Q2 2023 Keurig Dr Pepper Inc Earnings Call
[music].
Good morning, ladies and gentlemen, and thank you for standing by and welcome to Keurig, Dr. Pepper's earnings call for the second quarter of 2023.
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 and strategic initiatives Jane Gelfand, Wisconsin. Please go ahead.
Thank you and Hello, everyone.
Earlier. This morning, we issued a press release detailing our second quarter results.
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, while the exclusion of items affecting comparability and the use of constant currency growth rates are not in accordance with GAAP. We believe that the adjusted basis provides a meaningful comparison and an appropriate.
Eight basis for discussion of our performance.
Details of the excluded items are provided in the reconciliation tables included in our press release, and our 10-Q, which will be filed later today.
Due to the inability to predict the amount and timing of certain impacts outside of the company's control, we do not reconcile our guidance.
We will also speak about the concept of underlying performance, which removes the impact of non operational items in the current and prior years.
These items include gains on asset sale leaseback transaction reimbursement litigation expenses related to the successful resolution of our body armor lawsuit.
The business interruption insurance recovery and a change in accounting policy for stock compensation.
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.
Here with us today to discuss our results, our TTP chairman and CEO , Bob <unk>, Chief Financial Officer enhance your Priya Darci and our Chief Corporate Affairs Officer, Maria <unk> I'll now turn it over to Bob.
Thanks, Jane and good morning, everyone GDP second quarter, once again demonstrated our portfolio's resilience and ability to consistently deliver on our total company commitments.
Our solid performance was driven by strength in U S refreshment beverages.
<unk> developments in U S coffee and continued momentum in international.
Consolidated Q2 results were healthy with strong revenue momentum and sequentially accelerating operating income and EPS growth.
Net sales advanced more than 6% supported by net price realization modest category elasticities and good share performance across much of our portfolio.
For the first time since Q3 2021.
Gross margins expanded.
As an improving balance between pricing inflation and productivity began to emerge.
Gross profit dollar growth funded marketing increases across all segments and helped to offset continued cost pressures in transportation warehousing and labor.
As we forecasted we are in the early stages of a margin recovery and we expect to become more visible in the back half.
Looking ahead to the balance of the year, we are raising our 2023 net sales growth outlook to 5% to 6%.
While our full year EPS outlook is optically unchanged. It in fact represents greater than originally anticipated underlying rule with an enhanced compensation to our earnings profile.
As Sudhakar will discuss in more detail, we now expect minimal non operational items in 2023 setting.
Setting <unk> up for strong and sustainable earnings base from which to grow in 2024 and beyond.
U S refreshment beverages performance in Q2 was outstanding.
With double digit revenue growth and strong operating margin expansion.
Similar to last quarter category growth and our own momentum remain pricing glut.
Limited volume elasticities across the portfolio.
So demand is resilient, we are mindful of the various pressures facing our consumers and are proactively meeting their needs through product and package innovation along with strong in market execution.
And these elements come together, we see market share gains.
Due to these were most notable across our cft's sparkling water coconut water and juice portfolio.
Even as price realization begins to moderate in the back half we remain confident in our ability to drive attractive organic growth by creating value amongst three key dimensions.
First by driving growth in core brands through marketing and brand renovation.
Second by filling portfolio white spaces via innovation and external partnerships.
And third by enhancing the effectiveness of our omnichannel selling and distribution system.
We delivered on each of these dimensions in Q2.
Focusing first on our core brands.
For the second consecutive quarter, Dr. Pepper was the largest share gainer in the CSD category.
I'll start by the success of strawberries and cream and the continued strong momentum of Dr. Pepper zero sugar.
It was once again named a top two food and beverage product in IRI zircon is new product Pacesetter innovation rankings.
Work also continued to outperform.
Driven by its multicultural appeal and.
And in Unsweetened sparkling waters, our partnership with powerhouse now boosted the brand because the number two volume share position nationally.
