Q3 2022 Keurig Dr Pepper Inc Earnings Call
Good morning, ladies and gentlemen, and thank you for standing by welcome to Keurig, Dr. Pepper's earnings call for the third quarter of 2022.
This conference call is being recorded and there'll be a question and answer session at the end of the call.
I would now like to introduce Keurig, Dr. Pepper's Vice President of Investor Relations, Mr. Steve Alexander Mr. Alexander Please go ahead.
Thank you and Hello, everyone. Thanks for joining us.
Earlier. This morning, we issued our press release for the third quarter of 2022.
If you need a copy you can get one on our website in the investors section.
Consistent with previous quarters today, we will be discussing our performance on an adjusted basis, which excludes items affecting comparability and presents growth rates on a constant currency basis.
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 we 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 results are Katie P. C E O o's aren't dumped messier loop and our interim CFO George log of darkness.
Also joining us for Q&A are Katie P Executive Chairman, Bob Gamble work, and our Chief Corporate Affairs Officer Maria Scalpel Garcia.
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 1995.
These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially and the company undertakes no obligation to update these statements based on subsequent events.
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 ozone.
Thanks, Steve and good morning, everyone.
Being that this is my first earnings call as CEO I would like to start today's discussion with my thoughts on the K D. P operating model and a strategic approach that makes us unique in the CPG space.
Our focus continues to be on managing our business for a range of potential macro outcomes and leveraging the all weather business model. We have created to drive success, regardless of the environment, We may face.
Our results this quarter and the consistency of our past four months since merger and a testament to the strength of this model.
Which has continued to perform well in the highly volatile macro environment. Our industry has faced since the onset of Covid.
And most recently our portfolio has performed well with significant levels of inflation and pricing.
Along with a challenged consumer landscape demonstrating its recession resistance.
Beef elasticity impacts remaining modest and our market share positions remaining strong.
Our business model starts with an attractive and competitive organic total shareholder return I'll go to Tim which is driven by our flexible and scalable strategy.
In cold beverages, our strategy is focused on driving graft.
In core brands through marketing brand through innovation and in market execution.
By filling white space in our portfolio through innovation and partnerships such as our poll that felt says.
Partnership and the recently announced rebel selling and distribution agreement in Mexico, which we will touch on a bit later.
And by enhancing the breadth depth and effectiveness of our omni channel selling and distribution system, including our company owned direct store distribution system.
The investments we have made in selling and distribution over the past seven years. He built a strong good go to market capability that has driven consistent these strong market share performance across all the brands and beverage segments.
In coffee systems, we are focused on.
Driving household penetration growth for the Cuda X system at the rate of approximating 2 million new households every year.
Giving the number of remaining a crystal ball new households for the queuing system, which we estimate at more than $50 million.
Have line of sight to household growth well beyond the next 10 years.
We are also focused on increasing revenue and profit growth from our existing 46 million cubic households through new platforms, such as connected Brewers and the new beverage formats and occasions.
In addition to all of our core algorithm.
K D piece extra ordinary free cashflow enables the potential for incremental shareholder returns through strategic capital allocation.
We believe that M&A is the most attractive and value accretive option for the deployment of our capital given our disciplined approach and proven ability to create value for K D P and I watched that holdups.
We also see opportunistic share buybacks and investment in our internal growth projects as attractive uses of our capital.
We view, our North America drove traffic focus as a distinct advantage, particularly in the current macro environment as we can execute our organic and inorganic growth strategies in what is arguably one of the.
Well, it's most of the stable and predictable operating environments in.
In addition, while most companies.
<unk> K D. P report profit and loss growth rates on a constant currency basis, and strong U S. Dollar reduces cash flow and profits and foreign currencies are translated into U S dollars. The same pack as many miles for K D. P.
The first quarter results, we reported today provide a great example of how about the strategy and operating model at work delivering for shareholders, specifically net sales advanced 12%.
Adjusted operating income increased 2% and adjusted diluted earnings per share grew put in a half percent.
How about a cash though was again strong in the quarter, bringing our year to date free cash flow to almost $2 billion driving our free cash flow conversion ratio of 114%.
They spent four months continues to demonstrate the strength of our brands and in market execution.
In an environment with broad based inflation and reduced consumer approaches in potash is all about L. S tissue Tees continued to be modest.
These consolidated results were in line with our guidance without pet four months, you know about cold beverage segments offsetting some pressures in coffee.
It's just one quarter left in the year, we continue to expect consolidated results to be on track with our guidance as cold beverages is expected to continue pet forming well and coffee strengths considered up here.
As it moves past supply chain issues earlier in the year and see if he kind of green coffee pressure.
Experience in the third quarter.
This is what we mean by the benefits.
What all weather business model provides reinforcing the advantageous oh, how about a uniquely diversified beverage portfolio.
Continue to expect the fourth quarter that could represent a step change in total K V P pet for months.
Anniversary the spike in inflation across the business in the fourth quarter of last year, and our coffee business about four months I've Saturdays.
As has been the case throughout 2022.
<unk> pays inflation continued to impact margins in core debt free.
As the significant pricing actions, we have taken to date have not yet fully caught up to insulation.
We experienced total cost inflation and quoted one of 15%, which escalated further to more than 17% in core there too.
And in quarter three it remained at the 17% level.
In the fourth quarter that we will begin comping this significant inflation spike in the year ago period, which reduces the rate of inflation on this year's profit and loss.
