Q2 2021 Keurig Dr Pepper Inc Earnings Call
[music].
Good morning, ladies and gentlemen, and thank you for standing by welcome to the Keurig Doctor Pepper's earnings Conference call for the second quarter of 2000.
And in 'twenty..1 this conference call is being recorded and there will be question and demand for session at the end of the call I would now like to introduce Keurig Doctor Pepper's Vice President of Investor Relations. Mr. Tyson Seely Mr. Silly. Please go head.
Thank you and Hello, everyone. Thanks.
Joining us.
Earlier. This morning, we issued our press release from the second quarter of 2021.
If you need a coffee you can get 1 on our website at keurig, Dr Pepper Dot com and 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.
With the exclusion of items affecting comparability is not in accordance with GAAP, we believe that the adjusted basis provides meaningful comparisons and and appropriate basis.
For a discussion of our performance.
Details and the excluded items are included and 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 to discuss our second quarter 2020, and results are <unk>, chairman and CEO, Bob <unk>, Our CFO boson darkness, Yo glue, and our Chief Corporate Affairs Officer, Maria Skype and <unk>.
And finally, our discussion. This morning May include forward looking statements, which are subject to.
As for the Harbor provisions of the private Securities Litigation Reform Act of 1095.
These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from the <unk>.
Undertakes no obligation to update these statements based upon subsequent events a day.
Detailed discussion of these risks.
And the state and uncertainties is contained and the company's filings with the SEC.
With that I'll hand, it over to Bob.
Thanks, Tyson and good morning, everyone.
Since we spoke last quarter consumer mobility across North America has continued to increase with improving trends and travel grocery and retail and recreation.
Translating into changes in growth trends and beverage category segments and retail channels.
As we experienced in 2020, the Covid recovery period, and 2021 is creating significant volatility and demand, which has required us to remain nimble and flexible and managing our business.
1 area.
And which mobility remains challenged is offices, which continues to be a headwind for us and coffee.
While we've experienced some improvement year to date and expect more over the balance of the year, we projected recovery of office mobility to lag other areas of the economy.
Mixed management with key to our.
And 2020, as we were able to drive growth and on trend segments and channels to offset those that were structurally challenged by COVID-19.
And while managing demand mix continues to be critical this year. We also face the added challenges of input cost and labor inflation transportation constraints.
Labor shortages and supply chain disruptions, making 2021 arguably more difficult in many respects and 2020.
We expect another 6 to 12 months of macro volatility before a more predictable operating environment emerges.
Key to stabilization will be a return.
Our success with school and the office environment.
<unk> of the Covid virus and its variance.
And the impact of reduced or eliminated government subsidies the catch up of global supply chain to meet unprecedented demand and an improvement in the labor market.
Despite all the challenges, we remain confident and our ability to deliver our EPS.
Turn to guidance for 2021, while increasing our revenue growth target to 6% to 7% for the full year.
Our updated financial outlook offsets the challenges I mentioned, a moment ago with new pricing actions announced across most of our categories, along with continued productivity and efficiency.
<unk> efforts and the improving performance in our higher margin and beverage concentrates and fountain and foodservice businesses that both benefit from increased mobility.
It is important to note that we still intend to and reinvest any earnings upside into growth investments.
At the midpoint.
The 2021 guidance range, we will have achieved the 3 year financial algorithm that we communicated at the time of our merger delivering.
Delivering annual adjusted diluted EPS within our target range of 15% to 17%.
Revenue growth well above our target range of 2% to 3% and our leverage.
Ratio at or below 3 times by the end of this year.
We will share our outlook for the business and update our long term algorithm for total shareholder return at our upcoming Investor event in September.
Details regarding the virtual event will be shared next week.
Turning to second quarter results, we announced this morning.
We posted another strong quarter highlighted by double digit growth and adjusted diluted EPS and high single digit growth and constant currency net sales. Please.
These results were broad based and balanced across the company with growth driven by both core business and innovation.
Because we're 1 of the few companies.
Morning, layering strong current year performance on top of strong year ago performance. It's also helpful to highlight our results on a 2 year basis.
Comparing the first half of 2021 with the same time period, and 2019 shows constant currency net sales growth of 13, 5%.
Adjusted operating income growth of 19, 5%.
And adjusted diluted EPS growth of just under 30%.
We expanded our market share of total liquid refreshment beverages over the previous 2 years driven in part by our 1.4 share point increase and carbonated soft.
Drinks total K Cup pod shipments increased nearly 15% over the same time and brewer sales are up nearly 50%.
Looking specifically at the second quarter more than 70% of our cold beverage retail sales base expanded market share reflecting continued growth of cst's.
<unk> driven by core brand strength and innovation. The most recent being our new zero sugar lineup, which is performing exceptionally well.
Growth in key non carb beverage brands, such as Snapple core buy and Evian was good for the quarter, but could have been even stronger had it not been.
This apply disruptions, which I will discuss in a few moments.
And coffee, our K Cup pod shipments were essentially flat and the quarter.
Successfully lapping the very strong year ago period that was driven by peak at home consumption.
Comparing K Cup pod shipment volume to 2019, we removed some of the significant noise.
And timing for that business.
For the quarter K Cup pods grew nearly 10% on a 2 year basis demonstrate the underlying long term growth trends and our coffee business.
Keurig Brewer sales and the quarter increased by nearly 30% compared to a year ago, some of which was influenced by government stimulus.
And the timing of Amazon Prime day.
