Cup pods registered double digit growth.
While brewer shipments grew 21%.
Which reflects a combination of new households, entering the system as well as existing households, upgrading their brewers.
Household expansion of the Keurig system was very strong this year with approximately 3 million new households, entering the system.
That translates to 10% household growth nicely above our longer term pre pandemic trend of approximately 7% growth per year.
Not surprisingly the consumer shift to work from home at home consumption of K Cup pods was strong throughout the year.
While the away from home channel, which is focused on offices remained a significant headwind.
And while we expect the away from home business to improve slowly over the course of 2021.
We will begin to lap the 2020 declines in the second quarter of this year.
In addition to our strong topline results. Our Bottomline performance was also strong for the year with adjusted diluted EPS growing 15% to $1 40.
Which represents the high end of our 2020 guidance.
This was achieved by offsetting significant mix headwinds and operating cost pressures with revenue growth that was above our targets.
Strong productivity.
And merger synergies.
And reductions in discretionary spending.
We also drove strong free cash flow, which enabled us to reduce our indebtedness and improve our management leverage ratio to 3.6 times, while also making significant capital investments.
Specifically, our new Spartanburg, South Carolina coffee pot facility, which will be the largest LEED certified manufacturing facility in North America.
Our Allentown, Pennsylvania, Cold beverages facility, which was recognized as plant of the year by food Engineering magazine.
And our Newbridge, Ireland facility, which represents our second manufacturing location for our important beverage concentrates business.
In 2020, we also invested in the expansion of our portfolio and DSD network through multiple transactions, including a long term agreement, we announced with the Hanak net companies that provides Katy P with sales and distribution for key brands in the Metro New York area.
National franchise agreement with polar beverages.
And other numerous transactions with smaller but strategic independent bottlers to ensure competitive distribution scale for our brands.
Consistent with our focus on improving the effectiveness of our distribution system.
We exited some non strategic skus during the year.
Enabling us to keep our high volume brands in stock and creating space for new partnerships in 2021 innovation.
In 2020, we also made great progress on our sustainability initiatives.
We know responsibly sourced 100% of our coffee and 85% of our Brewers.
And have improved the livelihoods of over 1 million people in our supply chain.
We also completed our multiyear conversion to 100% recyclable K Cup pods and during the year. We co founded two industry coalitions focused on enhancing U S recycling infrastructure.
We watch our first post consumer recycled or PCR packaging and cold beverages, putting us on track to deliver our goal of using 30% P. E. R. In our packaging across the business by 2025.
This long list of accomplishments would be impressive in any year, but it is even more so against the backdrop of the challenges and uncertainty we faced in 2020.
I'm proud of and grateful for the nearly 27000 team members across Katy P.
Who have proven to be our underlying competitive advantage.
Turning now to our outlook for 2021.
The guidance, we're providing today is consistent with the commitments we laid out at the time of the merger announcement and position us to meet our three year merger targets.
Specifically for 'twenty and 'twenty, one we expect constant currency net sales in the range of 3% to 4% and.
And adjusted diluted EPS in the range of 13% to 15%.
On a two year stack basis, which eliminates any noise from COVID-19 impact.
This translates into net sales growth of over 8% and.
And adjusted diluted EPS growth of nearly 29%.
Both at the midpoint of the ranges.
Our confidence in 'twenty 'twenty, one growth is supported by both innovation and renovation.
Both of which will be backed by increased marketing investment.
Ongoing productivity savings and our final year of merger synergies will help offset increased inflation.
We expect our management leverage ratio to improve by three times by year end.
Driven primarily by our continued strong free cash flow generation.
In 'twenty and 'twenty, one we are rolling out zero sugar varieties across our CSD portfolio.
For most brands the new zero offerings represent a rebranding of our existing diet skews.
To more clearly articulate the zero sugar benefit to consumers.
For Dr. Pepper, the introduction of a zero sugar variety will be in addition to original Dr Pepper and diet Dr. Pepper.
We are also introducing by boost our new platform of caffeine and Mott's Mighty a line of juices and sauces fortified with vitamins and fiber.
In addition, we will be launching new flavor varieties across many of our brands.
We've begun the staged rollout of our new Snapple bottles made with 100% recycled P E T at featuring new graphics.
Also we are now producing all core hydration bottles with 100% our pet.
In coffee, we have another strong lineup of new Brewers plan for this year, including our first connected brewer for the broader consumer market.
