Q4 2022 Keurig Dr Pepper Inc Earnings Call
Good morning, ladies and gentlemen, and thank you for standing by.
Welcome securing Dr. Pepper's earnings call for the first quarter or full year 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 now like to introduce Keurig, Dr Pepper, Chief Corporate Affairs Officer, Maria Scrubber Guccio Scrubber Garcia. Please go ahead, thank you and Hello, everyone.
Earlier. This morning, we issued a press release for the fourth quarter consistent with previous quarters, we will be discussing our performance on an adjusted basis, which reflects constant currency growth rates and excludes items affecting comparability.
The company believes that the adjusted basis provides investors with additional insight into our business and operating performance trends.
Well the excuse loved the exclusion of items affecting comparability and to use of constant currency growth rate are not in accordance with GAAP. We believe that the adjusted basis provides meaningful comparisons and an appropriate basis for discussion of our performance.
Sales of the excluded items are provided in the reconciliation table included in our press release, and our 10-K, 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.
Today, we will also speak to the concept of underlying performance, which removes the impact of previously disclosed non operational items.
In 'twenty two these items included gains on asset sale leaseback reimbursement of litigation expenses related to body armor it business.
Interruption insurance recovery and a change in accounting policy for stock compensation.
Here with us today to discuss our results are KGB, chairman and CEO , Bob Gymboree, and our Chief Financial Officer said aren't you put you darcie.
Also with US. This morning is the IR team, including Jane Gelfand, well, we are excited to welcome. This week as our new Vice President of Investor Relations and strategic initiatives.
I'm confident that many of you know Jane from her time on the street as well as her most recent role that way fair, where she led a number of finance functions, including Investor Relations and Treasury.
Jane is replacing Steve Alexander we after more than 16 successful years in finance commercial and I are with KCP and predecessor companies have decided to take some time off for family and travel.
We are pleased that feed has agreed to stay on through April to support the transition.
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 upon subsequent events a detailed discussion of these risks and uncertainties is contained in the company's filings with the SEC with that I'll hand, it over to Bob.
Thanks, Maria and good morning, everyone. In 2022, we continue to advance our vision of a modern beverage company by expanding our portfolio to reach more beverage consumers' needs and occasions and by enhancing our unique selling and route to market capabilities to make our brands available at every point of sale.
Yeah.
Our full year financial results were in line with or above our guidance with revenue growing by 11% and.
And adjusted diluted EPS expanding by 5%.
Since our Q3 earnings call, we had the opportunity to engage with many of you twice.
First at our early December in person event, where you met the ADP management team and board of directors.
And again on our mid December Fireside chat during which we discussed our investment in neutral.
The distribution agreement for <unk>, four and answer questions regarding recent trends and the categories in which we compete.
Those conversations provided us with a good sense of what's top of mind with our investors, which we will build upon during today's call.
I'll start by providing perspective on the macro and category environment, we faced in 2022.
Discuss how we created shareholder value over the past year.
And offer thoughtful on how we see 2023 shaping up both in terms of the macro environment and our strategy to continue winning.
<unk> will follow me with specifics on our Q4 and full year 2022 results for <unk>.
More detailed guidance on key metrics for 2023 and discuss the evolution of our capital allocation policy.
While it seems like a long time ago, we started 2022 with the lingering effects of supply chain disruption, primarily driven by our final COVID-19 wave that reduce labor availability in late 2021 in early 2022.
We felt that impact most acutely in our coffee business were strong 2021 consumer demand had depleted our inventories.
And in our still beverage portfolio, where we face a range of supply shortages.
We implemented supply recovery programs that yielded strong customer service and pregnant with replenish inventory levels.
By Q2 or concerns around Covid and supply chain disruptions were quickly supplanted by industry inflation ingredients and materials labor and transportation that was.
The outpacing significant pricing.
[noise] elasticities held up well in the categories in which we compete which enabled strong revenue growth.
Driven by both the higher pricing and increased volume, but came at lower margins.
For perspective, we faced total cost inflation in 2022 up 16%.
Barb off our expectations going into the year.
And we implemented pricing actions across our portfolio that averaged in the low double digits.
Pricing realization was strong and accelerated throughout the year you had a consistently lag the timing of the escalating inflationary impact on our P&L.
As we approach the ended the year and enter 2023, we became more focus on the potential impact of recession on our consumers despite seeing minimal evidence of changing behavior to date.
We are monitoring consumer behavior closely and are taking proactive steps to ensure our brand strength continues into 2023 and beyond.
Of course, the wide range of challenges of 2022 with a continuation of the rolling set of obstacles, we have navigated since the onset of Covid in 2020.