We also brought significant excitement to our juice categories, where Marston Hawaiian punch are driving innovation and gaining share.
When it comes to the partnerships our seat for distribution transition is proceeding well.
2023 is a year of transition and investment and though it is still early days in our distribution rollout, we are driving gains across multiple metrics and remain confident in the growth potential of seaborne.
ADP distributed geographies total points of distribution increased nearly 60% versus prior year and weighted weeks on display across large format food outlets are up nearly 15% relative to the beginning of 2023.
These gains translated into continued velocity and share momentum for C. Four and accelerated the brand's already strong revenue growth even further.
Clearly our partnership approach continues to create win win outcomes, making this model increasingly attracted to other high potential companies, including lock Hull, which I'll speak more about shortly.
The effectiveness of our selling and distribution engine underpins our success across all the examples I cited.
I want to acknowledge the hard work our teams have done to drive improvement across the system.
Where it showed signs of strain during the pandemic.
Customer service levels are now significantly improved relative to where we were during the COVID-19 period and in some cases exceed pre pandemic comparisons.
So our work here is never complete these strides are leading to even tighter in store and on shelf execution as our market share momentum demonstrates.
Turning now to U S. Coffee, we're exiting Q2, we saw several encouraging developments that are expected to benefit segment performance over the coming quarters.
On our last earnings call I identified three key tenants underpinning our expectations in this segment.
First that at home coffee category momentum would begin to recover in the back half as mobility comparisons ease.
Second we would add approximately 2 million new households to the cure ecosystem in 2023, either by Brewer in part innovation and the addition of new brands.
And third that segment operating margins would improve meaningfully in the back half supported by a better balance between pricing inflation and productivity.
We had even more visibility to these elements playing out today Q2, marking an expected trough in both topline growth and margins.
Let's address each point in term.
First as anticipated at home coffee category momentum began to improve towards the end of the second quarter and has continued to do so in July .
Amount of time, our consumers are spending at home this year versus last is continuing to normalize.
Since we believe time spent at home is the single largest variable driving at home coffee consumption. It follows that volume trends are recovering too.
We are observing this across broader at home coffee.
Within which single serve continues to gain share.
The category recovery is very clear when looking at publicly syndicated data.
In Q1 jewelry compatible pod volumes.
Good proxy for the total single serve category declined nearly 4% across measured channels.
Q2, these declines moderated to less than 2% with improvement, particularly notable towards the end of the quarter.
Over the last four weeks category volumes are flat to up slightly.
Notably category and KDB volume performance has been even stronger in non tracked channels, such as E Commerce and Unmeasured club.
The category trend is a positive leading indicator for our business and we would expect sequential improvement in net sales growth in the back half.
That said, we are prepared for our volume growth to lag the single serve category in the shorter term as we focus on optimizing profitability.
Pricing across all sub segments of our K Cup portfolio is now more fully flowing through our financials, including from our partner brands.
<unk> with our previous expectation that pricing would catch up to inflation.
Why.
We also exited some of our lowest margin private label contracts.
Both of these elements are now filtering through our results and the syndicated data.
Longer term our growth in U S. Coffee more remained underpinned by driving incremental household penetration for the keurig system and increasing revenues from our existing 38 million active households, which brings me to the second tenet of our coffee outlook driving incremental household penetration.
Q2, we further this growth strategy by elevating our presence and cold coffee, which is an important trend among younger consumers.
This spring, we nationally expanded the K ice brewer platform, and especially formulated ice K Cup pods.
Strong marketing and activation activities across all media and digital channels, including a special limited edition Rollingstone K ice floor, that's sold out in less than 24 hours.
These innovations are off to a very strong start with the K ice brewer family performing extremely well and our ice pods proving highly incremental to our base business.
Just last week, we announced a strategic partnership with Lockheed wall.
Super Premium and award winning coffee brand with wide appeal and untapped potential.