As a result, we expect the contribution from previously taken pricing actions to catch up to inflation in the quarter.
Which will enable us to deliver margins above last year.
How about cold beverages business continues to perform exceptionally well and posted significant sequential improvement in margins a lot of packaged beverages and beverage concentrates segments combined.
Grew both net sales and operating income by 14% in the core there.
Maintaining a combined operating margin, even with a year ago.
In coffee net sales up one 5%.
Led by pricing that was partially offset by lower volume mix, while the impact of broad based inflation.
Including the highest year over year Green coffee costs weighed on operating income.
Pricing continued to at once but has not yet fully caught up to inflation.
The good news is peak green coffee installation is largely behind us.
Closing the impact of inflation on the coffee profit and loss to moderate significantly as we lap the inflation spike in quarter four last year.
Along with these improving trends heading into the fourth quarter that I'm at a coffee segment top line is expected to strength.
As the benefit of pricing and brand investments builds.
And the supply issues, we have encountered in the first half are truly behind us taken.
Taken together, we continue to expect meaningful sequential improvement in coffee segment net sales and operating income growth in the fourth quarter.
Turning to in market pet for months, let me provide some perspective on what we are seeing intentions or trends you know what categories, including pricing elasticity is and consume at mobility.
Starting with the cold beverages.
In liquid refreshment beverages, the category continued to perform well with dollar consumption in the quarter and year to date periods up 10% and volume down less than 2%.
Elasticity in the category continues to be modest it when there's pricing was up in the low double digits for both periods and consumer mobility continued to increase.
K D piece and ought to be dull lot consumption increased more than 11% in the core of that.
Growing N V. She out in both the quarter and year to date periods, reflecting.
Reflecting the benefit of pricing that was only modestly offset by William which remained quite resilient.
This is below the category in both periods.
We continue to benefit from healthy categories as strong portfolio of leading brands and very effective in market execution.
The strong pet four months in the core that was broad based and led by share gains and premium waters, and South says Ts Apple juice and food drinks.
In carbonated soft drinks, our pet 40 months also continued to be strong.
We saw a consumption up 12% in both the quarter and year to date periods.
Shad up year to date, we are pleased that we continued to expand on the impressive share gains we generated over the past couple of years.
We didnt carbonated soft drinks or zero sugar innovation continues to perform well.
With modest elasticity impacts and a stronger velocities than the overall zero sugar and diet category.
In premium water core hydration grew dollar consumption further 5% in the quarter driving almost two full points of Shadowgraph snapple.
Snapple led by the success of our Snapple brand refresh and Snapple at M. S.
Zero dollar consumption growth of 15% and she had a growth of almost one full point in the quarter.
And in sepsis or partnership with Paul that continues to drive growth for the brand.
With a C V increasing six points and she had Gainesville two points.
Moving to coffee.
Before discussing category dynamics, let me quickly share some context, I don't know what business and they've had four months of improvements that are now beginning to materialize.
You will recall that the combination of consistent this strong consumer demand and supply constraints led to a part shortage starting in late 2021.
Consequently, we pulled back on how about demand investment.
Most of our partners and lounge, the coffee supply chain recovery program to increase output and rebuild finished goods inventories for all parties in the acuity ecosystem.
We completed the program last quarter.
And have nobody store inventories across the ecosystem, which enables us along with our partners and customers to resume investments in demand generating programs to drive category growth.
As a result, the single sort of pulse category continues to recover from supply constraints, we stole that consumption up 6% in the quarter advancing two 7% in September and after a good start in quarter four.
That has been considerable noise in the broad out at home coffee category numbers will be on single serve coffee that is worth discussing further.
A combination of increased consumer mobility.
Retail price actions and a reduction in advertise at the tightening in promotion and spent.
The latter related to the single sort of supplier challenges.
They got to the impacted at home coffee category demand over the summer.
A lot of analysis suggests that consumer mobility had the outsized impact.
With mobility, returning to more normal patterns. Once the school year started we are seeing sequential improvement in at home coffee demand.
Importantly.
Single serve coffee outperformed all other forums of at home coffee Julien core debt free.
Sure that the away from home.
Coffee category, while still down significantly versus pre COVID-19 levels continues to improve with further runway as return to office behavior builds.
Looking specifically at two K D P coffee pet for months K D. P manufacturer port consumption was up 4% on a dollar basis in the fourth quarter.
With owned and licensed brands consumption growing by 5%.
They might cut that doughnut shop, and Green Mountain brands posted a strong growth.
At four months of strength during the quarter with us or with US dollar and volume share advancing sequentially in September versus July and August and continuing to improve into the fourth quarter.
K V. P continues to maintain its strong leadership position in the category.
Market share for K D P manufactured parts at approximate the eight 2%.
Moving forward.
Spec mix to shift for K V. P of manufactured parts from private label to branded as community coffee comes on board beginning late this year.
Turning to bluish today, we are confirming that we are on track to add 2 million new households into the acuity system in 2022 which is consistent with our long term Ive got it Tim.
As discussed many times, we expect the elevated rate of 3 million new households that we attracted in 2020 and 2021 to normalize post COVID-19 and that's exactly what's happening in 2022.
Of course, we don't need to sell as many brewers to support 2 million new households, as we did to support 3 million.
Which explains the 15% decline in brewer shipments in the fourth quarter.
