Q1 2021 Keurig Dr Pepper Inc Earnings Call
Good morning, ladies and gentlemen, and thank you for standing by welcome to the Keurig Dr. Pepper's earnings call for the first quarter of 2021. This conference call is being recorded and there will be a question and answer session at the end of the call.
I'd now like to introduce Keurig, Dr. Pepper's Vice President of Investor Relations, Mr. Tyson Seely Mr. Seely. Please go head.
Thank you and Hello, everyone. Thanks for joining us for.
Earlier. This morning, we issued our press release for the first quarter of 2021.
You need a copy you can get one 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 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 reconcile our guidance.
Here with me virtually today to discuss our first quarter 2021 results are <unk>, chairman and CEO Bob Davenport.
Our CFO.
Dr <unk>, and our Chief Corporate Affairs Officer, Maria Scuppered yourself.
And finally, our discussion. This morning May include forward looking statements, which are subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 1990 Fives. These.
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 on.
Apart in some subsequent events.
A detailed discussion of these risks and uncertainties is contained in the company's filing with the SEC.
With that I'll hand, it over to Bob.
Thanks, Tyson and good morning, everyone I Hope you and your families are well as we enter spring cautious optimism is in the air vaccine rates are approaching 50% for the U S adult population and growing across North America.
Higher levels of consumer mobility are evident in retail restaurants, and entertainment and there isn't increasing belief that the worst of the pandemic is behind us.
It's the last year has taught US anything however is that our goal is not to predict the future, but rather to be nimble responsive and prepare for whatever we may face in the future.
This day mindset enabled keurig, Dr Pepper to deliver meaningful outperformance in 2020, and a strong start for 2021.
While some companies have been devastated by the impacts of the crisis.
We have experienced a windfall from it.
We on the other hand has succeeded despite the pandemic by driving the parts of our business that are performing well overcome the declines we've experienced an area is structurally challenged by COVID-19.
While that May sound easy in concept it is very difficult to execute in the real world and I would like to thank our 27000 team members across ADP, who continue to step up to meet the challenge.
In the first quarter of 2021, we delivered strong performance across the board highlighted by double digit growth.
Both net sales and adjusted diluted EPS.
We also reaffirmed our outlook for another strong year of double digit adjusted diluted EPS growth.
Spite, the specter of rising inflation.
Part by increasing our net sales growth expectations from three years to 4%.
4% to 6%.
This sets us up for a solid 2021.
This is up to achieve our ambitious three year merger targets ending this year.
Yeah.
Let me now provide.
Key highlights of the first quarter.
Our net sales grew by 11% with all four business segments posting growth.
Driving this performance was continued strong in market execution across the business.
In cold beverages, we continue to perform well with more than 80% of our cold beverage retail sales base expanding market share during the quarter.
We believe a helpful way to assess both our results and those of the broader industry given the unique volatility of 2020 is on a two year stack basis.
Over this time period, nearly 90% of our cold retail sales base grew market share in <unk>.
Our consumption was up nearly 17%.
<unk> performance continues to reflect adp's broad based strength in CSD.
Premium on flavored water.
<unk> teeth, and fruit drinks and others.
During the quarter, we launched new zero sugar varieties across our CSD portfolio, which has helped to solidify our number two CSB manufacturer status you retail accounts.
We're also seeing Katie P brands takeover leadership position.
The latest being sunkist, becoming the number one fruit flavored CSD brands fueled.
Fueled by the zero sugar introduction and flavor line extensions.
In the past few months, we launched innovation behind by with by boost.
Made with clean ingredients, including plant based energy from tea extract by boots has been well received by retailers and consumers and early days.
Finally on cold beverages, our new brand partnership and the growing sparkling water segment with polar is performing well.
National ACB has grown to 55 per cent with more distribution to come a shelf resets for completed across the country.
Our coffee business posted an exceptionally strong quarter with net sales advancing 17% on a constant currency basis due to a 14% increase in pod volume growth and a 61% increase in brewer volume.
The latter primarily being driven by a roughly 40% increase in consumer sales and some benefit of shipment timing between the quarters.
Approximately half of the 14% increase in pod volume was due to strong consumption in the quarter.
With the remainder driven by differences in PON shipment timing relative to the unusual year ago period.
The fact that pod volume growth in tracked channels registered at just above three per cent for the quarter.
Demonstrates the trend that we've been discussing for some time.
K Cup pods are experiencing significantly higher levels of growth in untracked channels, particularly e-commerce.
Sticking deeper into Untracked channel pilots further the growing importance of e-commerce.
Strength in at home part has been tempered by continued weakness in the away from home channel as the return to office has continued to be slow.
We do expect improvement over the course of 2021, especially after labor day, when we anticipate the rate of office reopening to accelerate.
On a two year stack basis dollar consumption of pods in tracked channels was up 11%.
With two year shipments up more than 20%.