Partnership, which includes an equity investment sales and distribution agreement for RTD coffee and K Cup pod licensing agreement is a compelling example of our ability to add value to a single partner across both hot and cold beverages, which Katie P is uniquely positioned to deliver.
Our collaboration with block Columbia encompass several exciting strategic avenues.
We will leverage our sales and distribution capability to scale, our colome across major retail classes of trade.
Along with the Pizza brand, we are creating a ready to drink coffee platform, which will enable us to better serve the needs of our consumers and retail customers in this important category.
We will also work closely with locks along to formulate and introduced the brand into the keurig ecosystem and a K Cup format.
Here too we are building a super premium platform as lot, Colombia joined several recently added brands like intelligentsia, black and bold and Phil.
Additionally, lock loans, a vertically integrated model and specialized manufacturing knowledge, our other differentiated elements that could enhance our collaboration overtime.
In short this partnership has strong value creation potential that went unlocked will benefit both Katie P and lock loans through our joint ownership model.
Now moving to the third element driving our coffee outlook.
We continue to expect segment margins for the U S coffee segment to meaningfully improve both sequentially and year over year in Q3 and Q4.
Multiple factors led to segment margin contraction over the last two years and several elements, including sequential favorability in pricing commodity cost and productivity are now starting to come together to facilitate our margin rebuilt.
Pricing to offset cumulative inflation across our K Cup portfolio, including for partner and private label brands will now more fully flow through starting in Q3.
Commodity cost pressures, including in Green coffee and packaging are also projected to ease and.
And efficiency benefits should ramp up throughout the year as we have redoubled our productivity efforts following a period focused on mitigating supply chain disruptions.
We will work to further enhance these elements going forward with the expected back half margin inflection an important marker for future profit growth.
Our international segment continues to perform well even as it begins to lap double digit growth in the year ago period.
Q2, Canadian volume momentum was fueled by non alcoholic and low alcohol beverages, where we have multiple brands like eight to peak and labatt gaining share.
This is an exciting set of emerging categories, where we plan to leverage our learnings across markets.
Execution also remained strong in our Canadian coffee business or ADP manufactured pods grew consumption dollars and gain market share during the period.
Share prices remain dislocated.
We are raising our 20 twenty-three outlook for constant currency net sales girl to 5% to 6% and reaffirming our guidance for adjusted E. P. S growth of 6% to 7% with an improving composition of our earnings profile.
We now expect only minimal nonoperational benefits within the frameworks of this guidance, implying double digit adjusted E. P. S growth on an underlying basis.
I will now turn it over to Sudan shoot to discuss Q2 results in our balance of your outlook in greater detail.
Thanks, Bob and good morning, everyone.
You are pleased with our consolidated quarter to resolve the issue presented another quarter of a strong sales group with reported gross margin expansion, both secretly and ear over here and significant reinvestment in marketing.
He bought himself advanced 6.6% 3.8 billion with 6.1% organic growth, reflecting strong pricing and a modest decline in volume mix.
Consolidated top named momentum budget, driven by U S. Just been beverages and international segments, partially offset by a trough quarter and U S coffee, which the anticipated.
Boarded gross margin expanded slightly ear or what are your 254.8% as D made progress in offsetting ongoing inflation.
This is an important changing trend after nearly two years.
Even continued course, fishers and cross transportation and housing and labor.
Easy investors significantly in marketing.
Increases across each segment.
As a result.
Total SG&A as a percentage of sales Deleveraged 40 basis points you over here.
I, just it operating income and 4.4% and additional reload the line leverage.
Drive adjusted EPS of 42 cents, 7.7% above prior either.
We continued to deploy our cash in accordance with other evolved top dollar location priorities.
Over the past four quarters.
Upper to this theory purchased nearly 22 million Katie B shares, including 7 million shares in quoted too.
Cognition or significant long term opportunity and all the stock.
The mind with all the quarterly dividend, we have returned approximately 1.9 billion of cash to shareholders over this time frame.
In addition, since the merger.
If all of our ownership instruction to that of the modern beverage company be out today.