Remember we had in the household penetration business not the brewer saves business as we lapsed the break even on brewer sales and generate nearly all of our profits from attracting new consumers into the keurig ecosystem.
Taking a longer term perspective.
Cordon bleu or save a healthy 16% about 2019 and on a year to date basis Brewer shipments are up more than 30% versus the first.
Three quarters of 2019.
In addition.
Single serve Brewers continue to hold the number one position in the at home Brewer segment and K V. P continues to grow share driven by strong innovation across all consumer price points.
Finally, our Latin America beverages segment continued to post exceptional the strong results in the fourth quarter.
That stays advancing 29% and operating income was up 14%.
They love that on top of all the 8% growth in the first quarter of last year.
Leading this as strong pet four months in the core that their opinion F E L cause amato months and scar.
Earlier this month, we announced a strategic partnership to sell and distribute Red Bull and Mexico studying in quarter four.
The majority of the revenue we generate in our Latin American beverage segment is from Mexico and.
And we are excited to enter into this win win partnership with Red Bull.
Which was the strength of our position in the energy category improve our go to market scale and drive efficiencies over time.
And now I will hand, it over to George to cover our third quarter their pet four months in a bit more detail.
Thanks, Suzanne and good morning, everyone I will start with a brief review of our third quarter business and financial highlights and then provide detail on our segment results as usual, we will be discussing our performance on an adjusted basis.
Total company net sales increased 11, 8% from three 6 billion with growth across all segments.
Led by continued exceptional but four months of our cold beverage business.
Net price realization of one 1% was only slightly offset by a volume mix declined <unk>, 3%.
Adjusted gross profit grew eight 6% in the quarter, reflecting our significant price in Europe is beginning to approach the level of inflation, we experienced in Q3.
Also benefited by foreign language productivity.
As previously discussed we cute our highest quarterly year over he had increase in green coffee cost to this yet pressuring.
Pressuring, our gross margin, which declined versus year ago 54, 8%.
Adjusted operating income increased 2% in the quarter as the increase in gross profit was partially offset by increased outbound transportation warehouse and labor cost as well as higher marketing investments to support our back half plans.
Our result, adjusted pulp anything modesty declined 250 basis points to 26, 1%.
Adjusted net income increased four 3% in the quarter, but I imagine, reflecting the operating income growth and lower interest expense.
Adjusted diluted EPS increased four 5% in the quarter.
Zero point $46 free cash flow remained strong at $686 million driving our free cash flow conversion ratio, 205% in the quarter.
Turning now to our segment performance in the quarter.
<unk> net sales grew 15, 6% driven by higher net price realization and volume mix that was even with year ago.
His impressive volume mix performance reflects the strength of our brands copy with effective marketing and strong in market execution.
A result, we continue to quote our multi year set a gain in <unk> and we gain additional shedding a little bit.
Categories, including premium and flavor, well Tex shell chess piece juice and drinks.
In an increasingly challenging economic backdrop, our packaging mix capability across our portfolio enables consumers to easily pursue options that fit their budgets. Many guns with notable loud fastest growing she has deep pockets by volume in the quarter.
I'll continue in market affecting this was supported by highly effective marketing investment during the quarter, including the decision five launch of the highly successful doctor Pepper funds will episodic.
In recognition of its continued strength doctor pepper, well recognized by Canada as one of the top 20, most valuable global food and beverage brands.
Turning to snap.
This important brand was a standout in Q3 and it just studying the strongest performance in the tea category led by snap elements launched earlier this year with a mounting packaging and board you Facebooks elements has different strong trial and repeat rates and it's proving highly.
Went up to the brand.
Adjusted operating income for the packaged beverage segment increased seven 9% after accounting for a double digit increase in marketing investment as pricing and productivity more than offset higher inflation and the videos.
Turning to beverage concentrates, which posted strong and balanced growth in fact walked at.
Net sales advanced 17, 3% with favorable net price realization and higher volume mix.
But a photo mask was fueled by Dr Pepper, Canada dry and crash adjusted operating income for the December for the segment increased 21% driven by the strong net sales growth and lower marketing expense due to timing.
Coffee systems net sales grew five 2% in the quarter driven by our recent pricing actions and higher port shipments volume mix declined warfare as at eight 5% growth in port shipments was more than offset by a decline in brewer shipments as I mentioned.
Brewer shipments were down 15% versus last yet, but 16% above the pre COVID-19 period.
Adjusted operating income for the quarter decreased 15, 7%, primarily due to broad based inflation, which included the highest yet over yet getting coffee cost this year.
Higher price realization and productivity continued to lag inflation.
But we expect an improved relationship for us.
Yeah, it'll be to get inflation rate moderated significantly from the peak and the contribution from previous pricing actions be.
Becomes fully realized in the coffee PNM.
And finally, Latin America beverage net sales advanced an impressive 28, 8%.
Balanced between higher net price realization and increased volume mix. The strong net sales performance in the quarter was led by Benefiel claw muscle March and square.
Adjusted operating income increased 13, 5%, reflecting the strong growth in net savings and productivity, partially offset by inflation and the significant increase in marketing investment, which increased at a faster rate than the sales growth.
Okay.
I would like my spend a moment discussing our expectations for the balance of the year.
Our strong execution gives us confidence in our outlook and we are reaffirming our guidance for full year net sales growth in the low double digit range and adjusted diluted EPS growth in the mid single digit range.
Supporting this guidance, we expect the following assumptions.