We will share additional information on this exciting new brewer and other Brewers plan as we get closer to launch.
In 'twenty and 'twenty, one we expect continued strength in owned and licensed coffee.
Last year, we reversed long term trends by expanding sales and consumption of our owned and licensed brand portfolio.
Within that portfolio, we have been able to improve the sales trajectory for the MC Cafe brand in partnership with Mcdonald's, which became a licensed brand for us in the second half of 2020.
In 'twenty and 'twenty, one we will launch Green mountain coffee roasters brew over ice pods, which taps into the growth of cold coffee.
The majority of our Brewers launched since 2018 also have a brew over ice option.
We are expanding our highly successful original donut shop, one step law taste introduced in 2020, it's a one step cappuccinos.
Last year, the original Donut shop brand registered double digit consumption growth and market share expansion on the strength of the new one step offerings.
And a new marketing platform.
Before turning it over to ozone I'd like to recognize the entire Katy P organization for their tireless efforts in delivering such strong and well balanced results.
Because of their success, we have confidence in our 'twenty 'twenty, one goals and look forward to sharing our longer term outlook at an investor day later this year.
I'll now hand, it over to ozone to take you through the specifics of our financial results.
Thanks, Bob and good morning, everyone.
Continuing on an adjusted basis.
I will briefly review, our pet CT of months for the fourth quarter.
Reach out to.
Discusses.
Second detail.
And then put it into our full year 2024 months and our 2021 guidance.
In the fourth quarter constant currency net sales increased 6.6%.
You buy a higher volume mix of six 3%.
And favorable net price realization all zero point put a price.
<unk>.
Our coffee systems packaged beverages, and Latin America beverages segments, all posting growth.
Adjusted operating income increased five 5% in the quarter.
Or even by strong net sales growth continued productivity merger synergies and lower discretionary spending which includes marketing.
These drivers.
Offset by unfavorable commodity zone.
Who are the million dollar gain in the prior year.
On the sale leaseback.
Manufacturing facilities.
Higher operating costs in the current year associated with increased consumer demand and.
In insulation in logistics on.
On a constant currency basis.
Adjusted operating income grew five 7%.
Adjusted diluted EPS grew 11, 4% in the fourth quarter, Inc.
Even by the growth in adjusted operating income and lower interest expense and effective tax rate.
Net me turning now to our full year.
<unk> for 2020.
Constant currency net sales increased 5%.
Driven by higher volume mix.
<unk>, 6%.
The offset by lower net price realization of 0.6%.
Adjusted operating income increased 10, 4% and.
And adjusted operating income margin expanded 150 basis points to 27, 5%.
This past summer months was driven by strong revenue growth.
Continuous productivity merger synergies and lower discretionary expenses.
Leaves the day was partially offset by higher operating costs associated with increased consumer demand for our products.
Inflation in logistics and certain other COVID-19 related costs on a constant currency basis.
Adjusted operating income grew nearly 11%.
For the year.
Pretax operating costs directly related to Covid, 19, total $150 million or $128 million well recognize as items affecting comparability.
These costs consisted of 10 point, Eddie and unusual compensation increases incentives.
Frontline employees incremental health and safety measures across our employee base and hence sanitation expenses quite a lot plus entities.
The remaining $22 million of costs represented in maintenance write downs and bad debt expense net Marine Corps and of course all 2020.
And included in adjusted results.
Adjusted diluted EPS.
15% to a dollar for the for the year.
This is strong pet four months was fueled by the growth in adjusted operating income loss.
Lower interest expense and then there's also continued deleveraging and then know that effective tax rate.
Turning to our segment performance for the year.
Coffee systems constant currency net sales increased four 8%.
By high end when you mix, all 7.2%, partially offset by lower net price realization of two 4%.
Volume mix standpoint of months, the connected part volume growth of six 3%.
Driven by double digit at home consumption packs.
The offset by the significant decline in the.
Away from home coffee businesses.
Strong 21% increase in <unk> shipments for the year was fueled by continued expansion of households, coming into the system and.
An existing households, upgrading their growers continuous brewer innovation marketing investments to grow household penetration and a very successful holiday season.
Adjusted operating income from coffee systems increased seven 9% and adjusted operating margin grew 110 basis points to 34, 2% net.
<unk> had four months of those fields.
<unk> net sales growth continued productivity and merger synergies and low non discretionary spending.