Increasing C D PS public float from 13% in 2018 273 per cent today.
This includes the exit of modulus Bitch earlier. This month completed its final sale of the long term strategic it could do stick. It took as part of a T. G M take private in 2016.
During the quarter.
Continued to assist usually invest in promising partnership and emanate opportunities.
Namely that 300 million investment we met in lock Lou announced last week.
It'd be successful track record in a scaling beverage bands and a strengthening our leadership positions that cross our key categories.
Make us a sought after partner for high potential companies and brand on us.
You didn't mean discerning and disciplined at all such opportunities.
Seeking out one of the doors that had compelling the strategic married create win win outcomes for both parties and provide significant value creation potential.
Turning now to segment performance.
U S assessment beverages sales green and impressive 11.8%.
Led by 12 percentage points from pricing.
With virtually no volume makes impact.
This resilient volume mixed performance.
Continue to reflect the center of our portfolio.
Ongoing market share gains.
Manageable category elasticities in the face of significant pricing and the contribution from seafood energy.
Segment operating income increased 18.1%.
And segment margins expanded 150 basis points and.
Pricing that productivity benefits more than offset commodity.
Faxing and liberalization and an increase in marketing investment.
In U S coffee.
Sales declined 5.7% with positive pricing more than offset by anticipated Volumic special.
Further explained no.
Focusing first on the consumable parts business.
As Bob indicated.
We are encouraged by the improving conjunction volume trends in the singles have category exiting the first half.
You see this category trend as the <unk>.
Leading indicator for the direction of other business.
Hardcore in quarter too.
Reported barge shipment declines had yet to reflect any improvement.
Three primary factors.
Lost a category volume recovery.
In the period, and therefore had a limited impact on quarterly results.
Second.
We laughed a period last year.
Then be replenishing retailer and partnered inventories after supply disruptions, creating a difficult shipment comparision.
And towed hour conjunction and shipment volume were impacted by our decision to exit some low value private label contract.
We expect some lingering impact low shipment volume from practice to entry as we move into a tree.
Even so they've been new trends are projected to secret until you strengthen driven.
Driven by positive pricing and moderating volume declines.
On a trailing 12 month basis.
Shipments declined 11% year over here.
For perspective.
Brewer volume I still 18% higher than the comparable 12 months period ending quarter 220 19.
We did it presents a clean pre pandemic comparision.
The point here is that is.
Despite all the volatility of the last several years.
Surging demand during the height of covered.
And the later stages of normal as you shouldn't be working through.
Demand for curing ecosystem is greater today than it was 40 years ago among consumers.
Retail partners.
R Q2, Brewer Shipman declined 10.9% a P.
He crinsley improvement.
You have to go out for one.
And were impacted by the same factors discuss last quarter.
These include softer disc, Australia demand for smaller appliances in brooding Brewers, which.
Saw mid single digits conjunction declines.
Additional.
Moderating.
Truth from trade inventory rebalancing.
After two quarters of eventually adjustments.
I believe these are largely behind us.
Looking at the the back half.
Importantly, kurian grounded rules gain share of all coffeemakers solely in order to.
Recently launched K I sprawl seeing good traction in the market.
We will further support Disney Bruce and highly incremental ice sports in the back half.
Be continued to expand our call coffee platform and offerings.
U S coffee operating income contracted 14.6%.
At 30.1% a segment margins, but similar to order one level.
But C N at 10 basis points, Lord ear over here.
Works as a priority or.
This is performance reflected that continued unfavorable relationship between pricing and inflation.
<unk> a significant investment in higher marketing in part to support our ice innovation lunches.
Look into the back half of the E or the newest coffee.
The forecast a gradual recovery and revenue growth.
Coupled with significantly improved margins.
This combination underpins our outlook.
Whereas strongly bone in segment operating income.
Well how'd you tube cruelty in quarter three to be followed by very attractive games in Port report.
All of our international segment performance, who quarter to remain strong.