For total <unk>, we delivered very strong bottom line results for the quarter with adjusted diluted EPS growth of nearly 14%. Despite lapping the sale leaseback gains in the first quarter of the year.
We also continued to generate high levels of free cash flow, enabling us to pay down debt and improve our management leverage ratio to three five times at the end of the quarter.
Since the merger we have reduced our leverage ratio by 2.5 terms, while also investing meaningfully across the business.
Let me now hand, it over to ozone to walk you through the financial results for the quarter and provide further detail on our outlook for 2021.
Thanks, Bob and good morning, everyone.
Continuing on an adjusted basis.
Briefly review our pen for months for the first quarter, which was very strong and all of our plants really nice discusses in significant detail.
I will then turn into our outlook for full year 2021.
Constant currency net sales increased.
11%.
By higher volume mix of pinpoint three per cent and favorable net price for the organization of 0.5 per cent.
These all four of our business segments posting good al.
Adjusted operating income in the fourth quarter for.
$741 million.
Increase of 8.3 per cent compared to $684 million in the year ago period.
Driven by the very strong net sales growth continued productivity and merger synergies and lower marketing spending in relation to the pre COVID-19 spending levels in the year ago period.
These islands, but partially offset by higher operating expenses.
With increased consumer demand and inflation in logistics and input costs and an unfavorable comparison to it for the $2 million gain in the Toyota yet on these sale leaseback or for.
All possibilities.
For perspective, this gain negatively impacted.
Year over year, adjusted operating income growth rate by more than seven full percentage points.
Adjusted operating margin in the first quarter net was 25, 5% a day.
Line of 70 basis points versus year ago.
Which included the 160 basis points headwind from the gain on sale leaseback transactions.
Adjusted net income a bottoms.
<unk>, 4% in the core net to $471 million compared to 408 million bullets in the year ago period.
Going by growth in adjusted operating income.
And then moving on adjusted effective tax rate.
Adjusted diluted earnings per share grew 14.8 per cent to for these three cents per diluted share.
Compared to 29 cents per diluted share.
A year ago period.
Switching to the <unk> gain.
From the get go on sale leaseback transactions.
Let me take a moment to discuss the inflation net of cash flows you have referenced this morning.
Like most other CPG companies Inc.
Our outlook for the installation over the past month.
Price expectations continue to rise for aluminium.
Glass.
Corn inputs and pointed propylene, which is in my Penny I'll use E K Cup pods.
Most recently we have expand.
And spike in transportation and logistics costs.
Especially on the acute.
Lindsey has been required to purchase spot capacity for.
Satisfying this strong demand for our products.
Some of these input costs for example, transportation and pointed propylene cannot be hedged.
To manage inflation.
We rely on a combination of productivity cost control pricing and incremental volume growth.
Putting the right networks at the right time to protect the long term health of our life.
Business, while offsetting rising input costs for 2020 one.
We added net positional strength.
As we are able utilize our sales growth momentum to mitigate installation.
Hello, Matt.
Insulation going through affinity.
You may need to utilize all of their options just like we did in point in 'twenty.
Nimble and flexible to react to changing market conditions for a shoot our continued success.
Finally, we got a number of questions on the benefits of hedging and Paul was buying with regard to mitigating insulation.
First why did we use these practices whitening day, our goal is probably mildly to provide planting something from for a period of time and to insulate against short term volatility in input costs.
Can postpone but not offset inflation.
Okay.
Paul.
We are seeing green coffee prices on the rise right now.
For a period of time.
Could you, let us see how the market took long before we need to react like every other input costs.
Green coffee inflammation to be.
Persistent.
Then we would consider at all of our.
Option.
To offset its impact on all of our properties net loss.
The good news today is all about the strong guidance for 2020 one.
England Pet AIDS all of these considerations.
And we are confident that we have the tools and management discipline.
Good day lever and strong growth in Boston day venue and earnings.
Despite the inflation outlook net has been widely discussed in this earnings season.
Let me now turn and talk about segment plus peptide path for months in the first corner.
Coffee systems constant currency net sales increased 16, 9% driven by higher volume mix of 19.5 per cent per.
Partially offset by net price realization of $2 six per cent.
The volume mixed path for months reflected pulp shipment volume growth for all 13.7 per cent.
And even by double digit at home shipments, partially offset by continued softness in the.
I mean from home coffee businesses.
The 61 per cent increase in brewer shipments in the quarter was fueled by strong consumer consumption and the benefit of shipment timing.
Adjusted operating income for coffee systems totaled $389 million, an increase of $12 one per cent compared to freehand with for the $7 million in the prior year.
The increase was driven by the strong net sales growth.
That's continued productivity and merger synergies.
These graph developments were partially offset.
By installation in logistics and.
And input costs and the unfavorable comparison for the sale net.
These spec game in the U S Gulf call day.
Impacted the segment by $16 million.