Finally, with regard to coffee systems innovation, we were excited to announce earlier. This week the launch of the case Supreme plus Mark Brewer, marking our first launch of a connected brewer for the broader consumer market.
We look forward to talking more about the new <unk> <unk> technology.
<unk> and the growth platforms that creates for us at our upcoming Investor day event.
Shifting from demand to supply nearly all CPG companies have discussed the supply disruptions in 2021, and we're certainly not immune to these challenges.
We continue to be effective in supply and K Cup.
Pods, and CSD and we've been able to overcome chip shortages and ocean transportation limitations to supply the high levels of demand for our Keurig Brewers.
However, our non carb beverage portfolio has been negatively impacted by supply disruptions, especially snapple and core which is evident and the latest scanner numbers.
Oh, you Snapple is 1 example of the type of challenges that we and most other CPG companies are facing and the current environment.
As we discussed on previous earnings calls, we started rolling out a refresh snapple bottle on the West coast in November of 2020.
And that new packaged substitutes post consumer recycled plastic or.
And our pet for glass and non recycled plastic and it also contemporize, the snapple brand look and feel.
And the consumer reception has been very strong with snapple growing share for the first 6 months of the year as we increased recruitment of younger consumers.
Exactly what we intended to do with the refresh.
However, and unexpected shortfall and committed glass bottles from our supplier required us to transition, our new our pet packaging faster, which pressured material availability from our supplier of our pet and stretch the startup curve of our new production lines.
We're navigating through this challenge and other disruptions that have become the new.
While at 2020, 1 to maintain our guidance. However, we do expect some sales and share share pressure on key non carb beverage brands throughout the third quarter.
Our learnings on how to successfully manage our business through the volatility of Covid continue to serve as well as we build and increasingly resilient organization.
Before I turn it over to ozone to discuss our segment performance and detail I'd like to mention the great progress, we continue to make and the area of ESG, which we know is important to an increasing number of investors.
We recently issued our annual corporate guidance and we will.
Responsibility report that highlights our performance against.
Our previous ESG goals decreases our ambition through new ESG goals and expands our impact in new areas, such as diversity and inclusion and health and wellness.
Haven't done so already I encourage you to read the <unk> report, which is available on the <unk> corporate reps website.
Boson over to you.
Thanks, Bob and good morning, everyone.
Continuing on and adjusted basis I will briefly review our past 4 months for the second quarter, which was very strong and our press release discusses and significant detail.
And I will then turn to our outlook.
'twenty 'twenty 1.
Constant currency net sales increased 8.1% fueled by higher volume mix of 6.1% and favorable net price realization of 2%.
And with all 4 of our business segments posting growth.
Driven by elevated consumption and a strong and market execution.
For the first 6 months of 2020, 1 constant currency net sales grew 9.4% versus year ago and.
And 13, 4% versus the first 6 months of 2019.
Adjusted operating income in the second quarter total any comments from the $9 million and increase of 8.3% compared to $775 million and the year ago period, driven by the strong net sales growth across our portfolio productivity.
Activity and merger synergies.
These growth drivers were partially offset by significantly higher marketing investment in the corner.
Inflation, and logistics manufacturing and input costs and higher operating expenses associated with increased consumer demand.
For the first 6 months of 2020, 1 adjusted operating income increased 8.3% versus year ago.
And 19, 4% as compared to the first 6 months of 2019.
On a constant currency basis, adjusted operating income for the second quarter.
Increased 6.8% versus a year ago.
Adjusted operating margin and the second quarter was $26.7 per cent compared to 27, 1% in the prior year.
And second the impacted by net investment in marketing.
And the core debt installation and unfavorable margin mix due to the higher brewer sales.
Adjusted net income advanced 14, 7% in the quarter to $538 million compared to $469 million and the year ago period.
Driven by growth in adjusted operating income and lower interest and expense largely driven by lower interest rates stemming from this strategic refinancing we completed and the first quarter debt off 2021.
Debt repayments and the low debt adjusted tax rate and the quarter.
Adjusted diluted EPS grew 15, 2% to first the 8 cents per diluted share compared.
Compared to <unk> <unk> per diluted share in the year ago period.
For the first 6 months of 2020, 1 adjusted diluted EPS advanced.
And approximate 14, 5% versus year ago, and more than 29% versus the first 6 months of 2019.
Let me pause for a moment to discuss the inflationary pressures and supply chain challenges we have referenced this morning.
Price and I expect.
<unk> continue to rise for aluminum.
<unk> corn products, and polypropylene, which is a material use in our K Cup pods and.
And like most other CPG companies, we have also experienced an increase and transportation and logistics costs as well as supply chain.
And just related to supplier constraints labor shortages and material and packaging availability.
Despite these challenges we have confidence in our ability to successfully navigate them.
I will elaborate on this.
For 2020.
And 1 we are and a positional strength.
Our sales growth and momentum will help to offset inflation.
As discussed previously we rely on a combination of productivity and cost controls pricing and why they use other revenue growth management.
<unk> and strategies pooling right levels at the right time to protect the long term health of our business.
In terms of price and we have already announced increases in both our cold beverage and owned and licensed coffee portfolios.
And long.
Along with the other levers and I just mentioned this approach enables us to mitigate rising input costs and address supply chain challenges, while reinvesting in the business and protecting bottom line profit.
As we did in 2020.
We will remain nimble in response to changing market conditions to ensure our continued success focusing on flexibility speed and delivery to manage our product and SKU pet for months at a granular level.
Our updated guidance for 2020.