Even as we lapped tougher your ego competitions.
Net sales increased 10.9% under reported basis.
With constant currency brought up 7%.
Nick price realize you shouldn't contributed 6.1%.
And volume mix, what's up 0.9% year over here.
Segment operating income grew 11.5% on a reported basis.
And 7.7% in constant currency risk.
Flexing the benefit of the growth in itself.
And increased productivity, partially offset but inflationary pressures and a significant increase in marketing investment.
Turning briefly to Castro.
Free cash flow total almost 300 million in the second World War.
As they entered the seasonally more cash generating back half.
You would expect our absolute levels, so freak out flu.
As well as free cash conversion to meaningfully improve from here.
This brings me to our consolidated outlook for 2023.
Which we updated you know the press release this morning.
Our outlook for constant currency net sales growth is not higher at 5% to 6%.
And we continue to expect adjusted EPS to grow 6% to 7%.
While our EPS outlook and teenage on the surface.
Expected profile off our earnings isn't all further improved.
Two hours guidance earlier this year.
Specifically, you'll recall that 20 twenty-two benefited from several nonoperational items.
At the start of this year.
We expected to reduce the use of these items, but approximately 50 per cent in 2023.
I'm pleased to say that our EPS forecast snow in Bruce Willis minimum such benefits.
As a result.
Underlying basis.
E P S growth and are projected to be in the double digits forces hour prior to Spectation for a high single digit game.
This very strong underlying foreman's.
The most strange the earnings power inherent in Katy bees model.
It is also effectively an increase to our 20th 23 growth outlook.
And will preclude any further upside EPS expectations for this year.
While I was setting us up for a strong ancestor naval base from which KDB can grow earnings in 2024.
Other fully a guidance improves the following expectations or below the line items.
Interest expense.
472 $475 million range.
It could be a method, earning some neutral bolt of approximately $40 million to $45 million.
And effective tax rate of 22 per cent for the ear.
And approximately 1.41 billion diluted wages average shares outstanding.
We have covered a lot of ground today.
So I would just finished by remarking on the projected shadings of earning for the balance of the year.
Even the evolution of pricing.
Inflation of productivity.
Wrong with the timing of laundry investments over the back half.
You expect only modest EPS growth in quarter three.
Followed by very strong results in Port report.
He was a good first half in the books.
And the enhances your ability to the balance of the year.
We are confident in a robust finished 220 23.
With that I will not turn the call back to Bob closing comments.
Thanks. It at you if you haven't done so already I encourage all of you to read or 20 twenty-two corporate responsibility report, which was published last month.
Highlighted within its pages is the significant work Katie P is doing to further our sustainability agenda.
We're very proud of our progress across multiple focus areas, including in renewable energy.
Stewardship and diversity and inclusion.
Too close to too was a very good quarter for TDP across multiple dimensions.
A format and U S. Refreshment beverages was once again exceptional and international posted another great quarter.
You must coughing is approaching an important infection.
With improve visibility to a significant margin recovery, which we expect to meet the strong operating income growth as we close out this transitional year for the second.
Ah consolidated basis, our efforts to offset inflation are increasingly evident in gross margin stability.
And marketing reinvestment across all segments.
As we discussed today full year guidance implies double digit underlying E. P S grow.
With an even stronger tumbling outlook.
These are all key elements to set us up for ongoing momentum in the back half and ultimately into next year.
I will now turn the call over to the operator for questions.
We will now begin the question and answer session.
To ask a question you refresh star the one you touched on the phone.
If you're using a speaker phone please pick up your hair before pressing the keys.
It was dry question. Please post stars in too.
We ask that you please limit yourself to one question and one follow up.
At this time, we will pose momentarily assembler roster.
Our first question will come from Chris carry with Wells Fargo's security.
Now go ahead.
Hi, good morning, everyone.
Hi, Chris.
So clearly you know solar gull.