They had already adjusted operating income growth rate would have been five percentage points higher in the quarter.
Absent this you had a ball game.
Adjusted operating margin in the call. There was 74.1 per cent compared to 35, 7% in the you and I go period, a decline of 160 basis points Inc.
Moving and 170 basis point headwind from the asset sale sale leaseback gain in the first quarter dental 2020.
Also impacting the comparison was unfavorable margin mix.
With the exception on the strong Blu build at all in the current quarter.
And the breakeven margin structure, all Brewers ox.
Offsetting these impacts were continued strong productivity and merger synergies.
Packaged beverage as constant currency net sales grew 7.2 per song in the first quarter.
Driven by strong volume mix growth of six eight per cent.
And higher net pricing of 0.4 per cent.
They spent for months reflected growth in both our company owned DSD operations.
And that holds direct businesses.
Driving this rule the Doctor Pepper.
And Bob would you kind of a dry sunkist.
I have enough and skirt Inc.
Yes. Please.
With the Snapple and non auto partially offset by a decline in bi.
Adjusted operating income for packaged beverages in the first quarter totaled $197 million, a decrease of three per cent compared to $203 million in the year ago period net.
Included the sale and leaseback gain of 26 million bullets for the segment.
Do you at all that you had adjusted operating income growth rate would have been 14 percentage points higher in the quarter.
Absent this year ago gain.
Inflation in logistics and input costs and higher operating costs to meet strong consumer demand.
But also headwinds in the quarter.
As for continued channel and for my mix challenges.
And we are comping to a largely non COVID-19 period last year.
Partially offsetting these drivers were the strong net sales continued productivity and merger synergies and lower discretionary expenses.
Adjusted operating margin for the segment was $15 one per cent in the quarter compared with adjusted operating margin of 16.7 per cent in the year ago period.
Decline of 160 basis points, including the 220 basis point headwind from the year ago sale leaseback gain.
Beverage concentrates constant currency net sales increased 6.5 per cent due to favorable net pricing of 10 1.2 per cent per.
She was offset by lower end when you mix, all 0.7 or something.
We spent for months continue to be affected by the unfavorable impact of COVID-19 on the fountain foodservice business all day.
It improved since the beginning of 2021.
Adjusted operating income for beverage consumption increased 21 three per cent.
Two $279 million compared to $197 million in the year ago period.
It didn't even buying and that seems to grow and logo to marketing spending.
Adjusted operating margin in the corner of months anytime at 50 basis points to 72.9 per sample.
Primarily reflecting the favorable net price realization.
And finally, non denominated come beverages constant currency net sales grew 7.7%, reflecting strong net pricing of pinpoint three per cent punching the offset by nobody wanted it makes up two six per cent.
Consumer mobility, and Mexico continued to be impacted by COVID-19.
Hello, Matt.
This has improved from the beginning of 2021.
Liquid refreshment beverage in market execution in Mexico continues to be strong.
Driving market share growth for our key brands, namely opinion F. P L Scott and come out of book.
Adjusted operating income decreased 15% to $23 million compared to $27 million in the year ago period.
On a constant currency basis, adjusted operating income decreased 14, 8%, reflecting the impact of foreign currency transaction expense and installation and logistics, partially offset by the strong growth in constant currency net sales.
Continued productivity and lower discretionary spending.
Our adjusted operating margin in the quarter decreased 470 basis points to 82, 4%, primarily reflecting the unfavorable impact of foreign currency transaction expense.
Switching back to total K V P.
Free cash flow in the quarter once again exceptionally strong at $458 million.
Which translated into a free cash flow conversion ratio of nearly on the per cent.
As previously announced we completed a $2 2 billion dolomite and strategically financing in March of this year.
Since the time of the margin near the sleeves angle we.
We have generated significant cash flow.
And have they.
D level.
This is strategically financing for that enhances our liquidity profile and the strength a lot of Beaumont ship.
To that end, our strong free cash flow for months in the core that enabled us to reduce outstanding bank debt by $25 million and structural payables by $5 million.
And we paid $95 million to support the early retirement of debt in conjunction with previously mentioned March strategic financing.
We also ended the first score that it's free.
For the full.
$9 million, all unrestricted cash on hand.
Due to growth in net earnings.
Alright reduction in bank debt.
And increase cash on hand.
Improved a lot of money to spend that money. They show a 2.5 times at the end of the first quarter of 2021.
Since the merger closed in July 2018, we haven't reduced our management never nature. They show by two five times.
Let me move to a lot of updated outlook for 2021.
For the full year 2020, one we now expect constant currency net sales and do the angel for two six per cent compared to all of our initial guidance of 3% to 4% at the beginning of this year.
Which reflects the strong demand for a lot of brands across all segments.
We also reaffirmed our EPS guidance range of 14 to 15 per cent for the yes.
In part driven by the benefit of higher net sales outlook in offsetting higher inflation.
