Q1 2022 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 2022. This conference call is being recorded and there will be a question and answer session at the end of the call I would like.
To introduce Keurig Doctor Pepper's Vice President of Investor Relations, Mr. Steve Alexander Mr. Alexander Please go head.
Thank you and Hello, everyone. Thanks for joining us.
Earlier. This morning, we issued our press release for the first quarter of 2022.
If you need a copy you can get one on our website in the investors section <unk>.
Consistent with previous quarters today, we will be discussing our performance on an adjusted basis, excluding items affecting comparability bigger.
Beginning with this quarter, we will also exclude the impact of foreign currency translation from our adjusted results.
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 provided 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 us today to discuss our first quarter 2022 results are <unk>, chairman and CEO , Bob <unk>, our CFO who's on Dr. Michelle Blue and our Chief Corporate Affairs Officer Maria <unk>.
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 1095.
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 subsequent events a detailed discussion of these risks and uncertainties is contained in the company's filings with the SEC and with that I'll hand, it over to Bob.
Thanks, Steve and good morning, everyone. Our Q1 results reflect different stories of challenges faced and progress achieved across our portfolio.
One common threat. However is the continued strong consumer demand for our brands as demonstrated by consumption growth and share expansion.
In coffee systems. The story is one of accelerated supply recovery to enable us to fuel the continued strong growth of be cured system <unk>.
Following our addition of 6 million new households in the past two years.
As discussed previously the December January Omicron wave caused widespread labor outages that resulted in supply shortfalls in coffee pods at a time when consumer demand was at a record high.
As the first quarter progressed, we accelerated our efforts to rebuild pod manufacturing capacity increased finished goods inventories and improved service levels are.
Our first coffee pricing actions intended to mitigate inflation also began hitting shelves in the quarter with single serve coffee pod pricing up more than 5% at retail during the quarter with additional pricing still to come.
Across our coal portfolio. It's a story of continued volume growth at the same time, we're implementing meaningful pricing actions with the combination leading to double digit revenue growth in packaged beverages beverage concentrates in Latin America beverages.
Given that we're still in the steep portion of the inflation curve the timing of pricing is lagging inflation, which leads to a pressure on margins.
Looking forward, we believe there will be an inflection point in which high current costs begin to lap elevated year ago costs.
Leading to lower year over year inflation comparison.
At the same time pricing actions will have caught up which we expect will lead to margin recovery.
As we look forward, we believe our cold beverage portfolio will continue to perform well throughout the balance of the year. We are confident that our coffee production output and inventory levels. We will have fully recovered by the end of Q2.
Therefore, we have increased our 2022 full year guidance for net sales for mid single digits to high single digits, while maintaining our EPS guidance at mid single digit growth.
Looking at Q1 earnings and EPS boson will discuss the key drivers of results in the quarter, but the biggest headlines of the relationship between inflation and pricing and the investments we've made in the business, particularly in coffee.
Taken together, we delivered modest net earnings growth and adjusted EPS in line with year ago.
During the quarter inflation, which was significant across the board, particularly for inputs, such as coffee resins aluminum and sweeteners as well as transportation and labor approach 15%.
Which is higher than we expected entering the year.
Within our segments packaged beverages again reported another standout quarter.
With net sales advancing 13% on volume growth of 5% and pricing up 8%.
In market performance also remained very strong with market share growth registered in almost 90% of our cold beverage portfolio led by continued strength of CSD, along with filters coconut waters, Ts Apple juice and fruit drinks.
Performance of Snapple on core continued to improve from the material availability issues faced in 2021.
With both brands posting improved market share results in the quarter and upcoming innovation and marketing plans for this summer expected to accelerate this progress.
<unk> continues to recover from supply issues last year posted consumption growth for the past four consecutive quarters.
Margins for packaged beverages were impacted by escalating inflation, which outpaced the timing of pricing as well as ongoing transportation and labor challenges.
We expect new pricing actions already announced to the trade to be in market late in the second quarter.
In coffee systems, we under ship consumption with negative KDB net sales for the quarter comparing to three 6% K Cup pod consumption growth as measured by IRI.
You'll recall from our fourth quarter discussion that record consumer demand for K Cup pods was challenged by production shortfalls as the only crime related labor availability issues combined with the delayed startup of our new Spartanburg manufacturing facility pressured our capacity.
We prioritize our service recovery during the quarter to partners and customers at the expense of our owned and licensed brands to rebuild our internal inventory levels.
Well that was the right decision from a keurig ecosystem perspective, it came at a significant cost of Kt in terms of both revenue and profit.
We made significant process progress during the quarter in restoring our coffee supply chain.
K Cup pod production finished goods inventory and customer service, all improving by double digits.
We now expect a full inventory recovery by the end of Q2, enabling coffee systems to return to normal service levels in the second half of this year.
Supporting this recovery is new manufacturing equipment, we expect to come online as the year progresses, which will ensure supply to meet strong consumer demand in the second half of this year and in 2023.
As we continue to work on coffee recovery and rebuild our finished goods inventory in the second quarter, we expect pod shipments to remain below consumption.
That trend is expected to reverse in the second half of the year with shipments outpacing consumption as improved internal inventory positions will enable us to refill customer and partner inventories and returned to driving our owned and licensed brands through marketing and promotion program.