Adjusted interest expense is expected to approximate $425 million.
The adjusted effective tax rate is expected at the high end of our guidance the age of 22 to 'twenty.
22, 5%.
Diluted weighted shares outstanding are estimated to be approximately 143 billion with that let me hand, it back to Roger for some closing remarks.
Thanks, George before moving to a question and answer.
Let me spend a moment on recent organizational announcements on Monday, we announced the appointment of our new CFO Saddam Shaw three other issue.
Who will be joining us on the wombat 14 so.
<unk> is a seasoned global finance strategy and operations executive with significant go about experience, including in the beverage and retail industries.
It can be a strategic partner to all of our team as we deliver against our commitments scaling our business for growth and continue to successfully navigate the complex macro environment and we look forward to introducing him to you soon.
Earlier this month, we announced a strategic realignment of our supply chain organization to accelerate enterprise wide productivity and speed of decision making.
In doing so.
Average AUM on a strong supply chain bench promoting free expedia and supply chain leaders with fragile Johnson, becoming our new chief supply chain officer.
The move builds on our strong supply chain Foundation, and we believe positions us well as we head into 'twenty 'twenty free.
In closing, we believe that our attractive organic growth coupled with our significant inorganic value creation opportunity.
Loss to continue to drive strong total shareholder return results over time.
I'm excited about the talent and the structure, we are building to continue to execute against our opportunities with excellence.
I will now hand, it back to the operator for your questions.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Please limit yourself to one question for today's call you may rejoin the queue. If you have a follow up.
At this time, we will pause momentarily to assemble our roster.
And our first question here will come from Bryan Spillane with Bank of America. Please go ahead. Thanks.
Thanks, operator, good morning, everyone.
Morning.
So what was on you know we get a lot of questions. This morning about brewer shipments being down in the quarter as much as they were I know you talked a little bit about this dynamic even earlier at the Barclays Conference back in September , but I guess can you help put this into a little bit more context.
How this tracked relative to you know what your expectations were.
Maybe about you also just how you're you've planned for holiday this year against this backdrop, where theres certainly going to be less.
Discretionary spending.
And maybe within that just how youre addressing maybe the value equation of the keurig system.
Against the backdrop of consumers tightening their belts.
Sure. Thank you very much Brian .
First of all let me address the your first question on the Brewers in the end the decline as we have discussed we remain on track to add 2 million new households into the keurig system in 2022.
Which is consistent with our long term trend as we have been talking and as expected.
The elevated rate of 3 million that we experience in 'twenty, and 2020 and 'twenty one during the period of increased at home Covid behavior.
Therefore, it is very logical that we would need to sell.
A few words Brewers in 'twenty to 'twenty two to support the additional 2 million incremental households versus the 3 million that we have generated in 2020 again in 2020 one.
As we have said many times in the past shipments and consumption are not compatible over a short period of time, such as one or two quarters and again.
Not in the number of Brewers phase business as we communicated many times, we don't generate or make money on the brewer sales and their road years I'm sure you will remember that we sell we sold much less than what we are targeting this year for example, and still generated $2 million incremental households.
What matters is the composition of the annual saves that goes to the replacement cycles and several other factors that are at the end generates the incremental households, so that's very important to note.
The second part of your question in terms of how that plans on how we see the ecosystem and so forth as we also communicated before we still see 50 million incremental households that to be recruited into what cuda ecosystem.
That means if you take a long term horizon minimum 10 use them plus a parental graft is evading us around the corner and that's what we have been executing against and then we look to the near term as you ask are the holiday programs and so forth as we always do.
We have a we have very effective trade and the consumer programs, including uncoupled to me that a lot of innovation that we have been putting in the marketplace, we think ourselves Brewers and that made us successful at that.
That is ready to have another good Q4 holiday season, as well as continued into 2020 free therefore, a V C. Absolutely no problem and there is no any reason for us to deviate from a lot of long term target of creating 2 million incremental households on a year in year out basis and that's what.
But we are going to do.
Our next question will come from Lauren Lieberman with Barclays. Please go ahead.
Great. Thanks, Good morning, just I'm going to ask my real question, but just kind of put a fine point on and your responses now it's on to Brian's question.
Just wanted to be clear that your expectations are for Q brewer shipments and what's embedded in your guidance is very much in line with this expectation for slower deceleration household penetration because I think again, it's that.
Plan versus a market reality I think that that people are asking about so that just test that validate that that approach.
And my second and kind of real question was just to talk a little bit about private label performance and pardon me you spoke a bit about it also in your prepared remarks, but we have started to get some questions. There on getting a little bit of a park up in private label. So if you could talk about and you know your I guess participation in private label.
How this has an impact or it doesn't in terms of the margin he business and if you expect that private label performance to change at all going forward when you're kind of you have two dynamics. One is reinstating marketing you and your partners on Brent on branded coffee, but on the other hand.
<unk> increase and inflation to the consumer and so you know, perhaps more impetus to trade down thanks.
Thank you Laura.
And so I'll break your question I believe into into four parts.
And the first the first part the answer for your first part of quick question, Yes, absolutely and our guidance not only on a planning stance spaces, but in reality as well that includes to deliver 2 million incremental households for 'twenty to 'twenty two.
And we are quite certain in our numbers as you know we have a tracking mechanism and that's right. That's right. That's where we are at this point in time, when we step back and look at it with regards to be slowing down their consumption.