And 1 incorporates all of these considerations and we are confident that we have the tools and management disciplines to deliver strong growth in both revenue and earnings despite the dynamic installation and logistic challenges.
Let me now turn to our.
And pet for months in the second quarter.
Coffee systems constant currency net sales increased 3.9% driven by higher volume mix of 3.5% and favorable net price realization of 0.4%.
And the volume mixed pet for months and reflected.
And it pod volume growth of 0.2%.
And brewer volume growth of 29%.
The port growth reflected successfully lapping peak shipments in the year ago period related to consumer stock up behavior and the early days of the pandemic.
And and improved pet 4 months and the us.
Away from home business, even though the return into offices continues to be slow and this business remains well below pre pandemic levels.
With 29% increase and brewer shipments in the quarter was fueled by <unk>.
Continued strong consumer purchases stemming from successful grew and innovation and to a lesser extent.
Favorable timing of Prime day during the second quarter of 2021.
Versus the third quarter debt of 2020.
And the favorable net price.
Position and record that was largely driven by our breweries and the continued moderation of pulp pricing declines <unk>.
And with our other strategic pricing initiative launched several years ago.
Looking to the back half of the year, we expect part shipments growth to continue and day.
Mid single digit range, while brewer shipments are expected to be about even with year ago.
Given the 30% global growth, we achieved and the second half last year, which benefited from the government stimulus during COVID-19 sheltering.
At the time, we heard.
Real concern that the elevated brew and growth and incremental households, we were adding in 2020 representative pull forward from 'twenty 1.
Given the continued strength of Brewers, which are now expected to be up approximate 10% for.
And some year.
On top of the 21% last year.
At 4 months would suggest that a pull forward with growth.
And that our momentum continues.
Adjusted operating income for coffee systems, total $371 million and increase of 2.
2% compared to $363 million and the priority list.
And this increase was driven by continued productivity and merger synergies, partially offset by inflation and manufacturing.
Input costs and logistics on.
On a constant currency basis adjusted.
Operating income increased 1.1% in the quarter.
Adjusted operating margin and the corner there was 33, 7% compared to for the 4.8% in the year ago period.
Largely driven the negative margin mix associate.
Associated with the very strong growth with sales.
Packaged beverages constant currency net sales grew 7.3% and the second quarter.
Driven by strong volume mix growth of 6.2% and higher net pricing of 1.1%.
This past 4 months.
It reflected growth in both our company owned DSD operations and that how is that business and.
The majority of our and B portfolio contributed to this growth.
Cst's, including Canada, dry, Dr Pepper, and sunkist and along with.
Months and water, leading the way.
Adjusted operating income for packaged beverages, and the second quarter total $286 million and increase of 6.3% compared to $206 million to $9 million and the year ago period.
This was driven by the strong net sales growth as well as productivity and merger synergies.
These growth drivers were partially offset by inflation and logistics manufacturing and input costs and see if it.
Increase in marketing and investment and higher operating costs.
And to meet continued strong consumer demand on.
On a constant currency basis, adjusted operating income increased 5.9% versus unit growth.
Adjusted operating margin for packaged beverages was 19, 1% and recorder.
Compared to.
Adjusted operating margin of 19, 3% and the year ago period.
And lastly, reflecting our significant reinvestment and marketing.
Beverage concentrates constant currency net sales increased 27% due to favorable net pricing of 10, 4%.
And higher volume and mix of 10, 3%.
The net pricing was driven by our annual price increase and a favorable comparison to prior years.
And our annual true up of customer incentive accruals as well as a strong revenue growth management.
And the volume mix per for months was largely driven by improving trends in the fountain, and foodservice business, reflecting higher levels of consumer and mobility in the restaurant and hospitality channels compared to the year ago period and.
As well as the benefit of significant marketing investment.
And driving growth in the quarter.
Dr Pepper and crash less day growth, partially offset by declines in Canada dry.
Adjusted operating income for beverage concentrates increased 15, 3% to $256 million.
Compared to 222 million.
And once in the year ago period.
Driven by the net sales growth, which was partially offset by significantly higher marketing investment.
On a constant currency basis, adjusted operating income advanced $14.4 per cent.
Adjusted operating margin.
And before that was 6% to 8.3% compared to 71, 8% in the year ago period.
Primarily reflecting the higher marketing investments.
And finally net.
Latin America beverages constant currency net sales grew 28%.
Reflecting strong volume mix of 16, 6% and favorable net pricing of 4.2%.
Liquid refreshment beverage in market execution in Mexico continued to be strong.
And the resulting in the overall liquid refreshment beverage share expansion and continue.
And the robust retail consumption, which drove significant net sales growth for key brands, namely opinion, CEO and Colorado.
Adjusted operating income increased 61% to a further $7 million compared to $23 million in the year ago.
Period.
On a constant currency basis, adjusted operating income increased 44%.
Affecting the strong net sales growth and productivity.
These growth drivers were partially offset by significantly higher marketing investments and the core debt and inflation and logistics.
<unk> manufacturing and input costs.
Adjusted operating margin and the quarter odd months 310 basis points to 22, 3%.
Free cash flow and the core that continued to be strong at 490.
And then $2 million.
Which translated into a year to date free cash flow conversion ratio of nearly 95%.
In addition to our ongoing deleveraging and investing and the business to drive top line momentum.
And also increasing our return to shareholder.
Specifically during the quarter <unk> Board authorized the previously announced 25% increase in our quarterly dividend rate, which was paid earlier this month.
Despite these healthy increase our payout as a percentage of free cash flow remains below.