This will result in a much improved top and bottom line performance for coffee systems in the second half of this year.
Pricing in coffee has also increased to mitigate the impact of inflation.
Single serve coffee category pricing increased five 4% in the quarter as pricing actions continued to flow through at retail.
KDB manufactured brands pricing advanced six 7% in the quarter.
Given the escalating inflationary pressures, we recently announced another round of pricing that will be in market in late in the second quarter.
While navigating through the well discuss macro challenges over the past two years. We have also maintained our focus on driving long term sustainable growth through innovation renovation and partnerships across the full KDB portfolio.
Although these topics have received less airtime in a recent conversations I'd like to take a few minutes to do so now starting in coffee systems.
Youll recall that in 2021, we debuted a new platform for cured with the launch of the K Supreme plus smart connected Brewer. This is the first of many new connected brewers to come including the K Cafe Smart later this year consumer.
Response to our connected Brewer continues to be positive and we believe that we will have more than a million connected households in the next few years.
In 2021, we also launched our popular brew over ice feature on one of our smallest footprint Brewers are case slim plus ice coffee maker, which debuted as a target and keurig dcom exclusive.
More than half of K Slim plus ice purchasers where households completely new to the keurig system.
We will be expanding retail availability of this model late this summer.
Next week, we are launching the new K Cafe Essentials model, our first brewer less than a $100 that offers coffee lot taste and cappuccinos through a built in milk for author.
This brewer has scored an average four eight out of five stars in our consumer and Influencer review programs and we look forward to its debut as a Walmart exclusive.
In terms of coffee innovation in January we launched a snickers flavored K Cup pod under the original Donut shop brand as an expansion of our flavor platform.
This new product is already a top selling variety where distributed with a national rollout planned for later this year.
Lastly, we are pleased to announce the community coffee the largest family owned retail coffee brand in the U S will be returning as a keurig partner brand at the end of this year.
The relaunch of our partnership after a five year hiatus is a testament to the quality innovation service and consumer insights that keurig ecosystem can provide to coffee brands.
We look forward to working together with community the community team.
Help accelerate their brand growth.
Shifting to cold beverages, we're excited to announce that we have agreed to make a minority equity investment in tractor beverage to expand innovation in the fountain and foodservice channels.
Available nationally and Chipotle restaurants since 2020.
Tractor offers the first and only certified organic non GMO beverage solutions, specifically tailored to foodservice operators.
Okay.
To enable tractor to achieve widespread distribution across multiple foodservice channels. We have also agreed to enter into an exclusive sales agreement with tractor that leverages the strength of our fountain foodservice sales team.
Katy peak cold beverage innovation and renovation continues to be robust.
And we have recently launched Snapple zero sugar and Snapple elements, a new line of teas and juice drinks inspired by the elements fire rain and air.
The Snapple elements line is made from all natural ingredients with no artificial flavors or sweeteners and less sugar than traditional snapple beverages.
Snapple zero sugar is a rebranding of diet snapple similar to what we've done with several key CSD brands, resulting in an increased velocity.
During the quarter, we launched two new Cst's simple seven up and a new a new seven up line with clean and simple ingredients and reduced sugar as well as sunkist mango orange to expand our fast growing sunkist brand lineup.
Finally, returning to summer as a limited time offer is a fan favorite Dr Pepper, dark berry, including zero sugar variety.
The launch will feature promotional packaging tied to this summers release of Jurassic World Dominion.
I'll now turn it over to <unk> to take you through more highlights of the quarter.
Thanks, Bob and good morning, everyone.
I will start with a brief review of our first quarter business and financial highlights and then turn to our outlook for 2022.
As usual.
We'll be discussing our past four months on an adjusted basis and as Steve mentioned, beginning this quarter. Our adjusted results now exclude the impact of foreign currency translation.
As mentioned earlier, our topline was again quite strong for the core that is packaged beverages up months as significant 13% along with very strong growth for beverage concentrates and Latin America beverages as.
As expected.
Coffee systems net sales declined in the quarter that is the segment prioritized shipments to branded and private label partners.
And to rebuilding inventory.
Which improved sequentially in the quarter.
All in <unk>.
Net sales advanced six 1% to $3 1 billion.
These net price realization up six 3% and volume mix down slightly.
Excluding coffee systems net sales advanced 12, 8% and volume mix was up.
Four 6%.
On a two year basis net sales for the first core task.
17, 5% versus 2020 with all four segments growing.
Adjusted gross profit was up 1% in the quarter.
Benefiting from the impacts of the significant pricing actions, we put in place and productivity savings.
Escalating inflationary pressures combined with ongoing supply chain disruption.
And they would constraints where significant offsets.
As the timing of pricing continues to lag installation.
As a result.
Adjusted gross margin declined 280 basis points versus year ago to 52, 7%.
Adjusted operating income declined one 2% in the core of that risk.
Reflecting the significant impact of inflation.
Including the ongoing impacts of macro supply chain and labor challenges.
Partially offset by our strategic asset investment and other benefits that enabled continued investment in the business.
Adjusted operating margin declined 170 basis points to 23, 8%.
On a two year basis, adjusted operating income increased six 7% versus 2020.
Despite the inflationary pressures, we maintained our investment in brand marketing.
In fact wildly reduces spending in coffee systems due to supply limitations, we increased marketing spending in our cold beverage put on by 7%.