There are quite a bit of noise that we need to do a double click and provide the context a combination of Ah.
A combination of the increase.
Increase in mobility, especially early in the summer months following the post COVID-19 environment, along with the retail pricing actions combined 50 are less investments into I'd say it has been in promotion as well as consumer activities reached allotted one complete the net due to supplier.
<unk> parts supply issues that we have encountered and then when you got out of it fully at the end of quarter. There too. So all these combinations and how about I know. This is also suggests that the mobility increase was the out paced won an outsized one that impacted negatively.
Consumption in terms of the.
What consumption however, it.
The investments coming back and if life going back to more normal like the school season kicking in and also people are starting to go back to more to the offices. I mean, you started to see improvement in the consumption. For example, when you look to the market data in September versus July and August you would see an improvement in it.
We're also off to a good start into core therefore, which is October . Therefore, we have reflected all of these into all of our plans for the remainder of the year.
And and we are quite certain that I'll, let it go off the in the single serve meals continue both from a topline and bottom line perspective, and as we said in our prepared remarks as well quarter free had the highest absorption rate in terms of the green coffee beans, which created quite a.
The pressure in our P&L in Q3. The good news is that is behind us and therefore, the inflation rate that we are going to see in cord. Therefore, there's going to be significantly less versus the first three quarters that we have sent and due to the spike of our base last year. Therefore.
Several factors that are that are really enable us to deliver a very good corner in coffee in quarter. Four so that's our that's the important part and the last part of your question with regards to the private label.
When we when we actually look to the entirety of our portfolio.
We would see that I'll watch.
The private neighborhood exposure is limited.
Especially on the menu look to the carbonated soft drinks, we have very limited competition coming.
Coming from the private pay but when you look to the fruit juices that as soon as a healthy amount of competition in the private label yet as the data are I'm sure that you have looked at it we continue to increase market share in that category, which we have been really doing well on the base of a whole lot of innovation in market execution and the strong brands of.
All of that we have and on the coffee private label. Please remember that we are still in love just a produce ash and the manufacturers of the single serve K Cup pods for the private label sector as well so if the private label increases cash or debt.
The ongoing on maybe when they still contribute and participate to the economics of that given that we are still producing a vast majority of the private label K Cup talks. That's why we believe that our ecosystem is really intact again goes back to all of our all weather business model between the cold beverages and the coffee.
And we expect to have a very strong Q4 across the enterprise, but what would you like to add anything.
Yes, good morning.
It's a as we said over the past four years is always helpful to look at the keurig system not on a quarter by quarter basis, but over the long term there are a lot of fluctuations up and down but every time you step back and look at that the performance of the ecosystem over six months nine months or a multi year basis, the trends become really clear. So let's go back to that we've always said too.
Households for years, our target is those on said that gives us more than 10 years of line of sight to more than 10 years of very attractive growth as we convert.
More than 50 million households, or more than 50% of the U S population actually.
What we saw during COVID-19 or a couple of things that change. The household penetration went from 2 million to $3 million. We always said it was going to revert back to $2 million. We saw an increase in attachment rate you said it was going to normalize which it has we also I would remind you saw a spike in premium coffee brands at the expense of private label on our point of view was that would normalize over time.
<unk>.
We're relatively indifferent to that given that we participate against all of those the biggest concern that investors had the weeks when we talk to them was not that any of what I. Just said was going to happen, but rather there was some sort of pull forward. So the 3 million would translate into less than 2 million going forward, whereas we sit here today here's the good news we're on our long term.
2 million, which we always said attachment rate is back to normal levels and healthy and the balance between private label and premium and mainstream is back to where it was before and we participate in all of those the only noise in this period as it was on talked about is when you go from 3 million to $2 million, you don't need to sell as many brewers to <unk>.
Support that but as we said we're not in the brewer business, where in the household penetration business and 2 million households is exactly where we want to be and it sets. This up for a very very good future.
In this ecosystem.
Okay.
Our next question will come from Nik Modi with RBC capital markets. Please go ahead.
Yes. Thank you good morning, everyone.
And and maybe even Bob you know I'd love to hear your thoughts on that.
The deal environment, you know in terms of valuations any things that you guys have been looking at that that seem attractive obviously not getting into the details, but you know given your commentary historically about you know.
Cash flow cushion and balance sheet and the desire to do more deals I just would love some context on that and then just a quick follow up on on the coffee side. Some of the work. We've done would suggest there's been a fair degree of increasing interaction between them.
God away from home coffee like cafes, Starbucks and package bottled coffee that you can buy at retail and I was just curious if you had any thoughts on that or if you've looked into that at all thanks.
I'll start with the M&A environment or something then you can pick the second part of that question up.
Next we monitor the M&A environment and we continue to see what we described previously is a relatively easy funding situation for high growth companies starting to change and that continues to do so new investment for them is becoming more challenge. If you look at the public valuations as a marker.
For the few companies in that space that.
Match that high growth get your criteria you could see the change in investor sentiment reflected there pretty aggressively. So we continue to see an opportunity for us to be a catalyst.
Our goal is always to create win win partnerships, we're not out there trying to buy something at a low price, we're really trying to step in and be able to solve a number of challenges for these high growth businesses by creating a partnership that works for everybody and take a look at what's happened just in the recent past with polar and tractor beverage at 80.
Peak now on this call we're talking about Red Bull, Mexico. If you think about it every call we talked about a new piece of news, we're layering in more strategic businesses or segments into our business and as that continues to build.