50%.
And team for the exceptional strength awful lot of cash flow generation and the featured Optionality. It provides.
During the quarter, we reduced our outstanding bank debt by $427 million.
And the structural payables by 4.
And.
And we also ended the second quarter with $106 million to $7 million of unrestricted cash on pads.
Due to growth and earnings and a reduction and bank debt.
And we improved our management leverage ratio to 3.4 times at the end.
And off the second quarter of 2021.
Since the merger closing July 2018, we have reduced our management leverage ratio by 2.6 times.
Let me now move to our outlook for 'twenty 'twenty.
For the full year 2020, 1 we now expect net sales growth to be and new range of 6% to 7%.
This compares with our original guidance for the year of 3% to 4%.
And our most recent guidance of 4% to 6%.
And <unk>.
Continue to expect adjusted diluted EPS growth of 13% to 15% for the year and.
And plan to reinvest any other delivery back into the business to support continued momentum.
Supporting this guidance, we continue to expect.
Merger.
And what synergies of approximate the $200 million for the 3 year total of approximate $600 million in line with our merger targets.
Adjusted interest expense in the range of $505 million to $515 million.
Emerges and adjusted effective tax rate in the range of 23, 5% to 24%.
Diluted weighted shares outstanding of approximate 1 point for the $3 billion and finally.
Our management leverage ratio is ex.
Yeah.
To be at or below 3 times by the end of this year.
With that let me hand, it back to Bob for some closing remarks.
Thanks.
Before handing it over to questions I want to highlight debt earlier. This month, we celebrated the 3 year anniversary.
And of the Keurig, Dr. Pepper merger transaction that was based on our vision to create a north America focus beverage company that approach to consumer and customer beverage experience and a more contemporary way.
And the 3 years since we've accomplished a great deal and we are on track to achieve all of the financial commitments. We made back in January 2018.
We will continue to demonstrate what we believe it takes to be a modern beverage company and we look forward to sharing more details with you and September I'll now turn it back to the operator for your questions.
And then a reminder to ask a question you will need to press star 1 on your telephone do we draw your question press the pound.
Please stand by while we compile the Q&A roster.
Your first question comes from Bonnie Herzog with Goldman Sachs.
Lines open and you May ask your question.
Thank you good morning, everyone.
I guess I was hoping for a little more color on your packaged Bev volume and the quarter, which was you know definitely strong, especially considering you were lapping a tough comp from the pantry loading last year.
Could you guys give us a sense of how you know maybe the growth progressed through the quarter and your expectations for this business and.
And the second half and and I'm also curious how much of the strength was driven by the rollout of your new zero line and how incremental that has been on your portfolio and maybe any early reads on the rollout from retailers in terms of securing incremental space. Thank you sure.
Bonnie.
And packaged beverages for this quarter was pretty well balanced across.
All items CSD had particular strength and I'll talk about zero sugar and a minute. The 1 area that we did flag is that in our non carb portfolio, we started seeing some weakness.
As we got into the month of June in particular.
And it is 100% driven by some supply issues with with real issue on Snapple and core both those brands were growing.
Very very well up into the supply disruptions if you will.
Look at the.
If you look at the IRI data you see it where we actually start to drop off during a little bit and may but really in the month of June on those too.
Growth that.
Was the flow of the the volume over the quarter as well as what the composition was and as we talked about.
In the prepared remarks.
We've increased our guidance on the year, obviously, that's driven a lot by.
Packaged beverage business and so all of the supply issues that we talked about.
After taking into consideration that guidance, we're navigating our way through it real bright spot within the quarter continues to be CSD.
We refreshed our we converted our diet.
Flavor brands over 2 zero sugar.
And you look at even comparison of those 2 in other words take out Dr.
Pepper zero sugar, which is a incremental items. If you just look at like for light on the conversion.
Our sales were up 16% as a result of the conversion from diet to zero sugar and then the Dr. Pepper zero sugar variety has been incredibly strong year to date consumption. If you look at and IRI is about 100 million.
Our early read is about 70% of that is incremental and we've been able to get that in distribution and 85% HCV. So great execution across the board in that conversion and the addition of Dr. Pepper zero sugar, yet 1 more thing that's driving our CSD portfolio.
And that gave us strength combined with everything else I, just talked about and the packaged beverage segment.
Okay, Thanks, and all that helpful color.
Thinking about the second half you expect some of this momentum to continue would that be fair. That's fair and you can you can take a look at.
I think a very high level of info.
And so that we gave today, which is updating guidance for the balance of the year. So it allows you to see a first half second half calculation and then we were very specific about within that we're expecting in terms of coffee brewer sales as well as parts sales. So.
We're narrowing it down for you to give your packaged beverage business should look like alright. Thank you okay.
And your next question comes from Kevin Grundy with Jefferies. Your line is open.
Hey, good morning, everyone and congratulations on the quarter.
Bob just picking up on your prior remarks, but maybe bringing it up to a total portfolio level. So.
And the 6% to 7% upwardly revised guidance.
Plastic this is been stair stepped up from 4% to 6 previously and then 3 to 4 initially so just maybe sort of again picking up and the last line of questioning but bringing it more broadly to both the coffee and total LRB side of the portfolio. How has the view evolved over the past 6 months for you guys thinking about the portfolio and the growth outlook.
And specifically has come in better and what gives you confidence for the balance of the year and then longer term and maybe you want to get into this more at the at the upcoming analyst day, what do you want and communicated to the street in terms of what you think the sustainable growth rate is for this business longer term.