As indicated by the news this morning.
We plan to reinvest any earnings upside in both of our guidance range back in the business to drive future growth.
For perspective on a Toyota stock basis.
Assuming the midpoint of our guidance range.
Adjusted diluted earnings per share of a girl will approach 230 per zone.
Supporting our guidance.
Two I expect.
Justin edges of approximate $200 million for the for your total approximate the $600 million.
In line with a lot more jet targets.
Adjusted interest expense in the range of five from its 5 million bolt ons to fight for them that's $15 million.
And adjusted effective tax rate in the range of 23.5 per cent for 24 per cent.
As you have seen you know about results. This morning, our effective tax rate was below this guidance range at 22.1 per cent and call that one.
Due to one time discrete favorable items, Inc.
Joining employee stock vesting, which we anticipated. This his last day at first core that you've done.
For a dividend trades increased 25 per cent beginning with our regular quarterly dividend to be announced in the second quarter subject to official board declaration.
Moving to see disclose.
Diluted weighted shares outstanding of approximately one point for.
For the 3 billion.
Finally, we continue to expect a lot of money spent number of its ratio to be at or below three times by the end of this year.
While we do not provide quarterly guidance.
Giving the companion zone twin I'm, usually we'll have time for that to 'twenty to 'twenty.
Let me provide some additional perspective on the second quarter.
Giving the installation on a cash rooms, we discuss and that may be kind of viewed or whether you're increasing marketing spending we.
We expect to deliver double digit adjusted diluted EPS growth for the quarter, although it will be below the full year guidance.
Angel protein 215 per cent.
Transportation continues to be a headwind in the second quarter.
With respect to marketing, we continue to distort investments behind our brands this year.
Especially on it to support a lot of strong slate from innovation.
Which is comping a year ago period in which everyone in the industry.
Marketing expenses due to the uncertain consumer demand environment on that call me.
We hope this provides some helpful clarity on the phasing of our business results this year.
With that let me hand, it back to Bob.
Thanks for those on before moving to Q&A I would like to provide a brief update on corporate governance. As you are aware, we transition from a controlled company to a widely held one in 2020.
Since that time, we've enhanced our board structure, increasing its independence and diversity and establishing the role of lead independent director.
I want to highlight our announcement yesterday that we welcome Goober Mirror Rochelle.
As a new director to our board.
Since November we've added four new directors, each of whom brings a unique experiences and fresh perspective to the board.
Finally, many of you have asked questions about our post 2021 outlook.
Planning to hold an investor day. Shortly after we report our Q2 earnings during which we look forward to sharing insights on our long term strategy and financial expectations.
For the conference will be provided in the near future.
I will now hand, it back to the operator.
Ladies and gentlemen.
Remind her if you would like to ask a question. Please press Star then the number one on your telephone keypad.
Well pause for just a moment to compile the <unk> roster.
Your first question comes from day line of Bonnie Herzog with Goldman Sachs. Your line is open.
Alright, Thanks, moving Barney.
Hi, Bonnie.
Hi, I wanted to ask you guys for vouch for ourselves from the court I was hoping just to get a little bit more color on you know the much better than expected sales that you guys reported.
Our impactful Sunday innovation that you've put in the market place has been and then looking forward.
Should we think about you have for sale.
For the balance of the year cash in the context of some of the tougher comps that you have.
So you're saying.
And separately you know I'm thinking about attach rate on a go for it.
Cash they get out in front of it for volume for us that you've seen I guess for me. It seems like what's your attach rates for this really could be a meaningful driver behind pod volumes in the coming quarter and years.
And if you could just touch on that or is that the right way to think about it.
Yeah, Okay sounds great, let me start with attached burst.
During the pandemic, we saw an increase in attachment rate, especially in the early days.
And that was very different than the than the long term trend, we had experienced where he said attachment rates for various staple our expectation that we communicated at that time is that as consumer mobility normalized we would see attachment rates normalize back to their long term levels and that's exactly what we're seeing right now so I think.
Attachment rates from one hand have come down from their peak in Q2, a year ago no surprise there.
But the reverse side of it is our attachment rates holding up versus their long term trend, even as we add new households, absolutely and I think it's as simple as when we're able to convert a home from brewing coffee by the pop to bring it by the time it settles in at a consumption rates and unless there's some substantial change in their behavior.
<unk> stays very solid over time, which is which is ultimately good news.
As we talked about a number times, so it's worth but it is worth repeating.
Household penetration growth is what drives our pod growth over the long term.
And brewer sales.
Over a longer period of time have some correlation but especially in the short term there's not causality. So you cant automatically look at shrum Brewer sales in and say Oh, that's going to mean that we've got a an even higher rate of household penetration and then we can give you a little more depth on that because it's such a critical point.
In 2020 as you know, we added 3 million new households to the keurig system.