It makes us a stronger company going forward I would also add to that list all of the independent distributor acquisitions that we've made over the past couple of years it significantly strengthens our distribution system. So we're going to continue to do so I would say that as we continue to engage in these discussions and we have numerous discussions right now we're very clear on our strategic priorities we're really.
Confident in our ability to assess the value to Katy P and K DB shareholders and we're incredibly flexible in our approach on how to make these partnerships work. If you look at the track record of our success in and creating value and growth for the partners I just described as well as the continued growth.
Do we have on our long term partners like Evian and Vita Coco met Cafe.
That is very attractive to emerging beverage companies. So it allows us to have a seat at the table in a in a <unk>.
Number of these conversations and we're in we're very optimistic they will continue to play out in the way that I described.
Yeah, I'm going to talk about the interaction with their coffee, absolutely and actually I like to double click on that because it's a very important point, Nick that you mentioned them and stuff. They stay at home consumption. So at the onset at the onset of Covid due to the Lockdowns and so forth. We have seen a significant increase you know what attachment rate.
With regards to the single serve consumption at home, Boston, USA, and Canada and over time, if the mobility, increasing and as we were expecting and in line with our plans, which is a kind of post COVID-19 scenario that the attachment rate has started to come down and please bear in mind before the call at times, our attachment rate.
Has been very very stable for a long time, that's what I'd call. It was the on the exception that made it a spike and then came down more or less to the bad previous.
Previous Ah corporate levels as we speak right now therefore, that's an important point to note at the same time when Covid hit obviously a lot of way.
From home office business, which is how we define for the most part not all but for the most part also saw significant declines I debate right now we have seen improvements by the still significant the law pass again, the office coffee business that we have versus the pre COVID-19 levels and therefore, we see this as an APA.
<unk> bought in quarter, four and beyond that along the office habits build back that we will see our fair share in that segment at the same time. So there are quite a bit of interactions between the two and also as you said are right now.
Again, with the mobility increases, especially out in some and we see that the coffee shop products are being consumed more as one would expect.
Moderation at the at home consumption. That's what it is you set that up quite a bit of a intersection points that when you step back and looked at all of our portfolio. The good news is we are playing in all our in terms of the overall acuity ecosystem that we manage which is very important and goes back.
Again, another very strong leg to our all weather business model that we have successfully put together. Thank you.
Our next question will come from Chris Carey with Wells Fargo Securities. Please go ahead.
Hi, good morning, good morning.
Can you just confirm maybe the key drivers of the profit delivery and coffee this quarter between the <unk>.
Green coffee inflation youre seeing versus other.
Other inflation.
Other commodities or supply chain inefficiencies I'm, just trying to frame the coffee coffee operating profit performance in the context of pricing, which as you know building in mix switch.
It is more favorable for parts in the quarter, which should be mix accretive.
And then just just connected to that.
Wonder if you could just maybe frame how you see these toffee margins over the longer term horizon right like if this is a.
Structural reset because maybe the cost of doing business is higher or this is just about.
Commodity inflation and you should be catching up to these.
Yeah.
Inflationary headwinds overtime and I apologize. If this is just a confirmation on the model, but the extra week in Q4, that's been allowed in coffee would you expect to grow above the impact of the extra week apologize for all of that but thanks for the context.
No problem. Thank you very much so I will break up the question into three components.
So first of all the major drivers and how are we looking to the profit doubled retail coffee in the quarter definitely the major determinant and the driver of coffee P&L in Q3 was the absorption rate off the coffee beans, Green beans, which is all we sell it at all material that we use.
In terms of the negativity that at Kohl's in our P&L why because when you look talk about a base last year, you would see and we alluded to this during our last call the true cold as well last year, we had seven at all our hedges that came off in Q3, and which means that.
That a lot of inflationary step up was significantly higher in Q3 with regards to the coffee beans versus the other quarters and good news that's behind US. That's one of the reasons why we have a solid funds and we expect to see significant profit improvements in quarter four as well at the same time.
Our pricing continues to build up.
And and we believe that in quarter four we will be in a position that our pricing will fully catching up to the inflationary factors. As you said the inflation was broad based it's not on the coffee bean spot across the other materials in the ingredient sent to me have been using but I'll, let al go near term Cleveland suggest that.
Q4 will be a very good infliction point, although only for a coffee bought for the cold beverage business that we also have.
And these basically mirroring coffee P&L do you expect to mirror more of and that's what has happened in the cold beverages, as we had been expecting and communicating which was.
The pricing are coordinating quartet out was getting closer to the inflation and at one point that pricing would be fully sufficient to.
Overcome not only the absolute impact of the inflammation, but the margin percentage wise as well and that's what has happened in our lives. For example, when you look to beverage concentrates in the packaged beverages segment is set to be Helen ounce and we expect that positive trend to continue into quarter. Four so coffee is a little behind like a core that but that's what.
It's going to happen exactly.
And then we should not also forget that are obviously, we are continuing to build the productivity programs. And then Q4 is as has always been the case would be the highest delivery core that for us at the same time, therefore, a b C Q free coffee.
Inflationary trends in relation to the pricing and the negative operating income delivery. It transitory core there for us and we expect a very strong core therefore for the reasons that I have just articulated.