In this context, we have discussed the benefits of our all weather business model.
This is more than a punchy soundbite it reflects our ability to manage our broad portfolio and unique routes to market to deliver strong and consistent shareholder returns in an unpredictable and changing environment.
As we did in 2022 and every year since forming <unk> ADC in 2018.
In addition to delivering our ambitious financial commitments over the past five years. We've also been immersed in an integration and transformation process that created a modern beverage company.
Today can consistently deliver attractive high quality dependable returns with a well capitalized balance sheet.
Toward that end, we have evolved our capital allocation policy to reflect that of a more mature ADP.
And to be contemporary with a changing macro environment marked by rising interest rates.
During the integration and transformation stage, we had a strong focus on rapid deleveraging.
Using all available levers available to us while still investing in building our capabilities and brands.
We took advantage of compelling opportunities to monetize non strategic assets through sale leaseback transactions, which enabled us to simultaneously invest.
De lever and drive strong returns for our shareholders.
As we shift from integration and transformation to activation, we are planning for a step change reduction in the use of non operational benefits starting this year.
That means our underlying operational growth will exceed our adjusted growth in 2023.
Of course, our guidance will continue to be for adjusted metrics and we will report results on the same basis, we've always done.
But we will also highlight operational performance from time to time to provide you with a better sense of the underlying strength of our business.
Strong cash flow remains a hallmark of ADP.
As we discussed in December we plan to deploy our cash to improve our long term targeted leverage ratio to two buybacks or below.
While still funding strategic growth projects and attractive return of cash to shareholders.
With the learnings from 2022 in mind I'll shift to a discussion of our 2023 outlook starting with the most pressing industry topic from last year.
Relation.
Our plan assumes the rate of inflation will moderate to the mid single digit range.
That translates to a cumulative in freight and rate of approximately 30% over the past three years.
Clearly unprecedented in our lifetimes.
Regarding the inflation outlook for 2023 recent spot price declines of key inputs might lead some to believe there could be industry deflation.
The reality is we don't buy on a spot basis and the underlying commodity cost doesn't reflect the total delivered cost to us.
Such is certainly the case in coffee where seat prices dropped in late 2022. However.
However that differential which includes everything and are fully landed coffee costs, such as broker fees seek rate in premium coffee up charges was up meaningfully.
Labor is another area in which we're continuing to see persistent inflation.
To offset the continued impact of inflation, we have upped our gain in productivity reduced our discretionary costs and increased pricing.
The realization of 2022 pricing actions will continue to flow into our P&L during 2023.
And in some areas where continued inflationary impacts are not yet fully cover bike pricing, we have implemented additional revenue growth management actions to address key margin gas.
The combination of moderating inflation and continued pricing realization means that we expect year over year improvement in gross margin in 2023, but not yet returning to 2019 levels.
With higher gross margins in view for 2023, the conversation shifts the demand.
A key focus point for us in 2023 is the financial health of American consumers and its impact on price elasticity for the categories in which we compete.
Therefore, we believe it's prudent to expect that lower but still positive year over year pricing realization combined with modest elasticities will your GDP net revenue growth of approximately 5% in 2023.
It's also important to be proactive and ensuring the continued strength of our brands by increasing our investment in growth in 2023.
As we are all aware industry marketing budgets were reduced during COVID-19 and many haven't yet been fully restored.
While we have learned to be significantly more efficient with our brand spending 2023 is the right time to increase our absolute investment behind key segments and brands as well as to support our strong lineup of innovation.
The improvement of our gross margin combined with 5% revenue growth will enable us to deliver year over year improvement in operating income growth, even with our increased brand investments and the headwind of Comping significant non operational benefits in 2022.
Taking all of the macro and company specific factors discussed this morning into account, we expect adjusted EPS for 2023 to grow by 6% to 7%.
Removing the impact of previously disclosed non operational items from 2022 implies adjusted EPS growth that is toward the high end of our long term algorithm.
Our expectation for continued strong value creation in 2023 is rooted in the success of our unique and flexible business strategy over the past five years.
The cold beverage our focus is on driving growth.
First in core brands through marketing brand renovation and continued strong in market execution.
In 2022, we continued to build upon or hold a significant share gains we achieved over the past few years in total liquid refreshment beverages and key segments, such as <unk> and premium water.
Second by filling white space in our portfolio through innovation and partnerships such as our strategic relationship with neutral bolt foresee for energy and our Red Bull agreement in Mexico, as well as our expansion into new platforms, such as non alcohol beer with our investment in athletic drilling and better for you drinks and <unk>.
Foodservice through our partnership with tractor beverage.
Third by enhancing the effectiveness of our omnichannel selling and distribution system, including E Commerce, where we are one of the food and beverage leaders.