During the quarter, we also made significant investments to accelerate coffee comedy.
And get us back to normalized inventory positions.
Service levels to realize our full growth potential in the second half of 2022 .
Those investments will focus on additional labor.
Warehousing and transportation capacity.
As Bob mentioned, we prioritized partners and customer brands or with our owned and licensed brands for the long term benefit of the ecosystem.
But with a short term profit and revenue hit to us in the corner.
These incremental investments we were paid for in part by a $38 million benefit in the quarter from our strategic asset investment program.
Hello, we did $28 million benefit and noncash stock compensation expense.
$8 million benefit and legal fees.
Adjusted net income in the quarter increased approximate 1%.
Primarily reflecting lower interest expense, partially offset by a higher adjusted tax rate.
Adjusted diluted earnings per share was further <unk> in the core of that.
Thanks, Shelly even with year ago.
Free cash flow for the quarter at $632 million continued to be strong.
Driving our free cash flow conversion ratio of over 133%.
During the quarter.
Further strengthening our cash position.
Received a $350 million settlement from the successful resolution of our litigation against <unk>.
It was used to reduce financial obligations.
At the end of the quarter unrestricted cash on hand totaled $592 million.
As announced earlier this month, we completed a 3 billion goal that is strategically financing, giving dakota and interest rate environment.
Since the time of the merger nearly 40 years ago, we have generated significant cash flow and rapidly delever.
This is strategic refinancing further strengths, our balance sheet and liquidity profile with extended maturities and more favorable rates that we lowered our interest expense.
Turning now to our segments had four months in the core of that.
Packaged beverages again deliver double digit net sales growth.
The first quarter up more than 13% driven.
Driven by favorable net price realization and higher volume mix.
The latter reflecting continued market share expansion and strong in market execution across the portfolio.
On a two year basis net sales increased an impressive 21% versus 2020.
Adjusted operating income increased 16, 9%, reflecting the strong net sales growth and productivity combined with the strategic asset investment program Ben if he told further.
Dollars.
These benefits were significantly offset by the unfavorable impacts of escalating installation and macro supply chain disruption and labor constraints that drove higher than anticipated costs to serve the continued strong consumer demand we experienced.
Beverage concentrates also posted double digit net sales growth approximating, 10% in the quarter.
Led by favorable net price realization and higher volume mix.
The one who makes <unk> four months was driven by higher fountain foodservice volume due to improving by the still to be covering consumer mobility in the restaurant and hospitality channels.
On a two year basis.
Net saves at months almost 17% in this segment.
Adjusted operating income increased three 3% in the corner.
Driven by the strong net sales growth meaningfully offset by the impacts of escalating installation and the significant increase in marketing investment.
Latin America beverages also posted double digit growth in net sees approximating 18%.
Essentially balanced between higher net price realization and increased volume mix.
On a two year basis, Latin America net sales increased an impressive 26% versus 2020.
Adjusted operating income increased 14%, reflecting the strong growth in net sales.
Partially offset by broad based inflation and the significant increase in marketing investment.
And finally coffee systems net sales in the quarter declined four 3%.
This reflects the impact of rebuilding our internal inventory positions.
Combined feeds prioritizing shipments to branded and private label partners for which we received lower revenue recognition per pot than we do with our owned and licensed brands.
In addition, coffee systems faced significant comparison to the first quarter last year.
When net sales increased 17%.
On a two year basis coffee systems net sales increased 12, 2% versus 2020.
We achieved higher coffee systems net price realization of three 2% in the quarter.
Which was driven by pricing actions taken primarily on our owned and licensed pods in late 2021 .
And the first quarter of 2022 .
Sequentially LOE that retailers fines incurred in the first quarter that.
Little bit of volume mix in the core debt of seven 5% reflected comparison to the strong 19.5% growth in the year ago period.
And the impact of our coffee recovery program.
Consequent to part and Brewer shipment volume declined.
Five 2% versus a year ago.
Comping, the strong growth of 14% and six 1% respectively in the year ago period.
Adjusted operating income decreased 24% in the quarter.
Wireless spend four months reflected the higher net price realization, we achieved it continued to lack of inflation and the cost of our recovery plan.
This plan.
Which will continue through the second quarter.
Generated customer service recovery to partners and retail customers quickly.
All of it it added significant cost during the quarter.
I would like to spend a moment discussing our expectations as the year unfolds in the context of the first quarter.
We expected the first quarter to be our most challenging period this year.
Due to the timing dynamic between inflation and pricing and a comparison to quarter, one last year before the installation spiked coupled with our need to invest heavily in coffee supply.
With the first quarter are now behind US we continue to believe it will prove to be the toughest this year.
During the call that we deliver strong brand growth implemented new pricing actions and deliver significant improvements in coffee production customer service levels and inventory.
As we look ahead.
We expect continued strong revenue growth driven by innovation renovation.
Partnerships and are pleased that we will be in the position to invest in marketing to restore full demand 12, our coffee business in the second half as.
As inventories rebuilt.
As discussed this morning.
And at 18 coffee recovery and investing in our cold beverage marketing came at a cost in quarter one.
However, we have the flexibility to leverage our strategic asset investment program.
And other one time benefits to cover these investments.
This puts us in position for accelerated revenue growth in second half.