Sure and good.
The last part we will cover in some depth.
And at the Investor day, which is coming up so.
I'll wait for that event to talk about beyond 2021 with regard to 2021, we're seeing strength across the board. So.
In the decomposition of the year to date numbers that you've seen you've seen strength and every single segment and you've seen some mixed benefits. So for example.
Look what's.
Fountain, and foodservice and beverage concentrates.
Which are among our most profitable items were negatively impacted and the year ago period, we're getting a good rebound on that where <unk>.
And continued strength and at home coffee certainly not at the peak of consumption and home that we did a year ago, but we've been talking about.
<unk>.
That expectation since Q2 of last year.
And then brewer sales continued to be exceptional.
And we're projecting for the rest of the year that those will be flat.
But as <unk> said earlier it certainly.
It takes aside the concerns that many had debt the incremental.
Household we gained in 2020 and the extra brewer sales were a pull forward.
And certainly not the case, so quite simply we're seeing strength across the entire business.
And that's given us the confidence to take our revenue expectations up and then anything and a first half second half or quarterly comparison is really driven by.
<unk> the volatility of a year ago, and that's why I think it's really important to look at 2 year numbers to take the noise out and it's easy for all of us to get enamored with 1 quarter performance, we've always taken a long term view.
And youre seeing a lot of rebound from other companies, but the reality of it is if you compare our numbers to 2019.
Our revenue was up almost 14%.
Operating income of 20% as I said before earnings per share is up about 30% and I think that's the real way to evaluate performance.
Okay, Thanks, Bob and I'll pass it on okay.
And your next question comes from Bryan Spillane.
And <unk> with Bank of America. Your line is open.
Hey, good morning, everyone.
Good morning, Brian So Bob maybe just to just to step back.
<unk> further.
And I guess I wanted to get your perspective on 2 things 1 is just given all of the the supply chain.
<unk>.
I guess challenges or constraints and this is we're hearing this across a lot of companies just how youre thinking about the balance of reinvestment or like stimulating demand while.
It's just becoming more challenging to <unk>.
<unk> things and then.
If you can also comment on just this whole environment with inflation and labor force being tight and just.
Have you seen this before how does it change the way you think about just kind of.
And how you're running the business day to day over over the next over the next year or so I'm just trying to get a sense of just the.
And you have to change because it's just.
The environment is so dynamic yes, I think I think we've seen a lot and number of things and the past 2 years that we've never seen before and our career certainly the the.
The shutdown of Covid and all of the related issues around keeping employees safe.
And running our operations under under real constrained conditions was unique I think thats.
And as I said in my remarks, and some respects is actually more challenging than that because we're getting a lot of mixed signals. There is reopening and certain areas and then there's problems and others.
We've all dealt with inflation, we've seen it and commodities and input costs and we've never seen this level of labor inflation, which is not.
Not necessarily a bad thing because there are consumers as well so it gives them.
More purchasing power, but the labor shortages are something that none of us have seen and our career and have no idea how much of it is tied to government stimulus and concern about going back to work how much is tied to the fact that kids need to be in school and the fall.
And to free up the Labor force, who are watching the children.
We're going to know a lot more when September October rolls around but.
I'd say this is very much unprecedented and all of our careers.
Day that we're managing through it it goes back to how we started in March of 2020, when we had to make some dramatic.
Changes due to Covid, we stay very flexible we're looking at the short term as well as the long term, but emphasis on not committing to anything.
And for too long, because we know it's going to change your comments about supply chain disruptions.
And I am calling it the new normal now hopefully it's not normal it's the reality, we're dealing with and we just flexible.
<unk> when we have capacity and 1 area, we lean and more on demand generation when we have constraints and other certainly we're not going to promote.
Or spend incremental dollars promoting and area that.
We have supply constraints on so.
And the game is really going to be won or lost by speed and flexibility Thats something.
And that we were able to do last year, and we're certainly doing it too and even a greater degree this year and I think that will continue until this all settles out okay, and then just and maybe not even specific to <unk>, but just.
Would your expectation be debt.
It just doesn't stop at the end of the calendar year, meaning.
Some of these.
Some of the sort of factors.
Could continue for a while or should the baseline expectation be debt.
Within the next 6 months or so that should start to settle out.
It's really hard to forecast and I said in 2020, I don't want to get out of the forecasting game and get into the reaction game and I think that served us well.
As I listened to the fed and they don't know if.
Inflation is short term or long term.
And you and hear the president and talking about supply issues and they don't have a good handle on what's going on here, so I'm not going to be a better forecaster than day I do.
Do you really pushed us I think we will see this start to settle.
'twenty 'twenty, 2 but again, it's going to be driven by the course of the virus and the variance and it's going to be driven by things like government stimulus.
It seemed to be the 2 biggest factors and everything that we have.
Just talked about.
Okay. Thanks, Bob.
Hey, Bryan Thanks.
And your next question comes.
And from Lauren Lieberman with Barclays Your line's open.
Great, Thanks, and good morning and.
I wanted to talk a little bit about marketing spending because in 2020, we all know that you pulled back on marketing spend quite a bit, particularly and the CSD business and yet posted these tremendous.
And if you could share gains not just not just the sales growth and so as you bring marketing back into the fold I guess, 1 kind of short term question would you say at this point you are kind of back to 2019 levels of spend on your the CSB and cone business I should say excuse me number 1 and number 2.
As you think holistically, knowing the plan is to reinvest any revenue upside into the business but.