These pumps.
Partially offset by an unfavorable margin mix related to the very strong shipment growth for the year.
Packaged beverages constant currency net sales grew eight 5% for the year.
Driven by strong volume mix of eight 2% and higher net pricing or 0.3%.
This debt four months reflected particularly strong growth in our company owned DSD operations and I'll, let him add how did that business.
By very strong execution.
Total market share expansion across the portfolio Inc.
Clothing, carbonated soft drinks premium on flavored water.
Ready to drink tea shelf stable juice things, Apple juice and Apple sauce.
Adjusted operating income for the segment increased.
Our scent and adjusted operating margin expanded 320 basis points to 19%.
This debt for monthly connected the strong net sales growth continued productivity.
And merger synergies and low anticipation net expenses.
Action offset by higher operating costs to meet the strong consumer demand and inflation in logistics on a constant currency basis.
<unk> operating income increased 31%.
Beverage concentrates constant currency net sales declined 6% due to unfavorable volume mix of five 8%.
And lower net pricing of 0.4%.
This debt four months reflected the impact of COVID-19 on the fountain foodservice business.
And that is serves the restaurant and hospitality sector.
Adjusted operating income for beverage concentrates decreased 2%.
Due to lower net net sales price.
Offset by lower discretionary expenses, while adjusted operating margin up funds 310 basis points to 17, 8%.
And finally, Larry and I made it come back, but it's just constant currency net sales grew 3.8%, reflecting strong net pricing of five 8%, partially offset by low that wouldn't make so 2%.
Do you probably might have due to the impact from COVID-19 in Mexico.
Adjusted operating income increased 32% driven by continued productivity and lower discretionary spending.
Partially offset by the impact of foreign currency transaction expense and inflation in logistics.
Total operating margin increased 620 basis points to 21, 7%.
On a constant currency basis, adjusted operating income grew nearly 40%.
Our son.
Turning to synergies, we then you've ever approximating $200 million in 2020.
Bringing total merger synergies to approximately 400 million bolus, whereas the past two years.
Free cash flow in 2020 was again exceptionally strong and approximate $2.2 billion.
This translated into an adjusted free cash flow conversion ratio in excess of 110%.
We also ended the year with $204 million annually.
Net cash on hand.
This strong free cash flow pet for months enabled us to reduce outstanding bank debt by more than $950 million and instruct from payables by $170 million.
What I would point out the reduction in financial obligations of 1.1 billion goal is in 2020.
Due to our reduction in bank debt.
Growth in adjusted earnings and cash on hand.
We improved our management leverage ratio by nearly a full turn to 3.6 times in 2020.
Since the merger closed in July 2018.
They do a lot of management and average ratio by an impressive 2.4 times.
As Bob discussed earlier.
K V. P Board of directors has approved a 25% increase in our annualized dividend rate.
From 60 cents per share to 75 cents per share.
Beginning with the second quarter that'd be the debt, which is paid in the third quarter and subject to the board's official declaration.
This new rate you have right at 25% increase in dividends per share in 2021.
And I'll bet, you know, 1.1% increase in 2022.
The important thing.
Despite the sizeable increase.
Our dividend payout ratio remains below 50% of free cash flow.
Highly cash generative nature of our business and then as a lot of strong profit growth is expected to enable us to continue to delever to three times or below by the end of 2021.
Let me now move on to our outlook for 2021.
We expect 2021 to be another good year for T V P.
Which as Bob mentioned.
Drive exceptional results on a two year stack basis.
Before jumping into the full year outlook, let me provide some context for core then one.
As indicated previously.
Existed 2020, the strong top line momentum and we expect to benefit from net in the first quarter.
On the cost side, you will recall that we will be comping at $42 million gain and of course core debt or coupons and pointed on sales leaseback transactions and another $20 million gain in the year ago quarter from unwinding in penetrate swaps.
We believe this context will be useful to you as you build your models for 2021.
The specifics of our 2020 outlook include.
On a constant currency basis, we expect net sales growth to be in the range of 3% to 4% for the year with.
Which continues to be a bowl of a cleaning of the merger quite against all two to three per cent.
This is strong growth is expected to be driven by Hyatt you had already to your investments in innovation and marketing.
The benefit of recent partnerships and on going in market execution, all the strength.
Adjusted diluted EPS growth is expected to be in the range of 13% to 15%.