Including unconstrained growth in coffee.
Looking ahead.
Inflation is still looms as the greatest challenge and has proven difficult to forecast even for the expense.
Continue to lock in coverage on all items, where possible and have implemented additional pricing and are ready to add more pricing if required.
We have and will continue to protect our marketing investment as we believe branches ranked and its ability to lessen pricing elasticity is a key competitive advantage for K D. P.
As discussed on the last call. We also see this strategic asset investment program is an ongoing effective tool to drive marketing investment in an environment marked by significant cost pressures.
Our confidence in our topline, let us to increase our guidance for full year net sales growth to the high single digit range, while reaffirming our full year guidance for adjusted diluted earnings per share growth in the mid single digit range.
Supporting this guidance, we continue to expect the following unchanged assumptions adjusted interest expense is expected to approximate $430 million.
Including the benefit of our recent strategic refinancing which was planned earlier this year.
Adjusted effective tax rate is expected in the range of 22 to 22, 5%.
Diluted weighted shares outstanding are estimated to be approximate.
143 billion.
Finally, while we don't provide quarterly guidance given the current environment.
I want to share that we expect the second quarter to show modest sequential adjusted earnings per share improvement versus the first core left with more meaningful improvement in the second half.
Specifically, we continue to expect adjusted earnings per share to strength during the year.
Reaching the high single digit range in the second half.
Which would put us on our long term algorithm for the period.
Translating to mid single digit growth for the full year.
With that let me hand, it back to Bob for some closing remarks.
Before moving to Q&A I want to recognize Steve Alexander for his recent promotion to Vice President of Investor Relations.
Any of you on this call Ive had the opportunity to work with steep during his 15 years with KDB in Dr. Pepper Snapple and have benefited from a strong understanding of the beverage industry.
And finally earlier this month, we announced that I will be transitioning my CEO role to ozone at the end of July and I will remain executive chairman for the following two years.
Transition was designed to ensure continuity of leadership and strategic direction for Katy P. As well as to enable dedicated focus on the new and very significant inorganic value creation opportunity we have in front of us.
I have tremendous confidence in ozone based on working side by side with him over the past six years and I'm excited about the opportunity to continue to partner with him the K.
The executive team and the <unk> Board of directors over the next few years.
With that I'll turn it back to the operator for Q&A.
Ladies and gentlemen, as a reminder, if you would like to ask a question. Please press star one on your telephone keypad again, if he would like to ask a question. Please press star one on your telephone keypad, we'll pause for just a moment to compile the <unk> roster.
Your first question comes from the line as it Bryan Spillane with Bank of America. Your line is open.
Hey, Thanks, operator, and good morning, everyone and congratulations to Bob to you to ozone and Steve on all your new.
New roles.
Brian . Thank you. Thank you.
So the.
I guess my question I've got a couple of questions just around coffee systems.
One is just you talked about.
New capacity coming online. So just wanted to make sure were unclear about when that will be and what point in the year do you think that that service levels.
It will be optimized right are we still six months out.
A year out just just at what point do we think service levels will be normal.
Yeah, Yeah, and again good morning, Brian Thanks for the question.
We start with your first question with regards to the coffee.
Hey.
Coffee capacity and the production availability as we announced shooting starting actually middle of last year, we were expecting some slowdown ramping up a lot.
State of the art manufacturing facility in the K Cups in Spartanburg.
Slowing down but during our last call.
Also announced that the Spartanburg will be turned on prime out of the in 'twenty 'twenty free so that was a lot of sense in the meantime.
We've also gone through a significant consumption.
Demand coming from all of our consumers and as we always do this starting last year on the V.
We actually acquired a new <unk>.
Production lines utilizing the existing technology that we have and we were commissioning them as part of our ramp up plans. Therefore, two third of that capacity already went in and one third is also going to have coming online in the upcoming quarters. Therefore, we feel good.
Where we are with regards to managing our overall coffee production capacity and also.
And just to adjust to add you also asked a question then maybe it'll be feeling good in terms of restarting the capacity that we will be quieting of needing and the.
As we as we spoke to during our prepared remarks, we have seen sequential monthly improvements of these sorting all of our production capacity that includes inventory that includes our service levels to all of our partners to all of our retailers as well as our own and license and we expect actually to fully re.
Store of our capacity, including all those spaces. Some time in quarter. Two therefore, we feel very good about VR and AR.
It took a few quarters to go back to the levels that the veeva requiring for.
Thanks, and just one follow up just staying with coffee and pricing.
<unk>.
We fielded a lot of questions about <unk>.
<unk> potentially trading down and demand elasticity, but.
Maybe Bob could you talk a little bit about how you see.
Pods as a relative value to coffee away from home.
And is that really maybe the more sort of tangible comp, especially since coffee away from home.
The prices any inflation there it's been pretty meaningful so I'm just trying to understand if we should if when were looking at it looking at elasticities and cross elasticity is it is it really away from home more so than people, maybe trading up and down within within the coffee aisle.
I'll start Brian with in.
In home we do.
We think is very relevant and we could talk a little bit about away from home, but we put in this strategic pricing investment over the number of years and we've had a lot of investor questions about this as well. So if you go back to 2016 before we implemented it.