And our company owned direct store distribution system.
Over the past several years, we have built a stronger director Mark direct route to market capability through our investment in capabilities and tools and acquiring key DSD distributor territories, all of which have driven consistently strong market share performance across our brands and segments.
In coffee systems, we are focused on growth.
First by driving household penetration growth for the Keurig system every year.
Given the large number of remaining addressable households, we have line of sight to continued household growth well into the future.
As we enter 2023, we have built a U S install base of 38 million households.
Which along with our installed base in Canada consume more than 13 billion cups of coffee manufactured by TDP annually.
Second by expanding the roster of coffee partners in the Keurig system.
2022, we welcomed back community coffee and added new brands, such as Black and bold the first black on nationally distributed coffee brand and intelligentsia one of specialty coffee as most pioneering innovative brands.
Third by creating new platforms to drive incremental revenue and profit growth from existing keurig households, such as connected Brewers and new beverage formats and occasions.
In 2022, we expanded our lineup of connected Brewers with the introduction of K Cafe, Smart, which has received outstanding consumer professional reviews expanded the curing app, which works with both connected and non connected Brewers to help consumers make barista quality specialty coffee beverages at home and.
An expanded availability of our keurig slim plus ice brewer and expanded our brew over ice pods.
In 2023 August will be a significant focus area with procuring with expanded K ice machines in part supported by dedicated marketing and focused retailer support.
And finally, Adp's extraordinary free cash flow enables the potential for incremental shareholder returns through strategic capital allocation, including M&A and partnerships opportunistic share repurchases and growing our dividend within our stated payout ratio of 45% of free cash flow.
With that as important context, I'll hand, it over to Sudhakar <unk> to discuss 2022 results and our 2023 outlook in more depth.
Thanks, Bob and good morning, everyone.
Joined the company three months ago, because I believed GDP that presented a unique investment and value creation opportunity and.
And my conviction has grown significantly as im talking to understand the business better.
This conviction will be reflected in my perspective on our 2022 result, very important learnings as we look back on the year and the implications for 2023.
Starting with coffee systems.
Before jumping into specific numbers I would like to share my perspective on the coffee category.
Coffee is an attractive long term growth category.
<unk> operates primarily in the at home coffee segment in the U S and Canada, where we are the industry leader.
The at home segment comprises the vast majority of all coffee drinking occasions and single serve is the clear winner consistently growing share of at home occasions.
That has been significant noise between 2019 and 2022 in both the at home and away from home and home office categories.
Due to shifting consumer mobility.
And we acknowledge that it has been a challenge for investors to separate the signal from back noise.
After significant at home coffee volume growth in 2020 and 2021.
Due to increased consumer time spent at home.
Begin to see a deceleration in 2022.
This occurred globally in all forms of at home coffee, which is quite unprecedented.
There are several factors at play, causing this concurrent decline.
We believe the primary contributors are a reduction in time spent at home for consumers, which we know correlates with coffee conjunction as well as some elasticity impact of significant factoring actions taken in 2022.
Specific to the U S.
Consistent with global trends.
For the total at home coffee category decreased 6% in IRI with all major forms declining including back can and single serve.
Hi, water single serve coffee outperformed enabling it to gain share of total at home coffee conjunction.
<unk> owned and licensed brands demonstrated relative strength in 2022, despite having among the highest price increases in the single sub segment with the fourth quarter, representing its highest share position since before COVID-19.
Driving that strength by the strong innovation, that's designated with consumers and reinstated promotions in the second half as parts supply was restored.
We saw a similar trend at play in coffee Brewers in the U S.
Atlanta volume were challenged in 2020 to Comping against growth in 2020, and 2021, that's what family pool by time at home as well as in part by stimulus checks.
Although not immune from this dynamic keurig compatible Brewers also gained share of all coffee makers in 2022.
Moving to the financials.
For the year the segment grew net sales six 2%.
With pricing up 7% and volume mix down 8%.
<unk> revenue also advised six 2%, reflecting the benefit of pricing and a one 4% increase in volume.
Brewer volume declined five 2% in 2022 Comping the double digit growth, we have experienced each year since the onset of COVID-19.
As you know our goal is not brewer sales, but rather household penetration.
We added more than 2 million new households to the keurig system in 2022 modestly above our long term annual target.
Innovation is a key driver of household penetration and we are pleased with the performance of our 2022 broad innovation slate and excited about what's coming in 2023.
While top line growth in coffee systems was solid.
In 2022 lost operating income, which declined seven 5% as inflation exceeded net realized pricing compressing margins.
Specced and improvement in the relationship between inflation and pricing going forward, leading to a year over year improvement in gross margin in 2023.