Representing $1.58 to $1 61 per diluted share.
Important thing.
The three year period, ending 2021. This past four months, we would position us to achieve our emergence hot again quota holiday I mean growth of two.
Two 7%.
We again expect merger synergies of approximate the 200 million goal is in 2021.
Delivering on our three year plan to get those things done that media device.
Adjusted interest expense is expected to be in the range of five quantify to Python, that's $15 million.
Our adjusted effective tax rate is expected to be in the range of 23, 5% total.
24% for the year.
We expect our management leverage ratio to be at or below three times at the end of 2021.
Is that I've attended debt all of it to the operator for your questions.
Ladies and gentlemen, as a reminder to ask a question he will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the <unk> roster.
Your first question comes from the line of Bonnie Herzog with Goldman Sachs. Your line is open.
Alright. Thank you good morning, everyone.
I am sorry I.
I had a couple of questions on your pod business. This morning first one on how we should think about attach rates. This year and then into the future you know when I look at your Brewer household penetration and how much increase in 'twenty 'twenty, but then I compare that to the heart attack.
Trades, they seem to lag a bit so I'm just trying to understand if there's some type of timing effect, we should be aware of or should we assume that attach rates will be slightly below historical leather as you know going forward, especially off this higher base of breweries and then could you. Please confirm if your new pod Manny.
Factoring facility is already up and running or if not when it will be and you know really how we should think about the potential margin left on your pod business from mezzanine facility. Thanks, Yeah, Okay I want to take the first one and I'm going to turn it over to ozone and talk about Spartanburg.
Coffee attachment rates have been very steady for years and you know in the past we've talked about.
The best proxy for household penetration growth is actually pod volume growth because of our attachment rate being so stable.
In the early part of the shelter in place we saw an increase in attachment rates as you would expect obviously, we got some benefit from that in the early part of this but we've seen it normalize over time and our expectations going forward is that it does normalize over time.
We did get a short term benefit from that but remember that was offsetting a significant hit that we were getting to our office coffee business. So all of the the guidance that we put out there for 2021 does anticipate a more normalized attachment rate.
Also I need to talk about Spartanburg.
Absolutely absolutely and good.
Good morning, Bonnie.
OLED started I'll, let Petrobras I talked about is spartanburg facility.
And obviously, it's a multiyear ramping up the production facility, giving the huge size and the volume that will come out and about all we can say at this point in time yet.
On track in terms of a continuing month in month out of the ramping up of that facility and Andy and as we do as you said if you do expect to uphold zone of our coastal production in your thoughts as we communicated previously Spartanburg facility as we go into the year, especially all of this.
Second half of 'twenty, one and Dr. <unk> will be one of the.
Base productivity sources to improve our efficiency.
The manufacturing facility with regards to day parts, but not only that we also have said that all other programs is that we will continue to help us to deal with beef.
Our management of all that it all kind of caught that.
Total cost.
Going forward at the same time, so the things are on track.
Your next question comes from the line as Bryan Spillane with Bank of America. Your line is open.
Thank you operator, and good morning, everyone.
Right.
Just a couple of quick ones from me first maybe if OS on can you give us a little bit more color and insight in terms of just how we're thinking about inflation and in total for K D. P. This year and maybe more specifically in.
In packaged beverages.
With fuel fuel fuel costs likely to go higher.
Maybe packaging just just you know specifically in packaged beverages, how you're thinking about managing inflation and then and then maybe just one last one.
I, if we've done the math right. It looks like you under shipped in beverage concentrates shipments lagged consumption for the full year in 2020 so.
As we're kind of thinking about modeling 'twenty, one will there be any sort of disconnect. The other way, we will we'll concentrate shipments.
Maybe exceed consumption in 'twenty one thank you.
Good morning, Brian So on the inflation point, Yeah, we expect the 2021 to face higher inflationary pressure than 2020.
And if he had built that into our guidance for the year, obviously and we are very confident that we can manage the exposure.
Larry I think there's no cancellation in the 'twenty and 'twenty. One as you also know that Brian would be in the logistics as well as corn related products, while other areas such as coffee for example debt the contract for well enough months will also serve as a partial offset these basic.
The umbrella of the commodity and the input cost management that we always do and then the opportunity present itself. We also hedge our lessons.
To manage our cost profile. Therefore, we believe we have a good balance right now. It is true we are seeing as I said on a couple of line items of cost pressure is increasing in 'twenty one versus 'twenty.