The cost per cup, which is the relevant measure of K Cup pods versus bag coffee. For example was a 30 per cup premium we lowered that to 20 per cup during the during that investment and we saw tremendous consumer response now we're moving up in price, but the game as you point out is really a relative game and if you look at now.
The difference today between K Cup pods in bags, it's still 20, so we're maintaining that 20 differential while we're taking our pricing up which we think is the most relevant comparison.
With regard to away from them, it's hard to come up with an exact number to be able to measure that against but we know that we're talking about an average price per pod or price for a couple of 50.
For K Cup versus 30 for bagged coffee youre talking about a multiple of that somewhere between five and 10 X depending on what you buy.
Out at retail and that gap continues to get wider and wider and so we see as people get concerned about pricing.
Clearly, there's a tradeoff from away from home to in home, which benefits the entire category, but our price gaps versus other forms of roasting ground coffee has stayed the same at that lower level that we got it to in 2018 2019.
Alright, Thank you okay.
And your next question comes from the line of Bonnie Herzog with Goldman Sachs. Your line is open.
Alright, Thank you and congratulations from me as well for everyone.
I have a few questions. This morning on your your guidance I guess.
First on the topline your updated guide implies top line growth in the high single digit range for the remaining quarters. This year plus some so.
What gives you guys the confidence that.
Yet your topline can accelerate especially since you're not thinking about your Q1 results, which were driven entirely by price realization. So I guess I'm I'm asking about this in the context.
Increasing pressures on consumers and kind of a little bit of what you just touched on.
As it relates to last his cities and then on the bottom line I guess I'm trying to understand how you are factoring in some of the onetime items such as benefits from the gain on litigation settlement that you called out in.
<unk> sales leasebacks I guess it seems like these did help to drive your slight EPS beat in the quarter. So how should we think about these items for the rest of the year end.
How many points of growth do you expect some one time items in your EPS guide.
Okay I'll start with the top line and then I'll ask goes on to pick up the second part of your question there with regard to the top line you have to pull apart the quarterly results by coffee and all other and the all other businesses outside of coffee. So thats led.
See in packaged beverages were up all the up double digits.
And they were up in terms of pricing, but also volume in fact volume was up fairly substantially across those so our confidence is not that it's just all pricing driven as we're seeing really strong growth in both and our expectation is that that continues we talked about.
Pricing being being implemented of course, we built our model around elasticities and the kind of last disease, we've seen and we expect going forward. So that's where we get the confidence on the coal side, the coffee side of the business, which was a significant drag on growth in the quarter.
We know we will recover substantially in the second half of the year for a couple of reasons. One is we made substantial investment in the first quarter to accelerate our coffee recovery and part of those one time benefits you talk about were used to fund those investments and ozone I'll talk about that in a minute, but that puts us that acceleration puts us in great shape because as those on just said we believe our.
Customer service levels will be back to normal by the end of the second quarter, which means that we can have unconstrained sales in the second half of the year, we've been pulling back on shipments. We have also been pulling back on promotion and advertising.
First quarter. So we can go back to unconstrained demand.
For coffee in the second half of the year and then the other.
Point on coffee as we're under shipping consumption for the first half of the year.
It flips around in the second half of the year and we have the opportunity with the increased internal inventories to restock customers partners and then again be able to turn on the promotion and marketing. So the combination of all of those leads us to the confidence that the second half of the year will be in that high single digit range that we guided.
Or is there any way to talk about the.
Yes, the investment we made off of some of those discrete items at the opportunity and thanks for your best wishes as well Bonnie So let me start with the strategic asset the investment program, which we also define as one time benefits that we have incurred first of all as you would remember we have been implementing this initiative.
They've since 2019, so there is no new news or no new initiative for the implementation with regards to that.
Over time, we have leverage.
As I was saying the strategic asset investment program.
Covered investment.
Significant inflationary and macro challenges. So this is important to understand the sources and the use cases and we also had occasional benefits that we can utilize the next ship exceptional times like these.
Our lowest to continue to protect investment in the growth of our business, which is super important to us. So if you. So we can continue to innovate and support our brands, which is one of the reasons why.
Elasticities have held up to this point very nicely.
Going forward as well.
Opportunities that is we expect to use these strategic asset investment program is an effective tool.
For the single factor to drive marketing and other investments when required.
<unk> timing of these transactions is not predictable because we take a.
Overall holistic perspective, and on an annual basis. So that's the important part and I would like to take the opportunity to expand for the little 45 seconds on the other two one time. So that you have mentioned that each one of them was the stock comp benefit now that we have almost 40 years of history.
Public company we.
We have considered to estimating our restricted stock forfeitures raised as oppose to actual events, which is in line with industry practice. So both practices are 100% in line with the U S <unk> as well as how our peer group is treating these type of expenses and on the legal fees.
Over the past few years, we recognize as ongoing expense costs related to our litigation against <unk>.
And with the settlement agreement in our favor and we simply recognized the return of our legal fees to ongoing results.
It will be it thank you.
Alright, thank you.
And your next question comes from the line of Lauren Lieberman with Barclays. Your line is open.
Great. Thanks, Thanks, so much.
So I was curious to talk a little bit about the go forward in terms of the announced management changes it means that as you move into <unk>.
That gave chairman role I'd love to hear a little bit about how youll be spending your time and I know that we can have at least talked about M&A, but just.