Specifically, our 2023 outlook projects KDB coffee systems to deliver 3% to 4% net sales growth and 5% to 7% operating income growth.
Removing the impact of non operational items in 2022, this implies higher coffee systems operating income growth in 2023.
We expect a strong recovery in margins, reflecting the strength of GDP is owned and licensed brands.
A favorable relationship between pricing and inflation, particularly in the second half of the year, which will be significantly stronger than the first half.
While the queuing system is unique it's scale of $5 billion in net sales and Oi margins above 30% is consistent with our best in class CPG business.
While we continue to manage the business to drive household growth and extract incremental value from our existing installed base I think it makes sense to assess coffee systems using the same convention metrics as you would any other CPG business.
That translates into net sales and operating income performance.
Outlook for which we are sharing with you today with the pack.
Our 2023 outlook reflects the following factors that we believe are most relevant to consider.
Bust, while mobility has recovered significantly from 2020 lows. It still remains below pre COVID-19 levels and we expect continued recovery in 2023 to represent a headwind for at home coffee consumption, especially in the first half.
Second the industrials pricing actions taken in 2022 will have a carryover benefit in the first half of 2023, which will have a modest negative impact on volumes.
As discussed total at home coffee volumes declined during 2022 and these category trends have continued in early 2023, although single serve importantly continues to outperform.
So we see a rapidly evolving retail environment for small appliances.
Challenges in key mass and department and ask the specific deal is impacting the availability of other brewers.
We are targeting alternative channels, such as e-commerce to pick up the slack Psywar. We believe it's reasonable to expect a modest decline in keurig brewer shipments year over year in 2023.
These factors, which will have an influence with great <unk> results in no way alter our bullish long term outlook for the coffee category are avid expected outperformance for the single serve format.
Turning now to our cold beverage business, which performed very well in 2022 and into 2023, even strong momentum.
Beverage concentrates had an exceptional year in 2022 net sales grew 16, 4% with net pricing up 14, 7% and volume mix up one 7%.
Dr. Pepper brand drove the performance largely reflecting the expansion of Doctor Pepper zero sugar and strong in market support.
Dr Pepper zero sugar detailed dollars and volumes each grew in the strong double digits. During 2022 outpacing the judo sugar segment, reflecting net price realization strong velocity growth and incremental distribution gains.
Beverage concentrates at adjusted operating income grew 16, 9%.
This reflected the favorable relationship between pricing and inflation.
The shared benefits of bauxite pricing actions, one Wally minimally offset by inflation given the margin structure of the business.
During the year. We also benefited from the opening of our New Bridge, Ireland concentrate facility, which represented a dual source of concentrate manufacturing book ADP.
The new facility had a smooth and successful start up in 2022.
Looking ahead to 2023.
We continue to be excited about the beverage concentrates business, particularly given our strong innovation offerings, including the first quarter launch of Dr Pepper strawberries and cream.
We expect the segment to post operating income growth in 2023 that moderate versus a strong 17% growth.
<unk> in 2022.
This reflects our expectation for a reduced benefit of pricing in response to the expected lower level of vehicle where your inflation.
Continuing with factories beverages for the year, we grew net sales 12, 4% with pricing.
Strong 12, 1% and volume mix up 3%.
Elasticity is for the business remain modest due to the strength of our brand portfolio.
The juice category moths continued to be a stand out driving double digit growth in both pricing and volume 40 years and gaining an impressive 3.6 share points in a category in which it's primary compotator is private label.
It just it operating income for package beverages, three 1.2% in 2022.
A strong net sales growth and productivity were largely offset by inflation ashville as a negative you'd over here nonoperational competition.
Similar to coffee systems, adjusted operating margin for package beverages compressed for the ear due to the timing disconnect between inflation and pricing despite our ability to realize more pricing and cold beverages, then and coffee systems.
Importantly package beverages exited the yard with a strong underlying momentum.
Turning to 2023, we expect a strong next year's growth package beverages that moderates forces that 12% growth in 2022.
The impact from carryover and select new pricing actions is expected to be less significant than the pricing benefit realized in 2022.
Net sales will also benefit from our recently announced distribution partnership for seafood you know your dreams.
Integration is well underway and tracking other plans.
Package beverages has a strong you know with the lineup plan for the year, beginning with an active plush corner.
N C. S is the highlight will be the Q1 launch of Dr. Pepper, strawberries, and cream, which is diagnosed a strong consumer response, achieving a 1% sure. So C. As these in the very early stages of the launch.
In addition, we just launched God hydration, plus a nutrient enhance water that offers distinct functional benefits and we are launching a new variety for our highly incremental snapple elements line in March.