That was about a million households above our normal run rate of $2 million and there were a lot of questions about is this a pull forward from the future. When we look at 2021, we said absolutely not and that's exactly what's playing out right now.
To get those 3 million households, we sold 11 million Brewers.
So that tells you that we had a record year not only in terms of new household, but a record year in seeing existing households.
Which are now 33 million strong in the U S.
Replace or upgrade their brewers.
While replacement and upgrades don't lead to household penetration growth. They are really important because they represent a strong recommitment to the keurig system.
So let's talk about 2021.
When we.
Talked about when we put our initial thoughts about 2021.
We said that we believe that we will return to our long term trend of adding 2 million new households per year, and we werent concerned about any pull forward, we had a really strong quarter in brewer sales in Q1 and by the way 40% of that 60% rate growth was driven by consumption. So theres some shipment timing in there but it's.
It's really consumer sales driving the majority of that.
As happy as we are with that it is far too early in the year for us to conclude that that translate for household penetration growth above $2 million.
Is that because we've got a ton of innovation in the market right now and you're also seeing two rounds of government stimulus and the past few months that have people feeling very liquid and so a number of people are using it to still investing their homes and they are upgrading their brewers and we've given you an amortization to do so.
So as we sit here today, we're still talking about 2 million new households, which is a tremendous growth and as we always do we'll update our household penetration growth at the end of the year.
And the start that we see on on Brewers should give us confidence.
Nothing else should give us confidence that the 2 million number is a is very doable.
Your next question comes from the line of Bryan Spillane with Bank of America for lines open.
Hey, good morning, everyone I'm, just just two quick ones for me first one just was on on on the inflation outlook for the year and relative to the comments on hedging just wanted to clarify are or is your inflation outlook.
You know is it is it hedged so meaning is there a potential for for more I don't know volatility I guess in the Cogs inflation over the balance of the year or are we is the outlook you know pretty well locked in.
Sure Good morning, Brian and it like you have heard.
Like so for many of them are paying for the public companies. We have a we have increased our outlook for installation over the past month and when you looked at the major reasons or for the installation you would see that probably might have out on the pack aging likes off although medium glass as well as our pump polypropylene material.
Using the K Cup pods that.
That includes current inputs that comp sales for us is the high fructose and sugar.
And then in the past one month, LIBOR and expecting a older it'd be an inflationary environment in the car.
For patients and deal that on logistics, but we have seen an uptick in those and then he also sotheby's our increased volume amusing at times off the spot rate, which makes it a little bit tired of information that environment.
Right no.
Believe that we have for included a healthy amount of insulation expectations in our new to go period.
And then some of the input costs, especially in transportation, which is translated for us is freight.
Then as polypropylene and I don't know, it's really hedge level in terms of whether or not they relate to the market. So if we can pay for them and some of the hedging activities that Hogan.
And Andrew, but nevertheless, Ah Bryan if he feels very good for me that what expectations and how much inflation. We have increase you know what outlook and build for the rest of the year and for the commodities and the other input costs. The other hedgeable items as we always use.
For a white the hedging techniques to take and bring a price stability in the forecast, but that's why I don't see for the used to go there at all the impact, but please make no mistake that hedging or forward purchasing.
For whites.
So tentative for that period of time and the net persistent installation is just postponing is not really mitigating the installation as such but in short we feel very good with our expectations for the rest of the year and we believe we derisk the P&L as much as we could.
Your next question comes from the line as Lauren Lieberman with Barclays. Your line is open.
Great. Thanks, good morning.
I want to talk a little bit about marketing plans.
For this year and as you mentioned in the prepared remarks in English.
Cold drinks industry, everyone reduce spending significantly in 2020, and then you guys had tremendous results regardless, so I just wanted to talk about.
How your marketing plans for 'twenty, one, possibly have changed with inflation being so much worse than initially anticipated I'm sure marketing is up year over year, but just how much anything that you can offer how that may have shifted and then also the mix of that of that spend.
Given the.
The very strong return on a relatively low level of spend in 2020, how is that informing your thought process on what actually needs to be spent to support this business. Thanks.
Sure Hey, good morning, Larry Thanks for the question.
Marketing plans.
From a marketing spending for as you point out everybody industry dropped their spending in 2020. It was a combination of covering mix issues, but also in the early days for the pandemic the marketing wasn't very efficient.
As we got through the year as you also point out not only did we restore some of the spend but we also learned to be incredibly efficient with that spend.
Nothing like being under pressure to us to innovate on how we're able to reach consumers in a more efficient way and a lot of that learning carries over into 2021, where we build in that expected efficiency plus we have plans to invest more in marketing to be really directly to your question.
We have not changed our commitment to the increase in marketing than we had planned in 2021. Despite the fact that we're seeing higher inflation. So we havent touched marketing to offset inflation at all in 2021, our expectation is increased marketing spend.
For as much of that as we possibly can although we won't get all the way back to where we were in 2019 for sure that'll take a couple of years to get there.