Where are your focus areas will be we've talked about the big kind of checkbook.
You as a company we will have at your discretion. So curious about how you'll be focusing those efforts a little bit more and then it was on I mean, you and Bob had been partners since since the start but curious also as youre thinking about the path forward.
And.
Things that you think you can add where you can add value in a different way than you already have been in your current position.
Sure.
Bonnie for me first there's really three areas of focus as we go forward one is continuing to lead the board as.
As we've evolved the board over time from being.
Closely held to widely held and you know that that also will continue to evolve somewhat over time and so that's an important part of my role second part of it is working with OS on the executive team to make sure that the transition is seamless.
And that we continue the great momentum that we have on the organic delivery of our business that I have a ton of confidence in that and then the third part is to give some time and space for me to work on the inorganic opportunities in particular M&A wouldn't be a surprise to anyone that the last two and a half years or so have been very intensely operationally focused.
Very much managing it seems like everybody in the industry from one crisis to the next.
While that is critically important and.
And as the right priority it doesn't leave a lot of time to think about and work on the strategic aspects of the business that require a significant amount of time investment patients even relationship building to be able to do that properly and so.
Im certainly looking forward to be able to have more space against that while always being available to ozone and the team to to jump in and help as needed over the next couple of years.
Yes, Ed.
Also thanks to you as well Lorraine so.
Yeah.
I'm sure you all know that.
We have a robust strategic plan as we have all taking you flew back.
During our Investor Day October one last year.
And obviously I have been one of the important.
Important architectural third plant along with Bob along with the executive leadership team as well as our board and I am 100% behind the strategic expense and when you do the double click you would see that we have great growth opportunities in coffee systems doubling our business all the time.
<unk> recruiting new households, as well as its having to a lot of innovation.
Boston, the Brewers as well as the coffee beverage aside and we still have some white spaces that we can feel it and we look to the cold beverages again graph great growth trajectory in front of us soybean the way our distribution, making it the making of our distribution more effective more impactful as well as efficient as Bob was.
Saying, we have quite there'd be though we still white spaces in select brand groups.
That will get us to new consumption occasions that <unk>.
Includes perhaps some geographical dimensions.
And <unk> and Buffalo's also saying M&A. Therefore, as you see it's a full package in terms of the growth trajectory that we have in front of us, which makes us obviously very excited and motivated.
And our job is continue to execute very successfully against this strategic planning expense and deliver the business goals that we put on us.
Great. Thanks, so much.
Your next question comes from the line of Kevin Grundy with Jefferies. Your line is open.
Great. Thanks, Good morning, everyone and I wanted to extend my congratulations as well.
First I think just a housekeeping maybe on <unk> replacement at the CFO position, maybe just are you looking internally.
For that or are you looking externally for that I suspected as both maybe just comment on sort of what attributes are you looking for for that candidate maybe timing but.
But the broader question I have is really around investment levels. I think this is just to kind of pick up a little bit on what Bonnie.
It's getting out before excuse me, just how youre balancing that with EPS growth.
Bob you've been really clear about your commitment to how seriously you take the EPS growth targets in the delivery has been very very good.
Since the merger in what's been a really volatile environment, but.
With the one time items now providing some help the question is really around balance.
Number one what's in the outlook for brand support now.
And what's your willingness to sort of commit to those brand levels or is there. Some element that you, possibly willing to pull back if needed to hit the EPS growth targets. So just the question is really around around balance what's in the guidance and your willingness to pull back if needed to deliver against the EPS growth target. So thanks for all that I know theres a lot there.
Alright.
You start off and I'll pick up the second part absolutely and again, thank you very much as well Kevin.
So on the on the CFO search.
As we announced the public the the decision was to go outside and to recruit.
And for the fact that in order to deal with the complexity of our company, but also.
And more importantly to bring our CFO that will be able to navigate through.
The search has already started.
And we believe that we will manage the timelines that we have communicated previously in terms of being able to recruit.
Yeah on your on your second question.
I think the simple answer is we take all of our commitments seriously and we have commitments out there in a balanced manner. So think about what we delivered over the first three years as a public company, we delivered a 15% EPS CAGR.
While we accelerated growth so we beat our growth targets.
At the same time, we were more competitive in the marketplace as evidenced by all the share gains that we had across the board as well as accelerated household penetration of the keurig system and we put in place at foundation. This now scalable as we move into the into the future. So all of those were delivered as you can imagine when we put that commitment out there in 2018.
The world look very different than it has over the past three years, yet we've been able to balance across all of those without optimizing one metric at the expense of the other we were able to deliver balanced performance and thats exactly the way we look at it going forward. So one thing I would point out is that early back in October one we saw a lot of challenges in the macro.
The environment in 2022, and therefore, we said that we would be on mid single digit EPS growth in 2022.
We're pleased that we did that given what has materialized. Since then and now we're in this mode of balancing investment and growth and you can see we've taken our growth expectations up it's not just pricing driven it's volume and pricing and we make investments in brands.
As we mentioned on our Q1 call our cold business investment and marketing was up during the quarter, even though was incredibly challenging quarter. We spent more in the one time as youre talking about I would suggest we're not focused on any one quarter.
To look at those type of I put those mostly in the category of normal business, especially when you look at it over time.