Absolutely, we do not expect any structural issue a reset with regards to the coffee margins going forward and as I say, a b will be able to see a very strong actually the improvement in core therefore, there's no any reason and and as we discussed before the obviously coffee margins is one of the highest in our lives and overdose.
P G industry as well at the same time. Therefore, we were very pleased and we are very pleased and Theres no structural change that we are forecasting for any reason the last part of your question with regards to the 54th week extra week in the in coffee as well.
We said before it is true that we have few days not even a week because of the holiday season, Andi and most of the retailers being shut and the consumption and that the sort of the sell out.
In that a week, which is the last very last week of December is this love us and as almost a minimal no no. There's almost but it is very very small numbers that it wouldn't change our profile with regards to the cord. Therefore, it will have little impact to the growth rates as well.
That's why we have not quantified that number that we spoke before and communicated giving D. A.
Very minimal impact on our numbers.
Okay.
Thank you.
Our next question will come from Bonnie Herzog with Goldman Sachs. Please go ahead.
Thank you good morning, everyone. Good morning, I wanted to circle back to Brewers at that question and hoping you could touch on your inventory, which I know are quite high up 60%. This year. So wondering how much of this might have to do with retailer inventory levels of.
Ive Brewers being elevated and then therefore retailers arent ordering or buying as many breweries.
If that is something that's going on you know how big of a risk do you believe this is in the next quarter or two for you and then.
Quick clarification of your mid single digit EPS guidance for this year.
Last quarter, you mentioned you expected your second half EPS to be up high single digits, driven largely by Q4. So just wanted to verify that you know high single digits and two agents still expected or is maybe mid single digit growth more realistic and you know that would I guess result in your full year EPS growth, possibly coming in at the low end of.
Mid single digits. So just clarification on that too. Please thanks sure. Thank you Bonnie So let me start with the Brewers.
We need to get the context right in terms of the group with a P. O S. As vendors you sell outs.
As I explained due to the supply chain issues that have you started to encounter late 'twenty or 'twenty one.
And it impacted a good chunk of the first half of this unit as well they had very little investment in the category, including new Brewers, because simply we didn't have including all our partners, including our large retail partners to sell enough. Therefore that definitely curtailed the demand. So that this is a fact now.
And at the same time, a giving all the supply chain issues that the whole up landfill has faced in the last three years.
<unk> been continuing to execute and and co manufacturing and bringing to the USA in order to keep our pipelines are intact. When you step back and do a cat at the smaller appliances at the retailers that you would see some longer inventory levels that they are facing but please make sure that.
When you do the double click in that number and you see that the the single serve the Brewers as smaller plants is in fact, he's doing way better than the overall small lap dances retained number. Therefore are the headlines that we are seeing a if you don't do it to the double click released quite a bit of misleading we do not see.
That kind of a inventory long term being carried by the retailers and the retailers. That's number one second it is also true that we have a little bit more than more inventory than in previous years. It just because of two Fox first we wanted to be ready for the holiday season that we are facing and we at all.
So increasing if you count the investments behind the ecosystem, along with our partners along with the customer.
The retailer customers as well therefore right.
Right now we are seeing a very good traction that we stopped it into core. Therefore, therefore, we are not worried at all with regards to the inventory levels that we have and always at ups and downs that we have faced in the last seven years at.
At acuity business therefore the.
The overall system and the brewers, including the consumption in relation to the investments. It's one big circle than VIP to my children and tacked on that one let me say it more because I think part of your question and Brian also.
We're also hinting at potential concerns about the environment in Q4, let me make a couple of points on the holiday season. This year one of the things that we've seen is them whenever there's a challenging economic time gifting tends to shift from the indulgent are frivolous to functional.
And there's no better functional gifts than are gonna cured Brewer, we have a wide range of price points from entry level, all the way up to premium we have an incredibly wide range of retail distribution.
From e-commerce through all channels of brick and mortar distribution.
And we're already seeing a number of retailers very early are already pushing keurig is one of their prime a premium or prime.
Promotions going into the holiday season, and we continue to expect to see more of that so I know there are some concerns as you guys have articulated about inventory levels and purchase power and small appliances, but it's also I'd point out if you double click on this you see that single serve Brewers and surety in particular are doing incredibly well and we expect them to have.
A strong holiday season, but again, all consistent with driving 2 million households penetration, which is what all of this is about.
Exactly thanks, Bob and also the second part of your question with regards to the EPS, Yes, a core that Ford is expected to be the strongest quarter of the year as we expect to deliver margin improvement and accelerated EPS growth.
There are several drivers to that they've each the full benefits hold price realization.
And as we announced publicly we have taken another round of price increase behind our carbonated soft drinks portfolio early cord. Therefore that we will continue to deliver further top line and contribute to our profitability and also lapping spike in installation this quarter, if you would remember.
Last year in quarter four in 2021 and we had a big installation a step up which means that we are lapping a less increase this year compared to the first three quarters of this year. So that will drive further profitability in the full realization of productivity this year that'd be like.
To the core therefore, and again led by our supply chain issues that we ran into especially behind our coffee business last year, we had seven out of the one time unexpected costs, including the accustomed with penalties that we stated publicly as well that will not happen this year that for lots of a REIT.
<unk> Ah why core therefore, it will be another strong quarter from the top line as well as especially bottom line perspective, and we also expect to deliver a positive margin improvement, which would be in a good inflection point for this quarter.
Thank you.
Our next question will come from Brett Cooper with consumer Edge Research. Please go ahead.