We plan to increase marketing investments to support the core business and this new innovation.
Package beverages operating income is expected to be strongly 2023, with Martin expanding due to a better relationship we'd been pricing and inflation and we expect the segments underlying performance to be even stronger driven by gross margin expansion partially offset.
Like marketing investments.
Ending with Latin America beverages lap.
Latin America beverages had another outstanding either delivering a strong and balance next year's growth of 23% with bought net pricing and volume mixed up significantly.
Our performance was led by then you'll feel which delivered strong double digit sales growth and continued to gain sure cause I'm auto was also a stand out with double digit sales growth and a significant increase market share.
I suggested operating income for the segment grew 18.5% 20, twenty-two reflecting the strong topline growth and productivity, that's more than offset inflation and a significant increase your marketing investment.
In 2023, we expect continued momentum in Latin America beverages.
Think the strong commercial plans to drive incremental distribution.
The strong in market performance and our distribution partnership with the basketball Mexico.
Turning briefly to the consolidated results for the fourth quarter, which are addressing detailing our press release.
Concentrated next shows you more than 12%, reflecting higher neck pricing and a modest volume mixed declined.
God, what balance across our portfolio with all four segments expanding net sales at a double digit trade in the water.
At Justin gross profit advanced almost 11% and gross margin contracted 80 basis points, but improved sequence me on a ear or your basis.
[noise] yesterday operating income glued, 13.2% and adjusted operating margin expanded 20 basis points.
Adjusted EPS in the quarter, 11% versus the fourth quarter of 2021 to 50 cents.
Turning to our 2020 to 40 year results.
Total company Nichelle Scream, 11% with growth in both snatch price and volume mix.
Reflecting the strength of our portfolio.
That's just gross profit do almost 8% and gross margin contracted 170 basis points due to the timing of pricing and productivity lagging double digit inflation.
At Justin operating income group, 4% deflecting, the double digit growth in itself and ear or your benefit from companies strategic asset investment program, largely offset by the contraction and gross margin and significant inflation and transportation and bad Halston cost.
As a result, adjusted operating margin contracted Huntington 80 basis points.
Adjusted EPS B five per cent to one dollar and 68 cents for the ear consistent with the guidance.
Turning now to our balance sheet Castro generation and evolve capital allocation policy.
Pre Castro conversion, but exceptionally 2022 at Huntington, 11% well ahead of our long term target of approximately 100 per cent.
Operating cash flow totaled 2.8 billion for the ear and free cashflow due to 2.7 billion.
Other strong Castro generation is a powerful value creation tools.
Bob discussed we evolved our captain in vacation policy to reflect changes in the macro environment.
With the interest rate increases over the past year.
[noise] hurdle rate for deploying cash I didn't feast and it is appealing to maintain a strong liquidity and ample dry powder.
As disgusted me how about December fireside chat, we believe it makes sense to continue to reduce our leverage over time and had established a longterm management level target of two times to 2.5 times, which compared to 2.8 times at the end of 2022.
From a captain location perspective in addition to internal organic brought investments.
Top priority is value enhancing M&A and a strategic partnerships along with opportunistic Saturday purchases to return value to shareholders and manouchehr cream as well as growing our dividend within our 45 per cent stated they are pretty short target.
Our focus in 2023 will be the integration and expansion of our 2022 partnerships in investments.
So we currently do not expect M&A to represent a significant use of cash in the near term.
Our capital allocation accidentally 2022 already began to demand scraped our updated priorities.
During the course of the year, we invested almost 1 billion dollar an attractive new growth platforms, namely our 30 per cent you could just take a neutral bold the activation off a pig.
And you could investments and athletic brewing in tractor beverages.
We also continues to strengthen our D. S. P network with a number of Tennessee deals to further increase of a scale and effectiveness.
At the same time, we returned 1.5 billion dollar shareholders through our quarterly dividend between increased by 6.7% in September and the opportunistic repurchase of 10.6 million shares.
I will close with our outlook for 2023.
You expect 20 twenty-three constant currency net sales growth of 5% and adjusted EPS growth of 6% to 7%. The later, representing your or your garage improvement worth there's 2022.
Foreign currency translation is expected to approximate the Harper point headwind to both net sales and it just it gets cold.
Removing the impact of non operational items. This implies significantly higher adjusted E. B S called.
Included in our guidance had the following injunctions.
Interest expense in the range of 465 to 470 million, reflecting the rising interested environment and including approximately 45 million related to financing the neutral bold transaction.
Regarding neutral bold you expect some that fills benefit from our distribution agreement for C. Four.
Previously discussed 2023, and they expect it to be a transition and investment ear or the partnership and therefore, we are not expecting any material impact on earnings this year.