And we're just incredibly transparent about those and anytime they hit in one quarter, we tend to over focus on those and then we don't talk about them as a group when they are not or its an unfavorable comparison versus year ago, we never yet any questions about those so just look at it over the period of a year.
The fact that we have some of these items to the to double down on investments in our brands as well as in accelerating our coffee recovery allows us to have the confidence in the balance.
Delivery that we've committed to.
Very good. Thank you both good luck, okay alright. Thank you.
And your next question comes from the line of Chris Perry.
Wells Fargo Securities. Your line is open.
Hi, good morning.
Good morning, Chris.
I just wanted to follow up quickly on.
On the M&A commentary, Bob with your with your new.
Your new role and then and then I'll ask a question on coffee just around <unk>.
M&A and priorities.
Clearly the <unk>.
Tractor investment is on the smaller side, but potentially interesting over long time period historically.
Historically, you've talked about reticence for large scale M&A. So would we expect these types of deals to be more on your radar or are you open to larger deals if the category or geography fit so kind of following up on the prior line of thinking there and then just on the coffee side of the business I think you said that your owned.
Sure.
Portfolio pricing was in the 6% range, which is ahead of what you did in the quarter with coffee, where there any service charges that impacted you in the quarter and can you just expand on the partner brand pricing and when you would expect.
Coffee systems pricing to better approximate what you're doing.
Women owned perspective, really what I'm trying to get out there is just.
If youre pricing and winter weather the rest of the categories. Following youre not expanding price gaps too much. Thanks, so much sure.
First thing is is our reticence.
They use on large deals was not on large deals our reticence overpaying.
For large deals and so it's not about the size, it's about the multiple and I think that we're in an environment now where.
Where we're seeing all kinds of valuation shift.
People are investors are more in favor of paying for cash flow and earnings than just multiple of sales with no earnings potential in them. So that may present, some interesting opportunities, but what I would point out is that the way we think about inorganic is across the range of partnerships like we do.
Just announced with community, which is a huge win for our community and a huge win for us to be working together again.
And we don't need to own that business by any means to have the benefits of that and likewise by partnering with us they win as well we can make seed investments as we announced today on tractor beverage, which is small today, but we will certainly accelerated and its in a unique channel.
In fountain, and foodservice, which is one that we are incredibly strong, but you haven't done a deal like this in that channel before and then we're also looking at mid and larger scale M&A as well. So we have a I would say we have a consistent dialogue with a large number of potential partners can't get into the details of that but the fact that we are in.
In this position when we talk about businesses like community and tractor is good evidence that how we think about being proactive and creative in our partnerships with regard to coffee pricing again, the category was up five five or a little over 5% and we were up a little bit more than that again I wouldn't overreact to any one move in the quarter some.
That's mix actually if you break it apart further.
The area that has moved late.
Is private label within pods, so premium brands have actually moved substantially.
The mainstream brands.
We're heavy participant in with our own and license of all moved about the same level.
There was a late move in private label, but they can avoid the price of coffee and now youre seeing pricing coming up on that so we're not seeing any distortion in the gaps between private label mainstream and premium and pod sticking for any time period.
Thanks, Bob Okay.
Your next question comes from the line of Andrea Teixeira with Jpmorgan. Your line is open.
Hi, good morning, everyone and I will echo that.
And best wishes to you Bob for Us on that Steve.
So I wanted to just.
Breakdown a bit on the new guidance.
Isn't that conservative chill, given that volumes will likely recover from here.
On the Shipman comments.
Beverages, and perhaps call it low single at this point and then your price mix should accelerate from the 6% that you posted so far.
Isn't that potentially like an upside for that or we should be thinking into.
In the high single and the visibility that you have now in terms of cost youre not ready to it's too early in the year to call. It a little bit that Aps given that given the puts and takes that you appreciate that.
Yes first of all good morning, and thank you very much Andrea.
Regarding to your top end and you also touched to the bottom line as well so let me try to break it out.
Alright, we feel very bullish with regard to our topline as Bob explained the reasons and on the basis of that that we have increased our guidance from mid to high single digit top line growth expectations and there are so many proof points with regard to that and coffee, we it'll be one of the important.
10 minutes of especially second half kicking in <unk> state and put all the supply chain.
The disruptions that we have had.
And we are also planning to take a second round of pricing in most of our life portfolio by early summer, which would be more or less in line.
With the peer group Andy in the market class. So that's we have all announced to the trade of course, there will be some different timing with regards to the implementation.
But we feel very good with regards to our price expectations and we'll do all of those mean in kind of say, it's all about top line growth, having said that there is a reason why everyone is taking pricing can be cheese.
Correlation factor that came in and continuing to come in higher than everyones expectation.
For example, when we step back.
And look and just to remind a.
Our previous communications 2021 approximate the inflation came in as we announce.
One 7% and.
And we also said during our Q4 2021 call, which was like a couple of months ago.
We expect 'twenty to 'twenty, two inflation to trend around low teens, but in reality in Q1, we have faced approximating, 15% inflationary pressure, which was higher than what we were expecting and I am sure you have heard what all other industry players.
Been saying, which is essentially in line with what I am articulating right. Now therefore, too we are taking pricing through at the same time, our Williams continues to increase.
With our <unk>.
It is strong in market execution, and you can see the proof point in a lot of market share, which is around 80% of our view that we have either maintained or continued to gain market share and therefore really strong pet for months and daily very old on owned by the inflation is not stopping.