We are also looking for opportunities to invest more in our marketing spend so as we've talked about a number of times that we think 13% to 15% growth.
In an environment like we're in right now, especially when you look at a two year stack of 30% EPS at the midpoint is fantastic returns and anything above that we would then use opportunistically to investing back in the business to continue to drive long term growth getting the balance right between delivering best in class.
P S class best in class growth and market share expansion is what we're doing here and we will we will reinvest any opportunity to do we get.
We spend an increasingly increasingly we're spending more and more on digital that's not a surprise everyone's doing that we have much more science behind our marketing and our team continues to build their expertise in doing so and that leads to more efficiency. So absolute spending investment is no longer as relevant as it once was.
Cause we're dialing up the productivity and efficiency of that spend every year and.
And so we're able to squeeze more out of every dollar in terms of the consumer impact and as you point out even though our marketing was down in 2020, we gained share on 90% of our coal portfolio and we added 3 million new households, secure and so clearly we knew what we were doing on that spending and then my last point is what are we going to spend the money on this year, we've got an incredible lineup of.
Asian.
On the on the LR beside well first one CST zero sugar is our big news Youre already seeing advertising right now on Dr. Pepper zero sugar.
We're running a NASCAR for this first time this weekend in many many years with Dr Pepper behind zero sugar and bubble wallet.
We're introducing by boost which will support with advertising and then on the Keurig side. We've got a number of innovations Green Mountain grew over ice we're continuing the one step a lot pacing cappuccinos on donut shop, both of them moved it's done really well and then of course substantial spending behind Mercury business to drive household.
Penetration so not only do we restore the spending do we know how to spend it but we're really focused that spending on innovation, which we know drives a really efficient marketing. So thanks for that question.
Your next question comes from the line of Andrea Teixeira with Jpmorgan. Your line is open.
Thank you good morning.
This will go back to the comments about Q2 coming in below the guidance for EPS. Despite visiting day use this for you I understand.
The presentation of concert crashes and Reinvestments, but can you talk about the top line out to okay. If it caught me a boss the what do you have for them you know from when you have for the year now that you've raised thank you.
Yeah.
I will let you talk about the EPS.
Five of the earnings side of it and the pluses or minuses and Andrea Thanks for the question.
We.
Did something that we usually don't which gave guidance on a quarter.
Because of the volatility so we're certainly doing it in the earnings side, but we do not plan to give guidance for a quarter by quarter on the revenue side, but also on do you want to talk about the earnings visibility that we have in and why we decided to give some extra color on Q2.
Absolutely.
So when we look to our overall expectation in the construct of the call that we still see a very healthy quarter.
And as you have said the good top line includes expectation and it and then we look to the inflationary pressures that.
That are coming along we expect a healthy amount of installation to realize you know about a quarter could pan out and you should not also forget that when you comp versus the last year in quarter. Two we have seen some declines especially in the.
Transportation and introduces hardware for example, which was purely driven by the demand and supply which was coming from the marketplace as part of the pandemic environment. So we are going to lap those are periods that are on a like for like basis. These are up ticking a the overall freight.
Freight costs as well as logistics expectation for us, but the good news is we have a good handle on all flow schemes and we have built for cutting the trucks and not only for Cortez, two but beyond including the second powerful for yet at the same time last year in quarter, two as part of the overall.
Industry, giving that wasn't much returned in a pandemic environment. Neither do some more so a whole lot of marketing spending, especially behind the outset seismic day promotion and is Butler articulating a couple of minutes ago. These started to these states some of the advertisement and promotion.
Our investments behind our brands and also support and slagle from innovation.
Let me have and putting in the marketplace that for this is also technically creating a negative comparison.
Increase in NAV it pays for them on promotion versus last year, but this old grew their spend that.
Goes behind our plans in the investment and not for all of our business and as we always do a we are very carefully in terms of delegating or don't like productivity and merger synergies as well as the cost controls that we have been doing very successfully since the actually emerging date, but we took it to the different elements of that.
With the pandemic environment. Therefore, when we put all the puts and takes are do we still expect a very healthy.
Growth.
In terms of the either the top line mid part as well as the bottom line off of our P&L.
Your next question comes from the line of Chris Terry with Wells Fargo Securities. Your line is open.
Hi, good morning.
So I know, we're still not in a.
Completely normal operating environment with a with COVID-19.
But I guess with the strength that you're seeing in coffee.
What looks like a pretty rational environment in the.
North American beverage environment.
Especially on the price in front and you're still gaining share.
I Wonder if you have some incremental thoughts as we get into this year just about the steady state organic sales growth for the.
This portfolio because it continues to show an ability to grow.
Better than a low single digit top line algorithm, which the category exposure might suggest that.
The packaged beverage unit, specifically has been coming in significantly better and and and I just wonder if there's.
More opportunity here than than what again that that low single digit.
Category growth rate.