Oh, Lord we do expect it could get method income from our 30 per cent is taken neutral bold to approximate 40 to 45 million, which offsets the neutral bold related interest expense.
This could be message income will flow tool non-operating other expense and income.
The effective tax rate is estimated at approximately 22%.
Diluted weighted average shares outstanding I'd expect it to be approximately 1.42 billion.
From a diamond standpoint, we expect E. P. S for the fourth quarter could be roughly even the theoretical reflecting our belief that Q1 will have the highest rate of inflation.
Largest marketing increase and the smallest productivity benefit of the year.
Q1 will also be calm things significant darn operational benefits in the year ago period.
We expect EPS growth.
And in the balance of the year as inflation moderate and productivity benefits ramp.
They're not turn it over to Bob Hope closing comments.
Reform K D P and 2018 as a pure play beverage company focused on the North American market.
And the U S alone there are 1.2 trillion beverage consumption occasions employee every year.
You're on population growth that number doesn't change much nor do the fundamental consumer needs for beverages.
What has and will continue to change is which beverage formats consumers choose to satisfy their needs and where consumers purchase their beverages.
Compared to 2017.
Served an additional 6 billion beverage occasions in 2022.
Portfolio innovation renovation and new partnerships.
By executing our concept of a modern beverage company, which reflects our homeless to view all beverage opportunities, we've been able to better satisfy consumer needs bleeding to our accelerated growth rate.
We remain excited about the significant growth opportunities ahead.
In 2023 M B, a and will continue to leverage our business model to capture even more of the trillion plus beverage occasions, each year in North America.
Now turn the call over to the operator for questions.
Thank you we will now begin the question and answer session.
To ask a question you know that's our stars on the one on their touched on some.
If you're using a speaker phone we ask that you. Please pick up your handset before pressing the keys.
To withdraw your question please press start them too.
So the first question comes from Chris Terry Oh, all sorts of Securities. Please go ahead.
Hi, good morning.
Hey, Chris.
So I just wanted to clarify one thing that a fundamental question. So clearly the.
Pretty adjustment sticking point with investors I gather from your comments on this earnings call that you're well aware of panic then.
Making some changes going forward with specifically with the guidance range.
Reflecting essentially the Queen base and.
And so I, just but I I I I kind of wanted to be crystal clear about this the the use of these non-operating you know contributor and I. Appreciate there's an investment all upset but you know the these will be kind of a thing of the past and you know we can look at you know somewhat clean results going forward, obviously, if it's convenient dynamics every quarter, but with these.
These sorts of programs will be there at sunset and does that is that what I'm hearing them.
Yeah. So thanks, Thanks, Chris you know as we mentioned in the prepared remarks, yeah, we've been in really an integration and transformation today since the integration period since the merger and.
2018th that is complete and we moved from the integration phase two an activation phase and so that causes us to think about how we build a company that is contemporary as I said with the current environment and also one that is reflective of a more mature Katie D that can deliver consistent returns that are really.
Hi.
By investors overtime. So that's why it makes sense to use somebody's not operational benefits in the past four and a mode of transforming integrating.
We're also delevering and investing heavily in the business that hasn't been looked forward on here, we're making a significant step change in the use of not operational benefits in 2022.
Getting in 2023, and we're committed to continue moving in that direction in the future. So I think the most important thing from an investor perspective is that the dollar 78, an E. P. S, which reflects the mid point or 2023 guidance is a good reliable number that can be the focus of valuation.
Okay very clear just on the the expectation for gross margin expansion I, I guess I'm trying to frame that.
Context of you know you gave at outlook for inflation and also you were saying that you're gonna be investing in the marketing. So you know something like I've been single digit inflation.
Is that sort of a college did I see that it's the right way to think about that inflation overall, and then there'll be marketing on top of that so.
That's quite a bit of inquiry. So I'm just trying to frame. The you know the gross margin expansion needed to needed to offset that so any any contact that would be helpful. Thanks.
Crap visits with harm to figure that out for Ya.
Yeah, you're right. They expect a substantial improvement gross margin, but it will not go back to 2019 level.
But we said before if you would like to invest in marketing so there'll be reinvesting in marketing. So you will not see the fluid through from gross margin to lie all the way you will see some flowed through but we expect that we should start investing money you know what brand I'll be tops doing I would December fire. So trust them, that's how about class so yes.
Well, it's Martinez at Liverpool.
But we will it reinvested marketing so he wants you to all of them floating through July .
Thank you and our next question today comes from Brian spelling.
Please go ahead.