Have you discovered better ROI on your spend that you think is sustainable rather than just was a function of the environment last year and if so what are maybe some other key changes or areas where.
Youre getting greater efficiencies.
Thanks, Yes.
And good morning.
Certainly.
Been more efficient and our marketing and that's a continuation of a trend thats been in place for a while now.
The nature of marketing has moved from being.
More broad targeting to more precise targeting.
We have a significant number of.
Tools and metrics available to us today that weren't available even a couple of years ago and so the efficiency of our spend continues to increase and that got pushed to and extreme during COVID-19 and which we were able to.
And to generate demand as you point out with significantly lower levels of spend I think part of that.
P&C and a big part of that was a unique situation a year ago and if everybody pulls back at the same time.
Really it's execution in store availability the right promotions that were driving a lot of demand and we did that very well, but our intention is to continue to ramp our spending back up you see a big jump and our.
It was if it was this quarter versus year ago, I think everybody experienced that.
Along with pretty much everyone in the industry is not fully back to 2019 levels of spending, but we're ramping our way up and I think we're doing it for 2 reasons..1 is there are a lot of cost pressures on all of US right now and a lot of volatility so it's prudent to be able.
And number some and reserve.
As you are increasing your spend to say, let's let's ramp it up versus go all at once because we need some offsets to volatility going forward. In addition to productivity efficiency and the pricing that we've put in place and Thats. What Ive. Just said is true for everybody and the industry right now.
The second part is.
Leukemias and opportunity to really test efficiency, if you ramp it up you can see where your next dollar is being spent and it has a good return on investment and that gives you the confidence that the incremental dollars beyond that back so our track is too.
Is to continue to increase over time, we will talk more about what the long term projection of that is when we get together in September.
But that's how it's playing out right now and 2021.
Okay, that's great and as you also just think about.
And to reinvest in it.
And with any further upside you may see.
What would you say are key areas right because if there is an element and we're getting greater efficiency and marketing we don't need to go to quickly both because of the supply commentary that you.
And it gives you talked about with Brian and then industry kind of standard what are other areas. I mean is it kind of continued to change your route to market.
What are the kinds of activities that you might be investing and there.
And where some of this profit or sales driven upside might go sure when we get together in September and talking about.
The investments that we've made and the areas of R&D and product development and that's both on the hot side as well as the cold side of the business and will give you some real examples of that.
Point out route to market, which is critically important and beverages and something that we think is very unique so the investments that we've made in our DSD system, which has been a big driver of growth.
We've talked about it and bits and pieces over the earnings call, but when we get together, we'll be able to do a more holistic view of what we've done over the past 3 years, and where thats going and that's a big source of it.
Investment for us.
Commerce is another area.
Hard for you all to see the sales that we're generating and E comm.
Commerce, because it doesn't show up on IRI right now, but when you see the disconnect sometimes between our shipment numbers and the IRI numbers with the ship and numbers being stronger and that happens over time, you know that we're getting some significant growth out of E Commerce and that's a big investment area and then just purely from a brand perspective.
We would as.
As we add more money, we would add to the number of add to our portfolio. The number of brands. We advertise so right now and we focus our advertising on our largest brands, but we've got some mid size brands and there that are deserving of advertising as well and that would be the next area that we would fund once we get to what we think is threshold on the large brands. So there's a lot of opportunity.
<unk> for investment, we're very selective and test our way through it but again. These are these are some of the themes that we look forward to share with you in September.
Thanks, so much okay Laurent thanks.
And your next question comes from Andrea Teixeira with Jpmorgan. Your line is open.
Good.
So I wanted to discuss a little bit more Bob if you can on the pod attachments rates. So I think as I said last April and that is true and I hated your comments, so far and the call has been very positive against the historical levels, but a bit off peak right, So and I wanted to kind of.
Also.
Get a little bit of because I believe you spoke to pricing during the quarter or planned pricing so with the benefit of a few months.
Since your last comment can you update us what youre seeing as the office reopened and the at home could moderate obviously areas youre seeing.
Probably less than.
And 1 to 1 trade off with a wasteful and home more than offsetting day at home.
And of moderation and at this point.
And on the beans on the coffee beans, and the Green coffee I think it's not that much of AV and impact for you, but can you kind of.
Explain to us how protests.
<unk> hedged and you are and what are you embedding in your guidance. Thank you and sure. Okay. Yes, Let me let me just go with pod growth first and just remind everybody the formula for our pod volume. It's a combination of household penetration and growth and household penetration and the number of new households that we're adding to our existing base times the attachment.
Which is young.
Current usage per machine.
At this quarter a year ago, we saw a peak level of attachment rate as people were really and lockdown mode and as we talked about it at that time, we saw that as temporary and debt over time that would revert back to the long term average.
Run rate a very long term attachment rate is very steady and and that's why we've suggested prior to COVID-19.
Could you use pod volume growth is a good proxy for household penetration growth very simply our household penetration was very strong last year were up about 9%.
Added 3 million households.
We've told.
Told you before that we expected 2 million additional households, this year.
And net attachment rate.
I'd go back to the long term average it's exactly what's happened the attachment rate that we're seeing right now is very much in line with what we've seen over the long term and household penetration continues to grow and Thats, what youre seeing and the pod volume growth. So.
So far everything has gone as expected when we look at mobility, we're seeing a significant increase and people going out of the home into restaurants and.
And hospitality, certainly people going and get getting coffee out of home and coffee shops has gone up significantly and in fact, we saw a bit of a spike at 1 point.