At the same time, our second point is the answer for your question with regards to the beverage concentrates. It is true when we look in our closing like a month or two we may see some lapping.
With regards to the our concentrate shipments in beverage concentrates as well as the finished.
Finished product shipments from adult lives onto the distributors, but when we take a medium to longer total perspective, they always catch up and that's what they are going to see in 'twenty and 'twenty one as well.
Okay. Thank you.
Your next question comes from the line of Kevin Grundy.
With Jefferies. Your line is open.
Great. Thanks, Good morning, everyone and congratulations on the strong year, particularly in this environment.
Just just to stick with the guidance and the outlook for both of you so guiding to 13% to 15%, which is which is great but boy.
Oh good.
And just to pick through some of the items. The revenue outlook is better which is encouraging right, particularly given the inflection of the coffee business Youre getting one to two points of help from a lower tax rate synergy you are wrapping that up this year. That's a major contributor the financial pacing with respect to the balance sheet deleverage is in line with expectations to Brian.
Question, a moment ago commodity is more of a pressure point that I'd imagine you expected what else is as advertising and marketing moving up maybe you could comment on that what are some of the other pressure points that are driving it.
Below algorithm year at least for the three year target for EPS growth with the top line outlook. So strong.
Yeah, I mean, a couple of things I mean, when we put our algorithm out there. We didn't say we were going to achieve 15% to 17% every year and the guidance. We just put it out there puts it nicely within that range in that 15% to 17%.
Spike where we all agree is a world that is very different than it was in 2018.
The one comment I would put it we are restoring marketing in 2021, we've said all along that any opportunity to restore marketing to drive growth. We would do so in fact on our Q3 earnings call.
I think we were really clear on our attention and when we provided our guidance and we said that we would be in the 13% to 15% range for 2020, we also said any opportunity to over deliver would be reinvested back in our business for growth.
Which is exactly what we did we came in right at the high end of our guidance, we reinvested back into growth and we achieved six 6% revenue growth in the fourth quarter. So we look at the R.
Our outlook for 2021 to be incredibly strong and more importantly, well balance because of the results that we've delivered are not driven by <unk>.
Anything that would hurt us in the long term by driving the short term in fact quite the opposite we've invested in brand growth and innovation in new plant capacity, we've invested in technology.
And that's why we're able to do things like growth share on 90% of our portfolio and add an extra million households into the keurig system.
Your next question comes from the line of Lauren Lieberman with Barclays. Your line is open.
Great. Thank you so much.
I was curious I guess two things one is the dividend increase is sizable.
Sizable and I think unexpected which is great. But was also curious how that fits into your thoughts about overall capital allocation and the outlook for acquiring brands outright or continuing to make investments in new brands. So that was that was one question.
And then the second is you've had tremendous market share gains all year on net.
Cold side of the business as we've talked about we've also made all these route to market changes and so I was just curious kind of at a very high level, even what you're hoping to get out of those changes right is it accelerated growth is it better efficiency again, because the share performance in the existing footprint. If you will had already been as strong as it was.
Particularly in 2020 thanks.
On the dividend side.
The dividends are an important part of shareholder return in this space.
And we saw an opportunity to provide more return to our shareholders by increasing the dividend, 25%, we do that while simultaneously sticking to our deleveraging target and also investing heavily in the business and all I would say on that one is it's reflective of the very strong.
<unk> confidence that we have in line of sight to continued strong earnings and strong free cash flow and even with that substantial increases dividend radar payout ratio.
It's still below 50%, which is which is well below just about anyone else in this space.
It doesn't change our outlook at all on our ability to participate in M&A. We've said all along that even with our commitment to rapidly delever.
We would be able to participate in the M&A space and a number of different ways with core for.
For example, we use shares to make that acquisition and that acquisition has been very value accretive to us in terms of it being able to drive growth both on the topline and earnings.
We acquired big Red with cash.
We had a very unique transaction with the <unk> companies to be able to secure our brands in the Metro New York area.
We've entered into other deals that are more partnership and then I'm going to segue into your to your next question because it's related if you take a look since 2019, we've done.
A dozen.
Transactions in the route to market space.
And nearly all of those were paid for right out of our cash flow. So it just tells you that where.
We have incredible cash flow visibility that allows us to do all of this activity, while delevering, while increasing our dividend payment and also investing in plant infrastructure and technology. So.