Thanks, operator at good morning, everyone morning, right, Bob I guess, Hey, So my question was just around coffee systems and I. Appreciate your perspective, you gave on kind of the perspective for twenty-three, but can you give us a little bit of we're getting a lot of questions about you know holiday sell through you know both in terms of some of the retail.
Disruption, but just whether consumers are making other choices about small appliances at the holidays and maybe if you could talk a little bit about.
And the outlook for this year, how much of the Brewer declined do you think has just been you know there's been a bit of a pull forward. The last couple of years, how much of it do you think is the.
Disruption at retail or how much do you think is just a function of you know consumers being sensitive about how they're spending their discretionary dollars yeah a good.
A good question, let me start with something I've said, a number of times in the past, especially when we've had quarters, where the Burger sales were up significantly and that is we're not in the business of selling Brewers run the business of driving household penetration and while there is a correlation between brewer sells and household penetration Ah there's not this direct club.
Causation that we've talked about a number of times in the past and what do you mean by that is there are three reasons consumers Viper or it's a new household it's a replacement of an existing brewer, Oregon upgrades and so there's a number of factors that you can see brewers settled down and it has no impact on household penetration because it means that somebody who's delay.
Upgrade for example, so two things to point out in 2022 versus 2021, obviously Q for US we were delivering 3 million new households, and 2020th 2021. So I'll be between 2022 with 2 million households, you would expect to sell fewer brewer's. The other part is we have seen a challenge reach.
[noise] environment, and we refer to that in our script, particularly in specialty channels, and some math customers as well and while we're working with them to continue to thrive.
<unk> of a whole category and our Brewers specifically, we also think it's smart to continue to look for other opportunities could pick up that consumer demand elsewhere, where the consumer demand is moving a lot of that is you know it was moving towards E. Commerce, having said all that I think your question about our <unk>, our consumers, making other choices. The reality of it is K D T.
[noise] Brewers are cured Brewers picked up share of all coffee makers and a smaller appliances. So it's not a decision to buy something in place of it.
Clearly been some pressure on small appliances in general and some of that is the rebound effect post COVID-19.
Some of it was also due to some retail pressure that we we described in the prepared remarks.
Thank you and our next question today comes from cousin Grundy with Jeffrey.
Great. Thanks, Good morning, everyone just to just to follow up on Brian question, but but very succinctly cause you gotta pull this together looking household penetration your confidence in the business is this the call your coffee systems business with the expectation that this gross mid single digits longer term I think that's really important because it's a key debates for the stock.
And then just my follow up Unrelatedly, just on the advertising and marketing increase, but maybe just a little bit more color. There on the magnitude of the increased key areas of spend I think that would be helpful for folks as well. Thank you very much.
Sure if you've talked about our long term target for Alpha penetration is 2 million households per year, we actually delivered slightly more than that in 2022, we did deliberate significantly more than that in the previous two years. All our indications. This year is that 2 million is that still the right number to assume offer household penetration going forward.
And your question about mid single digits going forward is absolutely where we are that's what we talked about in the December .
Fireside chat, we gave you the context of the longterm Ah trends that also we looked at the first half of the Covid period, and then there were a couple of Covid recovery period are and how they're getting some shifts between there, but 2 million households in mid single digits is still we happened to you.
And bought like I'm sick I could take that much [laughter].
But I can take the marketing question. So I'd be upset about marketing spending will increase do anything when you see well our learning marketing returns will decide which brand and how much do you spend so we don't have the top down by cutting target people watch other band on his and elasticity during the year and then we'll make the decision.
Which plan B invested.
Thank you and our next question so that it comes from Lauren Lieberman with Barclays.
[noise] great. Thanks, and good morning, So I don't really Wanna had I only want to look forward and I need to talk about you know plans on Ah non-operating out for next year, but I I did want to talk about the gross margin performance in the fourth quarter cause my understanding had been at the expectation what's your gross margin expansion.
And that's you know kinda went went the other way and then we had another Shelley sat down and so I think it's important for people to understand what went on with gross margins. This quarter when that kind of changed and you know versus an expectation for anything.
Alrighty.
Tomorrow, and then stood honchos so.
Q for specifically.
Saw the pricing it continued to build but still lagged inflation, especially in the coffee.
Men. So that's gonna be solved the issue, but are fully and faithfully for last year about 16% that was higher than expected and as Bob mentioned figure out a script. So we'll be seeing that relationship improving but we did not see that in coffee.
We were expecting into four so, but if you've seen that the relationship with with pricing in English is improving and that's the reason we are committed that and twinkling three articles modular to expand.
Okay and is that gonna be a beginning and and Q1 do you think or is it later in the year that that starts to kick in it will be later in the year that'd be said you know we don't buy them spot. So he fixed you know 96 to nine months to see the brackets. What these women you will see that as a second half and I talked about that in my prepared remarks he will.