Good morning, everyone. Just one quick question I wanted to.
Wanted to double click on the supply chain organization change and I was hoping you could help us understand the rationale for the change.
Whether that changes are leading edge change for the enterprise and then just.
Just help me understand how that nets higher productivity.
Absolutely I mean are the always look for opportunities across our business either.
Javier operate their ways of working that we also align our organization Accordingly, as you know approximated two years ago, we moved a little bit from the function onto more business unit net organization structure and these day. This moves are in support of that board, taking it to the next level nothing new.
Is that around the edges and not that we have any issues, we have encountered in our supply chain or any unresolved issues that we are trying to tack on to the contrary as we have been talking at many different platforms that our supply chain.
The organization as well as the supply chain fundamentals improved drastically across two businesses that we have in the cold beverages, especially in coffee there.
This.
This organizational change is making all of our supply chain to get even closer to the business unit that we do expect to see a faster decision making.
These are at the right time with the right players around which would eventually impact our productivity programs as well.
And it'll be the more info on how these change may impact of our productivity programs, but at the.
The first six to nine months because of the supply chain issues that we have faced especially in coffee, but not limited to coffee.
In some brands important brands like a smartphone as we communicated publicly caught them by in a little bit in the CST is that we ran into some.
Supply chain.
Issues in fact are the.
The focus.
Whether that'd be like these are not that event towards getting a correcting all those issues that we have faced because that's what we should have been doing and these are putting those problems behind us and with the new organization that we made a small changes now enable us to focus on much.
One productivity they leave Eddie either in quarter, four or next year as well. So do you see as the sum up of the impacts that we expect from the latest supply chain changes. Thank you very much.
Yes.
And our last question today will come from Andrea Teixeira with Jpmorgan. Please go ahead.
Thank you good morning.
So I also want to have a clarification on the coffee side I'm sorry for.
Going back to that and then Bob on M&A first can you comment a little bit on the sell out for our divorced from a replacement standpoint, which I understand is it still bigger than the new households of course, the razor Razorblade model, we would like more households, but I don't want to underestimate what's happening.
The filter to a single serve.
And then Bob on the variable distribution agreement in Mexico first congratulations on that and should we see more of this deal was.
Nation, but or perhaps you know testing the waters for a potentially extended agreement, including the U S and it's not.
Keeping your firepower M&A.
We should be thinking about opportunities in the energy. Thank you.
Absolutely. Thanks, Andrea let me start with coffee and the Blue part.
First of all.
We are very pleased and more importantly, the brewer sales exactly in line with what we were expecting so that's very important to note.
So when we are when we look to the composition of a whole lot of Philadelphia is as you know we never broke that out putting 10 himself. So many brewers.
Brewers that we sell goes to replacement and other factors as well, but you're absolutely right replacements placements have been and will play a much larger enrolled in terms of the percent of our sales are in our blue water units are that is a fact, but what is also important as we have been saying the.
Incremental households that we will be driving that has too many levels. So that's why for example, <unk>, which we did improve the our brewing qualities. Obviously the life expectancy of the Brewers extended which means there is a replacement cycle got long gas, which means that we required and that's proven to south.
But that still enables us to deliver the 2 million incremental households that we have been delivering many successful. They all made 3 million bought in 'twenty to 2020 'twenty, one with no pull forward as well from 'twenty to 'twenty, two or even to be onto years. Therefore, our replacement our brewers Uh huh.
Has been and will be our realities and we will continue to improve our.
Our blue qualities and expect them to further extend the lifecycle and also we have increased and continue to increase our innovation cycle in the Brewers.
Enable us to top to the new consumption occasions, and with the new format says well, let bill for that give us the incremental top line as well as the bottom line. Therefore, we are quite pleased with the overall, but it would put four months that we have put together and feeding of our ecosystem bump on the Apple Yeah I'll refer back to.
To our Investor day, a little over a year ago, when we talked about the role of M&A and partnerships and we said that we had a number of criteria. One is we want to add on to our existing portfolio and leverage.
The infrastructure, we have in place, particularly our DSD system, we were really interested in new platforms, particularly in energy and alcohol or we saw good white space opportunities and we also talked about you know we've got these incredibly strong businesses in Canada, and Mexico that we really don't talk much about and we saw opportunities there so quite simply when I look at the new arrangement.
With Red Bull in Mexico, Mexico, We think about that hits on energy and it hits on continued expansion in Mexico H a peak was expansion within Canada. So we are beginning to.
AD into these opportunity areas that we identified about a year ago on a more aggressive way and all I will say on the Red Bull Mexico pieces. Our goal is to do what we do with all of our partnership which is demonstrate incredibly strong value added for our partners drive growth for them and that always leads to more opportunities in this.
Future and I would expect that that would be the same in the case of this one.
Before I think I'm turning it back over to you was on before I do that I have to at.
In my new role here I have to say, we didn't get a single question on our cold beverage business today.
And I want to give a shout out to our cold beverage team, who delivered another incredible quarter of revenue growth market share performance record profitability and they continue to hit it out of the park and they kind of feel left out on some of these calls so I wont knowledge their strong performance.
As it shows up in our EPS.
And our overall financial delivery to take ADP, so horizontal turn it back over to you yeah. Thank you very much.
Thank you very much to all of you as well Steve. This is Steve with the IR team Jason are around all day do you have any questions and we thank you all for your time participating on the call today, Thanks and have a great day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.