It's just a it's just another opportunity to reward our shareholders.
With regards to the route the market space.
You asked what our goal is at the all of the above so we look at our business market by market and as we've joked with you, sometimes but it's not far off ZIP code by Zip code.
Our situation.
Is very different across the market you know in aggregate, we control the distribution or where we have a DSD coverage covers.
Somewhere slightly north of 75% of the U S population, but for those of you that know the business intimately you know that it's very different brand by brand. So it's.
It's a two it's a two pronged approach.
Heavily in our brands through marketing and innovation and renovation and then we need to make sure that market by market. We have the most competitive distribution system for those brands and that has led to all of the transactions that I just talked about in the couple that you highlighted and what does that do for us. It's a long term play not a short term play it gives us access to <unk>.
<unk>.
Growth through better execution, and also gives us access to efficiency through consolidation of inefficient retail distribution.
Your next question comes from the line of Dara machine in it.
With Morgan Stanley Your line is open.
Hey, good morning, guys.
Hi, Dara so the the 28% Brewer growth in Q4 was very striking.
Became a few quarters into COVID-19 when theoretically allows new households had already purchased Brewers in response to Covid. So I was just hoping you could be a bit more specific on the key drivers behind the Q4 Brewers strength, how sustainable that might be as we look forward into 2021, and then also just taking a step back and looking more at the full year.
Clearly the 3 million household penetration increases above that typical 2 million dollar pace. So just how do you think about that incremental 1 million households, does a lot of that sort of come out of 2021 or do you think that 2021 household increase could be similar to the historical range pre COVID-19 driven 2002.
<unk> in theory.
Yeah. Those are great questions. Let me start with the last one which is household penetration and then talk about brewer growth because as we settle along brewer growth is not a great predictor of household penetration.
And while there's a correlation between the two.
Not necessarily year in and year out so let me start with household penetration.
Youre correct it or our most recent run rate has been about 2 million net new households per year that increased to 3 million households.
We don't believe that's a pull forward from 'twenty. One we don't believe that that's actually material in the Grand scheme of things because.
The best way to look at this business is to look at it over a longer period of time definitely not quarter to quarter and even year to year isn't particularly helpful and when I say that is in the past five years. So if you take a look at the five years since Keurig was taken private and then merged with Katie P. That's a good timeframe, we've increase households from 21 million.
To 33 million, that's an increase of about 9% per year, it's a compound growth of 9% per year, It's 12 million new households, and if you recall back in 2015 2016. The word on out there was debt household penetration had flattened and the market was saturated.
And we've increased our household base by more than 50%. Since then with all that growth. If you go back to the Investor day presentation that we laid out in great detail in 2018, and with the remaining universes of households, Theres still another 60 million households that ultimately should be converted from brewing coffee by the pot.
If I the cup and Keurig, obviously has the lion's share of that and so we've got years and years of runway ahead of us at the growth rate that we're at so when you look at 2 million to $3 million year over year. It looks material. When you look at going from 21 million to 33, and five years with 60 million households ago $1 million as a as a blip and all of that.
Having said that.
Let's be careful on the year over year comparisons whichever alone will report on so if we went back to our normal 2 million household penetration growth that would look like 6% growth.
In 2021.
Projecting that just keep going through the illustration and people right that there's a deceleration in household penetration, which would which would actually be a real misleading conclusion, let's talk about brewer sales brewer sales are a combination of things there are a combination of new households, entering the system.
People upgrading their brewers as we introduce new models with benefits and features that didn't exist before we're seeing more upgrades and also we see replacements of Brewers that overtime fail. So we shipped 11 million Brewers last year that was a record number in addition to the strong household penetration growth.
We saw a record number of upgrades people, we're investing in their work from home situation. We've got all these great Brewers that were just introduced in the past couple of years and so we saw people lean in and upgrade.
And as I always point out while that doesn't have a material impact in the year. That's yet another household recommitting to the keurig system for the next.
345 years, so it's all incredibly bullish.
Going into this year, we wouldn't expect to see that number.
In 2021.
We don't need that that we don't need 11 million Brewers to support.
Two or even 3 million household penetration growth we.
We have no idea of how many people are going to upgrade that's something that we can't predict so I think as you look at 2021 flat number on brewer growth would be.
Extraordinary.