It might imply so thanks for any thoughts around that.
Sure Chris Good morning. Thanks for your question. The this environment is anything but steady state as we sit here right now and as we set upfront appear.
Appears to be returning to more of a business as a new normal whatever that is going to be when it settles basis, but way too early in this year for us to even think about steady state we have our entire organization remaining on their toes. We're looking for changes in the environment. None of US went into this year.
Being the level of inflation that we're seeing right now for example, and we don't know if it's temporary or if it's sustained so I don't know what steady state looks like and Ah and when we are when we get towards the end of the year, we'll probably have a better view on that.
Your question is what's the longer term growth outlook for this portfolio and whatever that environment is.
I won't steal any thunder from our Investor day, which we'll be doing right. After our Q2 earnings because that will be the topic what goes the ADP.
Outlook look like both from our strategy and our financial algorithm post 2021 at that point in time, we will have more data on what the marketplace looks like and that will be a very robust part of that conversation.
Your next question.
It comes from the line of Steve powers with Deutsche Bank. Your line is open.
Hey, Thanks, and good morning, everybody.
Two questions if I could I guess, maybe it goes on for you just to round out the <unk> versus balance of the year question. I think you know I. Appreciate the color you gave to andrea's question, but if you can just hit maybe for a little bit more specificity on what you expect to get better in the back half versus <unk> weather, whether its the cost environment or the cost savings momentum.
Pricing benefits or otherwise just looking for a bit more clarity on where the back half acceleration has to be sourced from relative to what you said about too cute.
And then Bob.
I really wanted to ask about was just the relative strength of packaged beverages on the top line not just this quarter, but what we've seen over the past several.
There's been tailwind in that business, but <unk>.
Pretty consistently exceeded expectations and I'm curious if there are things you can.
Hammer home for Us in terms of where you attribute for what you attribute the outperformance to.
Part of that I think is that you your market shares are stronger in future consumption channels, where consumers have been biased for shop this past year.
It's an extent that's true I guess, maybe you can talk about that but I'm also curious if you feel you see opportunities to leverage the strength you've had in those in those channels into future gains in immediate consumption channels when traffic.
Builds as we go forward. Thank you.
Good morning, Glenn you want start with the first one yes.
Yes, yes. Good morning. Thanks for the question so in order to bring a little bit more color. Let me try to break up a little bit more and then and N V. Go from that so as I said, we do believe that we have a good planning stance not only for Q2, but for the remainder of the year, so but that's.
Let's make sure that we'll likely on one thing is still not 100 per cent out of the woods in terms of depending again, let.
We still don't know exactly how all these things going to play out and how they might be economic situation going to react and most importantly have them mobility is going to be impacted.
He set a in numerous number of times.
We did not get any being pulled from the pandemic environment. This was a ruthless prioritization and pendulum managing that mix alone, we see our innovation and the categories that the opening that's going to be also set that we have seen some cash out in a lot of clean example, and the coffee side.
The away from home business, that's probably a modem it shows the offices as well as the host to be coming for the sector.
On the cold beverage side and the most negatively impacted parts of them for what business what was it sounds from foodservice as we discuss again in a numerous number of locations. The good news for me close assessing quoted for $1 and we are going to lock those in and they got to the numbers that we have seen in 2020, and you're seeing pleasing off the mobility.
T V to X bank.
For those two parcel for what business from start to perform better than at 2020, and all base and be able to do start to see a month two months out since January on box. So we don't know and you don't have a real crystal ball in terms of how the mobility is going to be impacted and what would be the puts and takes.
All of our business, having said that.
We also have a good understanding and some expectations in terms of all of our top line will look like in relation to the price of stability that we believe now we have a you know a lot overall cost of goods sold portfolio that goes back for the inflationary comments and I have just made rich.
A good chunk of whole lot of port toward you on that day is hedge up all in we have taken all the necessary measures to showed up for that stuff for year end for.
For the other inputs costs like sulfur upon neutral for them and trade that are that are not regulated markets that we can hedge are that if you believe the AR, we put the incremental inflation that environment that would be applicable for a lot of business for the rest of day, yet and then as we also discussed.
So if at all levels is actually in case, the insulation goes for that until.
Put into the service like sofa productivity cost controls pricing than have any cause I portrayed as well as a lot of increased volume profile to support the bottom line. Therefore, we got really fortunate in terms of having separate of resources in order to fight back.
For that installation and that may happen and giving that we don't know exactly what people don't know at this point in time and therefore, when we step back and look at it and we will also continue to ramp up a lot and we named it productivity programs as well as merger synergies more in the second half of this year.
So when we add up all these puts and takes and we believe that we have quite a bit of healthy.
Profit and loss profile for daily bet, a lot of EPS commitment of 13 to 15 per cent.
To meet the associated top line. That's what are the good news is that we have built in all these again puts and takes into the remainder of 2020, one and came up with that for Ya profile that we have been talking.