In the early part of reopening I think people felt liberated to go back out and wanted to enjoy a coffee on the go the 1 area that has been lagging and continues to lag as office. So even with the strong numbers that we have in our coffee business, we're still getting a fairly significant headwind out of the away from home business.
For us is concentrated and offices.
And very similar to the question Brian.
It's hard for us to predict what's going to happen there and we see an improvement versus year ago Couldnt get much lower than the numbers, we saw a year ago and away from home, but nowhere near back to normal nowhere near back to 2019, so that provide.
And which long term or longer term upside for us and as we've said before that's a higher margin business. So it will be accretive to both top line as well as mix, but we think that it'll be a slow recovery and that assumption is embedded in the numbers. We gave you with regard to pricing.
Like everyone, who has a coffee business, who has reported so far we've.
Provide you about the significant increase in coffee pricing.
We are hedged like everyone else.
But hedging is just delays the pricing it doesn't make it go away and so our best practices have always been is that when we see an increase in pricing that we believe will be sustained that you take pricing now.
Because it takes time for it to flow through the system.
And.
And you know that you're eventually going to be paying that price when you add new coverage into your portfolio.
With regard to us Youre right coffee is a lower percentage of our cost structure.
If we were just the traditional.
And on roast and ground player, but when you have a significant increase like we're experiencing right now it certainly does impact as to the level that we want to take pricing and then the last point I'll add because I think you were asking about the different forms of pricing we have.
A big Big piece of our business, our brands that we own or license, we're responsible for everything on those so we.
And pricing on that because we pay for the coffee that's in that and then the remainder of our business is either partner or private label and most of those situations.
Partners responsible for the price of coffee, we're responsible for everything else. So it's really up to them to decide what they want to do for a pricing standpoint with regard to coffee that's not something we get involve.
And so I think I've covered.
Everything you asked about with regard to coffee.
Super helpful.
And the spike in and just.
ASP on that what are you seeing in terms of like any <unk> to your private label or the ones that you represent that you said.
The brands that you have pass through.
We've taken and how that would be acting it hasnt really if you take a look at the IRI numbers you haven't seen much pricing actually reached the shelf right now so more to come and that'll be something we could talk about on the next quarter call, but what that impact is but typically we don't see much and the way of trade down, but if we do I would just remind everybody.
Body that we have.
And we manufacture parts that are generating 83% of category sales. So wherever the consumer goes in terms of brand choice and wherever they go from a.
Outlet in terms of where they buy it we got it covered and so we're fairly neutral and those perspectives and we just give the consumer choice.
And then let them decide what they want to buy.
Okay. Thank you I'll pass it on okay.
And your next question comes from Steve Powers.
Deutsche Bank your line is open.
Hey, guys. Good morning, Thank you.
Bob just to round out that.
And non coffee so what I took from just the cadence of what you described as debt.
From any price now that pricing builds over the back half and then.
Presumably the and the delayed inflations and extended manifest would be a 22 phenomenon and you have the pricing and place when you get there is that the other way to think about it that's a good way to think about it and then.
The pricing and the cost never match up exactly and that's why we always create some some margin for us to smooth that out, but that's a reasonable assumption.
Great and.
I guess and maybe this will dovetail into some of the themes you talked about.
In September, but I, just maybe just a.
And update on the build outs.
<unk> had going on its part and.
Conversation, Allentown, and and in Ireland and just.
And where those are any any unexpected.
Development positive or or not so positive and then just.
Any way to think about.
The impact of that on the benefits that on the business as we as we go forward beyond 'twenty 1 thank you absolutely.
Berg and that's a good time to talk about that ozone would you like to jump in and update Steve on and everyone on the on those projects.
Absolutely absolutely the highest there and.
And with regards to unearned town and <unk>.
The production of our cold beverage cases earlier this year.
And as we speak.
Yes.
Proceeding to ramp up to reach their full utilization levels are and it.
And it will continue through this year as well as 2020..1 also as a side note the combined cold beverage and corporate debt How's that we've put together and the island is also fully operational.
And regards to Spartanburg.
Yes, I think we've begun to produces somewhere close on K cups as being the first line back in June which is very recent and we will continue to ramp up over the course of approximate the 18 to 24 months and the reason being is it.
Due to the sheer size of the.
And to volume.
And.
And the planned capacity that he has been implementing and the lines will be coming up and running and cycling shop.
And I'd say order.
So the investment and the project.
And in our idle and possibility the concentrates beverage growth debt has been building is almost complete and the.
And the same thing to put into service and zone pop from that on sometime in quarter 4 of this year and therefore after.
After the Covid related some delays as we have communicated.
And ultimately and investments.
And what's next.
We have been getting new lines up and running in line with.
And our new timelines right now and we are really happy with the pro.
We have been seeing.
That's great. Thank you very much.
And your next question comes from Sean King with.
UBS Your line is open.
Great.
Good morning.
In the prepared remarks, you mentioned the macro volatility lasting for the next 6 months to 12 months before sort of seeing normalized consumer behavior and is it safe to say that debt that this could impact I guess needed and it depends on the outlook for 'twenty 2.
Or and I am not trying.
And to jump ahead, a little bit too far here.
It's a little bit jumping ahead, a little bit I mean, clearly we think about this and going into 'twenty, 2 but I wouldn't have any read through in terms of trying to predict what that means for us and 2022 I think we've done a really good job of.
Recognizing the challenges and being able to mitigate them.
Pretty substantially.
If you take a look at what's happened last year and what's going on this year and I can I can't forecast that I could tell you that we all hope that things start to return to more normal and 2022.