A decline in brewer growth would be very normal and would support great household penetration growth, but again watch for the headlines that are gonna say house Brewer sales are down and that you know it's a.
It's a concern about the keurig system in the future.
My last.
Because it's a good point in time for me to say if I think my last point is as we think about 'twenty 'twenty. One 'twenty. One you guys are going to have to do this across the board just make sure you take a look at two year stack numbers not just year to year numbers. So as I put in my script. When you took a look at the total total Katy P basis, a two year stack basis, which takes out all that noise.
2021, if we hit the midpoint of our guidance, we're going to be 8% revenue growth over two years from 29% EPS. So I think that's the way we're going to have to look at the world in 2021.
Your next question comes from the line of Nik Modi.
With RBC your line is open.
Thank you good morning, everyone.
Hey, how are you Bob I was looking at some of the numerator data showing how more and more of the palms are being sold online regardless of the Brewers bought online or in a brick and mortar environment. So I was just hoping you can share with us the implications of that from a P&L perspective, you know margin wise.
Consumer insight visibility right, because it's not as easy to track.
Just from a from a retail consumption standpoint, so any clarity around that would be helpful.
Yes.
That's a great insight.
We've been really proud of the development that we have in ecommerce you know when we can.
Watch the company in 2018, we talked about one of the seven routes to market being E Commerce and that we believe that we were the most developed food and beverage company.
In 18, and I don't think anyone really cared much about ecommerce and beverage, but today, we all care.
And we talked last year about you know more than 10% of our total company sales going through E Commerce, and obviously, that's an area that's accelerating.
Dramatically.
Coffee in particular coffee pots, we go we get to the consumer three commerce two ways. We go through retailer Dot com and Amazon Dot com, but we also go through Keurig Dot com.
I know, it's it's more challenging for you guys to have visibility of that we've talked about.
On pods in particular that are increasing percentage of our parts sales are not visible through traditional syndicated data, but we have a really good handle on what goes on in E Commerce and to your point before we.
We also in many cases variable track it down to the individual consumer who is buying this that we have.
A much more targeted marketing program as a result of all of that as far as margins and all of that go it's great. There's not a concern here, it's more challenging as you can imagine to ship.
Liquids I think the future of ecommerce and liquids is much more in a click and collect mode or home delivery mode not shipping it through traditional you know Fedex and U P F.
But curie pods are high value lightweight long shelf life don't damage.
It's almost an ideal.
To ship through traditional e-commerce channels and Thats why its been really attractive so it's going to be an increasing part of our growth in our business and one of the things we'll talk about in 2021.
Is the launch of the first consumer excuse me the first connected brewer for broad scale consumer use we're excited about that we'll talk to you about that in the future and I think that's going to accelerate more of the e-commerce.
<unk> for the Keurig business going forward.
Your next question comes from day line of Andrea Teixeira with Jpmorgan. Your line is open.
Thank you and good morning, everybody. So my question is on the competitive environment and Bob you mentioned that reinvestment and also innovation day, you're putting a football from Pakistan, and and and and a coffee. So are you seeing the needs increase A&P investments in light of what some of your competitors.
So the loss principally flavors.
And the second part of this question. If you can also talk about pricing for packaged beverages in the car.
Inc, accomplish something or.
Ultimately that's the end of 'twenty one thank you.
Yeah. Our recent first during marketing is because we have an objective to increase our marketing as a percentage of sales over time.
And we know what happened in Covid across the board.
We're really proud of the fact that despite the fact that we had to pull some of that marketing and some of it was just it was just a bad environment too.
To invest in advertising and there are certainly in the early and mid parts of the year.
In other parts of it was because of the great mix headwind that everybody in the industry face.
We were proud of the fact that we did that but we got really efficient in where and how we spend our marketing and my best evidence of that is the market share gains across our portfolio that suggest that we were able to still balanced brand growth investments in innovation.
With a more.
More restricted marketing budget every opportunity that we get we will invest in marketing and innovation.
What we're doing in 2021, it's not a reaction to competition at all.
It's an investment in the great pipeline of brand ideas that we have and as you can tell from all of our conversation here.
We are building this business for.
For the long haul as I referenced before when we looked at the fourth quarter and we knew that we were trending very strong.
For 2020, we were very explicit in saying that any over delivery would be reinvested back into brand growth and that's exactly what we achieved in Q4. So that's our ambition is to build a very healthy brand portfolio for the long haul with regard to pricing I think this industry is incredibly rational in pricing and we.