Bob.
Let me add one thing for that Steve before I get to your second question.
To bring together your question and Andrea's question, sometimes we get into the for the details which are important we lose the big picture. So let me just step back before I move on and say the big picture on that.
Second quarter, we said is going to be below our 13% to 15% annual guidance, but still double digit.
So we're talking very strong performance in the second quarter. The biggest driver of that back in Q2. If you want to look at why is Q2 below the balance of the year is this reinvestment in marketing in 2021 compared to a quarter a year ago, where marketing across our business in the entire industry was had a dramatic pullback I view that as a.
<unk> of strength not as a cost, but obviously it shows up on the on the on the earnings side for one quarter. So.
All of that detail is really important but let's not lose the big picture of what I. Just said I think this is actually a very very strong position with regard to our results of our packaged beverage business. It's two things it's brand strength and it's.
See any execution at retail with regard to the brand strength.
We have talked about our share gain on Dr. Pepper, Canada dry for years, which continues to this day and I won't drill down deeper into those because we talk about this all the time, but we're getting broader share strength across our portfolio. So I mentioned once a day that deserves a little bit of a call.
Out, which is sunkist, which has now moved to the number one fruit flavored CSD share position, we never talk about non kit, but we've had innovation renovation and marketing behind that brand and you see that it responds and I could keep going throughout our CSD portfolio talk about that beyond <unk>.
We've had fantastic results on brands like core.
Snapple, we're in the middle of a snapple reinvention right now, which is a completely new look to it new bottle, 100% post consumer recycled etcetera etcetera. So I won't go through all this laundry list, but there is real brand strength and it's not accidental it's driven by innovation renovation and really strong marketing and that will.
With regard to execution, it's more than just we're getting the block in blocking and tackling right.
We have added really strong leadership for that side of the business. We'd upgrade is the data and technology that helps aid our decision, making we have real strength in things like are in areas like revenue growth management, which allows us to be very precise in our promotion programs and then finally, we've made.
14 investments.
Some are substantial like the <unk> partnership.
Some are very small, but we may 14 transactions in our route to market to take some independent businesses and move them over to our businesses in which our thesis is that when we can consolidate the day the supply and distribution, we're able to execute better market in that.
It's showing up and that's not going to slow down. So it's really the combination of those you point about C store versus others is really not a major factor in here. If you want to look at our relative C store performance I can make it really simple for you. The single biggest reason why we are not as large as some of our competitors just because we don't have a meaningful position in energy or spa.
But particularly in energy and energy is a big category in C stores, but it's nothing beyond that.
Your next question comes from the line of Kevin Grundy with Jefferies. Your line's open.
Great. Thanks, Good morning, everyone. Thanks for taking the question Bob a question for you on polar and the company's sparkling water strategy more broadly so you spend a little bit of time, you mentioned distribution opportunity for the brand and it also seemed like it contributed to the strong packaged beverage resolved in the quarter building on Steve's question a moment ago.
So a few questions. Please.
As the ACB opportunity I think you mentioned, it's 55% what is the ambition where do you think that can go and where those shelf space gains going to come from.
As you as you expand have you been pleased with the existing velocity as you've expanded here at existing retailers and then Bob maybe just more broadly on the company's sparkling water strategy.
Just just more broadly given given the attractiveness of it and it's it continues to be one of the higher growth categories in the beverage space. So a lot there. Thank you.
Yeah, Okay. Yeah. Thanks for the question we have.
Really if you look at our previous position of sparkling water was relatively limited we had some regional position.
Physicians in Canada, dry and Schweppes, and we actually think the frames are much more fit for the for the Ginger ale and Cfd business may arent sparkling water, but it made some sense. When we didn't have anything polar is the brand that we're backing we're happy with the velocity, we're really pleased with the a T V.
We're at right now, which is 55% and where does it go from here, it's going to deliver at the HPE level of all of our top brands.
That's.
Almost universal distribution. So there's no reason why this is one of our big investment areas is not going to achieve that strength.
With regard to how do we plan on playing within sparkling.
Absent niche brands or businesses that we can add around the edges here limitless was one which is caffeinated.
We are expanding beyond just caffeinated that we will position against that but I think very clearly polar is is the brand that we're backing it's an important brand in a high growth segment. One that's been a GAAP in our portfolio and like our position in premium water in total where we've now become the number two player for being very into.
Pension all about making sure that we have a good position in sparkling water going forward.
Alright. Thank you Dr conclude the Q&A session of today's call I'll hand, the call back to Tyson.
Thank you Jerome and thank you everyone for your participation today. The IR team is around as usual I know, it's a busy day for everyone. We didn't get that.
Everyone in the queue, but the IR team is here for your question the script per day, please reach out for us.
Have a good day.
Thank you first time for me and thank you ladies and gentlemen conclude today's conference. Thank you all for joining you may now disconnect.
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