Great and then 1.
And if I could sneak in just on the the substantial brewer growth that you're that you've been seeing is there is there any way you can kind of break that down between.
Brewer replacement and new Brewers versus trading up and I know a lot of that has to do with your household penetration comments, but any color you can provide around there would be great. Yeah, it's really hard to do that in the moment, we're always able to do that in hindsight and we do have quite a bit of analysis of understanding.
How much of these are brewer upgrades versus.
Actually ended up replacements.
Versus completely new households, or even a secondary placement and and existing household. So that's something that we dig in and we're able to see and hindsight.
For perspective, a year ago, we added 3 million net new households, and we sold 11 million Brewers.
That gives you and.
Idea.
<unk> of well how much household penetration growth, we were able to drive which was substantial and most 10% but at the same time, we continue to offer better Brewers with new features.
And that are encouraging people to upgrade and although and upgrade is not something that we profit from in the moment, because we don't make money on the Brewers.
No. It really is a serious recommitment for those households to stay with the keurig system for the long haul and because the models dependent upon and not just bringing in new households, but also keeping our current households, which we do at a very high rate and so right now it's hard to know the breakout we are offering really attractive brewers debt offer new benefits we just.
Or is it just this week the K Supreme plus smart Brewer.
If you go on line and look at some other reviews, both on our website from consumers as well as from the media.
It's getting terrific reviews, and I just think this will be yet another reason for people to upgrade so something we'll share with you and we have.
It.
But it's very very bullish indicator in terms of the health of the business from both the current households, as well as new households.
Great. Thank you very much okay. Thank you.
And your last question comes from Chris <unk>.
Larry with Wells Fargo Securities. Your line is open.
Hi, Thanks for the question just following up on the line of questioning around pricing and I guess I'm conscious that you are seeing like polypropylene inflation and 1 other categories, where you have a stated strategy to exit lower pricing. Obviously, you have these new plants coming on line youre announcing pricing and the back half, but yes.
I guess can you just comment maybe on like Holistically, How you think about operating a place you could certainly 1 could argue and area like packaged beverages.
And it probably has a bit more maybe like structural pricing power.
In North America, right now and then does.
Pods.
And so maybe just maybe just comment on that.
I guess it's.
Youre seeing positive pricing and and coffee systems. This quarter from first time I realize that's mixed driven but I just wonder if we're on the verge of seeing that.
Stabilizing and potentially rebound with inflation, if you're comfortable with that concept.
And anything just around.
Conceptually.
Thinking about offsetting inflation with pricing on a sort of a total portfolio basis would be helpful. Yes. So I think our entire portfolio has good pricing power and which 1 of the reasons why I think beverages is a great category.
We are aggressive and productivity and efficiency as our first.
Line of defense, we implement all kinds of purchasing strategies hedging as I said before being 1 that delays the inevitability of inflation and that gives you some short term pricing certainty, but it doesn't eliminate it and then of course pricing when it can't be covered by the others is the ultimate answer and Youre seeing pricing now and not just in the beverage industry, but across the board I have absolutely no.
Concerned with pricing and coffee as we've talked about.
3 years ago, when you talked about publicly but it's been and progress now for 5 years.
And we wanted to lower the price of coffee pods and the U S. Because we knew they were too high and when we compare them to.
Steady state.
It's around the world they were way out of comparison to those 5 years ago.
The price has been reduced significantly and the data that we put in our Investor day deck and 2018 is very relevant and.
In terms of what the right price point is for consumers and it shows that to a degree the industry is actually overshot that.
Right pricing it bill.
Below the levels that consumers thought would be a good value and theyre doing it for a variety of reasons and and what I've talked about before the retailers, who know that K cups are a real attraction to consumers and so they'll price and very low just to bring people and putting a little bit of pricing into recover inflation is not a concern at all given.
And where we stand across the industry and pricing and I think it price stabilization is something that we've talked about happening for a long term, it's already happening as we speak.
And I still think it's an incredible value to consumers.
Okay. Thanks, so much and I appreciate that at the end of the call and keep this quick but just on the relative to euro and their way to think about.
And I don't.
How long this launch could go before getting fully penetrated you are running 2 to 3 share, but obviously other zero offerings from competitors have had kind of like years of runway.
And just how youre thinking about.
The time horizon from which this can't continue to benefit the portfolio. Thanks, so much for that.
We've been successful in driving.
<unk> growth and our CSD portfolio now for years, we've done that through a combination of very solid marketing and good end market execution on our core brands and by bringing news and refreshment to them and it's hard to put a timetable around what does any 1 line extension or refresh and do for the brand.
We have a constant stream of them think about what Dr.
Driving and weren't cream has done.
For the Dr. Pepper brand and that's still growing right now I think zero sugar, both on Dr Pepper and across our flavors and a similar platform and we have additional innovation and renovation and ideas to come that will be layering on top of that and the future and that's that's really the game and so you don't launch something and assume that Thats the answer forever.
However that is part of the news that you're delivering and that's how we think about this as well so thanks for that question.
Thanks, so much.
Alright, there are no further question at this time I'll hand, the call back to the company.
Thank you this is taste and everyone. Thank you for the time.
Slightly over and you all have very busy days today, please reach out and myself or Steve or the IR team.
For any follow ups, and we look forward and talking to you have a good day.
Yeah.
Thank you, ladies and gentlemen for joining US today, Bob concludes today's conference. Thank you all for joining you may now disconnect.
Yeah.
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And.
Okay.
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