We don't discuss what our specific outlook is for pricing in a given year.
But where we have our eye on inflation as does everyone and I think that the beverage industry has shown that it's been able to recover inflation through a combination of productivity and pricing and I wouldn't expect that would change going forward.
Your next question comes from July Rob Aten Fine with Evercore. Your line is now open.
Great. Thank you very much and again congratulations on a terrific year in a very.
Challenging circumstances.
So as you look out on 2021.
I think a lot of a lot of the shelf set changes were postponed or didn't happen in 2020 what are the.
Shell sets look like from.
The spring reset.
You get a sense that you're gaining share.
Shelf space, and and maybe give us an update on some of the new brand initiatives.
Don't create a shock.
Polar so that'd be the first question and then just a second question just a detail if you could give us.
A reminder of your investment in body armor and if in fact that gets sold.
What.
How it will look at you know proceeds to two Kt piece. Thank you.
Yeah sure and good to hear from you Rob I think.
Let me start with the shelf changes more a more normal year in 2021 and 2020 when innovation was more challenging to get on the shelf. We got a good head start with Dr Pepper and cream.
And also with Canada dry bulb and you know as you know we have.
A long list of.
Innovation and renovation that we launch every year, so I'm not going to mention them all and.
2021.
Is it looks more normal in access to the shelf, we've got a really strong lineup of innovation across the board we talked about some of it in the prepared remarks, but we again, we have much more than that and so we stand in a really good position to get that strong innovation and renovation on the shelf quickly and our speed to market as a company has.
Improved every single year and it's our we're very proud of the distribution system that we're building a combination of our company owned DSD as well as our independent partners.
And through a combination of strength of ideas better joint planning with our partners and our customers, we've been able to to improve our reach to shelf and so that's going to continue.
You mentioned some of the seed investments that we have in brands like don't quit and a shock all in early stages. All are all very promising.
Too small at this stage for us to report, but I would expect it when we do our Investor day mid year, we'll give a more comprehensive update on all of the startup investments and that's just one of many tools that we employ where we've said before that we can launch something on our own we can partner with somebody.
In a in a joint distribution matters, we've done things from brands like Evian, and we can make seed investments as we did with don't quit and a shock and we can acquire things outright as we did with core Polish off to a great start it is.
A terrific brand and really our play in the.
Sparkling water flavored sparkling water segment.
We're ramping that up right now the HCV for polar has already improved by about 2028 points nationally. So it shows the strength of our partnership with them.
And obviously you can tell by the commentary that we're very bullish on on driving that brand to a national leader in.
In the not too distant future and then the last one a body armor as you know it's publicly available we have 12, 5% ownership stake in body armor.
If and when that.
That business is sold then we would receive payment just like any other other investor would would receive payment.
At that time, and we don't know anything more than what's been publicly reported to date.
I've covered all of your territory there thanks for the questions.
Okay.
Starting 2019 through 'twenty, and 'twenty $1 million to $100 million every year and as we just spoke of during a lot of script IV are very happy to share with everyone debt. After two years. We have delivered success will be 400 million dollar zone synergies and we expect to deliver another 200 million.
That was in 2021 debt would complete the three year cycle off the merger synergies that we put out debt now we also assessed and shaft topic day that well, they're all like efficiencies. If you look at it in two big buckets. One is the merger synergies that I just spoke of and the second one as we define them.
Call It base productivity programs, which obviously base productivity programs will continue including 2021 and beyond when we step back and look at it Holistically, we have several programs and initiatives that actually the identity out executing now or we will be starting to execute to continue to feel.
The base productivity programs that we have for example, when you look to what's happening in the coffee systems. We are building and state of the art a K Cup pod facility in Spartanburg, South Carolina, and as I said, I think 10 minutes ago and have you had at the early phase of having let's say.
So the profit cool and margin enhancement.
Thank you and that concludes the question and answer session I would I would like to turn the conference back to Tyson silly.
Thank you and thank you everyone for joining us. This morning, I know, it's a busy day from interview, but as usual the I R team myself and Steve are around.
For any follow up calls so please feel free to reach out to us stay well and be safe. Thank you everyone.
Thank you for centers and thank you, ladies and gentlemen for joining Kerry Dr. Pepper fourth quarter of 2020 earnings conference call have a wonderful day give me that'll disconnect.
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