See that in the second half you will see they improve mentioned gross margin more as we will see the benefits of commodity deflation not inflation, but ah moderate moderating inflation, a commodity yeah and look at me good visibility obviously for the early part of the year of water commodity pricing is in the first quarter for from a coffee perspective is where we see the high.
Inflation mhm and that it improves from there.
Thank you and the next question today comes from Breath Cooper Consumer research. Please go ahead.
Thanks, Good morning, you've talked about the under utilization of your bottling system was hoping to get a sense of how much of a step adding and brands like neutral bold is to raising that utilization to your desired levels or is there more that needs to be done to get to where you wanna be thanks.
Yeah, I think it was you know what we've talked about it in the past is that we have a tremendous asset in our direct store company on direct skirt distribution system with significant opportunity to run more high quality volume through that system. When we do that you get to that that she gets a cost benefit right cause you're leveraging that fixed cost.
Granted against a a higher base and the second part of it is you prove your effectiveness because what that allows our higher drop sizes and more frequent store.
Store visits so the area, where we've had the biggest opportunity was in C stores were incredibly strong and large outlets, but our C store business has been one where we have the most opportunity.
The largest segment within C store. So C. Four is a significant step in that direction.
And it allows us to to really increase our scale indices storage area, which has the benefits I described earlier, but we feel like we're just getting started on that that business has a tremendous trajectory for growth and as we talked about before we feel like we're not done yet in that space or some of the other areas, where we have white space in our portfolio. So much more to come there much more opportunity in front.
Thank you and our next question today comes from Bonnie Herzog with Goldman Sachs. Please go ahead.
Thank you the morning I have a question on your part volume switch you know what I bet weaker than I guess expected, Nick Carter and did they celebrate on a three years tax basis.
Yes, so I guess I wanted to better understand you know, how you're thinking about false and then your attach rates.
Charles So declining and I know you touched on that suggest more color. There would be helpful. You know just here you know I'd love to hear more about the changes you've seen in consumer behavior and it started off within the home and then yeah.
Ultimately why you have the confidence that essentially attach rates you know might actually improve our accelerate this year. Thank you yep.
Funny that I think is most interesting is if we just take a step back and say, let's look at at home coffee in total so we're a leader with an AD on coffee, but we participate in this bigger category.
I think it's the most noteworthy in 2022 is the there was a volume decline in all forms of at home coffee globally.
And single serve actually grew a chair a coffee consumption and the.
So from our perspective on a relative basis single serve continues to outperform within App and coffee, but at home coffee volume declined was about 6% for the year. That's pretty notable our biggest our belief is that the biggest driver of that is consumer mobility. If you.
Look at the first part of Covid as we talked about in December you would see an acceleration in attach rates. If you looked at it in the recovery period from covered you see a deceleration and attach rates and what happened, especially in the second half of 2022 is that there was this a global slowdown in volume of coffee.
It's driven primarily by mobility, but on a secondary basis it'd be driven by some elasticity cause there was significant pricing in there why do we have confidence in this is because the carriage system continues to outperform year in in Europe with an atom coffee none of us believe that at home coffee as a long term problem in fact that has significant tailwinds.
This is just an adjustment as people are spending less time at home more time out of home, we know that the number one driver of at home coffee consumption as time spent at home.
And it's as straightforward as that and we expect to see the discovery in the category of at home coffee up to occur as mobility improved throughout the year.
Thank you.
Thank you and ladies and gentlemen, our final question today comes from solar panels Salome with city. Please go ahead.
Hey, Good morning, guys Underpricing front can you just talk about how much of your pricing plan for 20 twenty-three scary older pricing from 2022, and how much is new pricing and then it comes with a new pricing Larry's concentrated mainly on the beverage side or on the coffee side are you planning for a price increases there as well.
Thank you yeah. The great majority of the pricing that shows up in our 2023 teeth. You know these carryover from 2022 and I'll remind you that we cook expensive price actions in 2022, when they did not pull through to the piano all the way through and 22. So that's happening we did take some additional pricing actions in the early part of 23.
Package beverage business to close some of the remaining marching gap, so that will flow through as we move into into the remainder of 2023, but that's all that we have plan right now.
Thank you ladies and gentlemen, this concludes today's question and answer session.
Turn the conference back over to the management team for any closing remarks.
Hi, everyone. This is Maria we are around today to take your questions. We'd love to connect with you. Afterwards, if you have any feel free to call as usual have a good day.
Thank you Ma'am. This concludes this conference call. We thank you all for attending today's presentation, you may not as commercial lines and have a wonderful day.