And we are still seeing a lack.
In the relation of the pricing and inflation as you know no one can take an anticipated inflation and pricing accordingly, which on a pure math basis. This means margins will continue to be under pressure as well as there will be a lag, but we also believe that towards core their free and prove up the morning quarter, Florida. This year.
That will be expect on the basal a whole lot of assumptions again, an inflection point in terms of the pricing catching up to cost and Thats, where the margin expansion actually will kick in.
From a pure math on the algorithm perspective, therefore, we believe that we have a good robust algorithm that we put out that.
Inflation is real inflation as has been higher than what we were expecting and it has nothing to do with our coverages where that we can cover it or not because it has some input cost elements that we cannot cover no. One can cover for example, the hotbed for example, polypropylene that we used with regards to the material of the K Cup pods and some.
First off the transportation and labor. So you see it's not like one or two therefore this is a continuous levers that we pull in order to run it.
And as well as they leave it against.
Got it.
Of course, if you. So if you do see some opportunities to do better as you. All know we are not going to hold back, but we think we have a good algorithm right now at <unk>.
And that keeps us to continue to invest behind our brands and business.
Thank you guys on that Sam.
And your next and your last question comes from the line of Brett Cooper with consumer edge. Your line is open.
Thank you good morning, congratulations to all.
Questions. If you don't mind you spoken about it.
Building the infrastructure to be a bigger company I was hoping you can expand on the most important pillars that you've built or have in place that allows for that leverage and then the second one is you have a scale ecommerce business and coffee both direct to consumer third party.
So just from the outside we can't always see what's going on and I was hoping you can provide us an update on the progress you've made in preparing for the move in your cold beverage business E Commerce, <unk> evolving the customer relationship to a more digital one.
Sure a couple of things Brett first of all on the.
Scalability piece that you talk about I think there are three big areas in which we have set up.
Business of scale I think wanted to just management structure. So we've got a management team that has the bandwidth to take on more than they have today and our focus on North America and it gives us a bit of an advantage youre, having managed global businesses in my past to be able to focus in one region, where you have common consumers common customers yet.
A significant amount of white space for expansion is an advantage for management to be able to continue to take on more without being distracted I think the second area, where we've made significant investment in us and our distribution capabilities and we talk about.
Wide range of them, but if you think about today, we announced an expansion in our fountain foodservice business, we've talked about on a number of calls Dr. Pepper is the most available CSD in fountain and foodservice. So we've got a really strong team, but they've had a relatively small set of brands and businesses to sell now.
We are equipping them with a new brand in partnership with tractor, where theyre able to get into new territory with GMO free organic and some really unique products to be able expand so it expands their toolkit. There is a good example of a great Foundation that we can now scale DSD is a very important area for us we have made.
Significant investment over the past three years.
Increased tools and capabilities, but also we've expanded our DSD breadth and depth by acquiring close to 25 independent distributors to be able to boost our system and obviously anything that you can scale within DSD improves both your effectiveness as well as your efficiency and then as you touch on E. Com is a really interesting.
Sting area when we put the two companies together and we showed how we are bringing the best of both.
Share across the business one of the conversations about E comm, but in 2018 E comm and beverage didn't seem like a big idea certainly it was a very significant idea during COVID-19 and.
And it's one that on the cold side of the business.
Has to build over time will build over time, but it has to be through click and collect and our regional delivery shipping.
Liquids by UBS and Fedex is not a great business model over the long term, but we see that area rapidly evolving and we're in a really good position part of enabling us to do exactly that required us to go back and redefine and renegotiated a number of our distribution agreements that were not contemplated in an environment of E com and we have been.
Very successful in doing that over the past now four years to set ourselves up so that we have a win win with our distribution partners, our independent partners and yet we're able to drive E comm to the benefit of the consumer as well as us and our partners with regard to our coffee business Youre, 100% right. We have a scale business in E. Comm, we've been very agnostic in terms of where our brand.
Or sold on E. Com, So we're very supportive of.
Amazon Walmart Dot com on any type of retailer dot com, we share our information with them, we try to make them better. So it's not that we are in competition with them at all in fact, we know that consumers want to go online, but they want to buy it from their preferred.
Retailer and so we enable that by doing what I just said.
With regard to <unk> dot com, we have focused it on.
Auto reorder, a reorder and that's it's primary reason for being and also it's a good place to find Skus that are small that are.
Favorites of a small group of consumers, who can't find a bit normal retailers will sell everything on there obviously that's been a challenge during the supply recovery faithful will get back to that again.
And so that's a big part of it and as you think about the one comment I made in my remarks about connected Brewers and the fact that we believe that we'll have 1 million connected Brewers in next few years that really add additional power to an auto reorder business. Because you go from replenishing based on shipments to replenishment based on consumption and.
That is a whole different level of convenience for the consumer and so that's why we're really bullish on that business over the long term as well.
Great. Thanks.
Thank you. Thank you and I'll hand, the call back to Steve Alexander for any closing remarks.
Great. Thank you operator, and thanks, everyone for joining us today Maria and I are around all day. If you have any questions. Please feel free to reach out we will get back to you. Thank you so much.
Thank you and that concludes today's conference you may now disconnect.
Okay.
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