On the total company level, but you know at the same time so much of the day's debate has been around coffee in it and I think there's been a bit of a misunderstanding.
The underlying assumption of the category has actually been improving through the year and and I think what I hear today is that that improvement has continued to accelerate through the quarter and and into the corner of the day.
Oh I just have you know a couple of specific questions around that so so first.
<unk> why do you think that underlying improvement has been recurring in really I'm trying to get some of the concept of sustainability.
Is it as simple as the away from home channel was recovering in the front half of the year. That's normalized now the iPhone channel has normal as well.
And secondly, you know it it sounds like you expect to remain below consumption and coffee and for the second half of the year is that apart and brewer comment.
And you know you know just give us a tough comps and you're making some changes to the portfolio would you expect that dynamic too.
You'll carry into 2024 or is this predominantly Q3 eases Q4, and then you've you've normalised from there. So yeah. Thanks for any perspective on just underlines.
Underlined or ability of this improvement we've seen in the at home coffee channel at all so this dynamic of shipping for consumption. Then you know when you think you can start to close that gap over the next two to four course, thanks, so much okay.
Okay, Chris let me start at a very high level with it with the total category cause I think that is most important we've clearly weathered a storm over the past year or so that's impacted our category on our profitability within their you know the negative impacts were on at home coffee. We saw this category decline all forms globally.
And to answer your question, we have seen that as primarily driven by mobility changes. This is the post COVID-19 recovery mobility impact that's largely played out I think by the end of the third quarter for sure that will be played out. We also had some issues in terms of supply chain recovery coming out of Covid.
There was a service at all costs mindset, and we were also enough focus on productivity of course inflation and that was combined with a lag in our pricing realisation and that's when you add that all up that's quite a list of challenges in our coffee business over the past year. If you look at what the setup is right now it's much more constructive we're seeing a rebound in cat.
[noise] worrying, that's largely driven by normalize mobility to your specific question about away from home versus at home wait for mom hasn't changed that much right. If you look at office occupancy, it's pretty stable, it's improving very very gradually over time, if that improves then we will get the benefit of from that on our <unk>.
From home coffee business, but that's not something that we're banking on it's really been an at home coffee consumption story driven by changes in mobility. So we're seeing this rebounding category.
We talked about and are prepared remarks were seeing that pricing that we talked about that was lag now flowing through the P&L and of course, we're seeing a moderation in inflation a combination of that is very constructive going forward and the only thing I would point out is that single serve coffee has has and continues to gain share of all forms of coffee over.
This time.
[noise] time period.
In terms of our shipments below consumption.
That's the way to look at us over the long term I'm not going to talk about 2024, specifically, but our shipment should approximate category consumption overtime. Our focus is on category growth. We have about an 80 per cent share of all parts that go through the system Mexican changed over time, but again, we're focused on category and I think you ought to just think about category rebound is.
Consistent with how we think about our long term shipment trip, but in the short term you know we're looking at Ah out against the period a year ago, we were still rebuilding shipments from supply chain disruption. So that's part of it.
We've also talked about exiting and some of the lowest margin private label contracts and that we've taken some additional pricing on our own and license. We think these are really the right decisions to prioritize March of recovery and a recovering category.
And that's what's caused us a little bit of a separation between consumption and shipments in the short term, but there's no. No reason to think that's the case over the long term it really I would point you to category consumption as the long term indicator.
Our next question will confirm Brian Spillane with Bank of America.
May not.
[noise] operator, good morning, everyone. So so just two quick ones for me Saddam to just the the the the flip of non Opper snapper nonoperational gains now you know not contributing as much. That's obviously good news is that a change in just the way you are going to treat them you know.
Backing them out versus including or.
His art things changed so some of these these financial moves like sale leaseback, just not as attractive anymore and then the second one for you. Bob is just 2 million house household penetration or new households.
It's 2 million held new households, and coffee brewer still a possibility this year or might that be you know, but it's a little bit you know below that just given the the you know.
Current environment. Thank you.
So Bob let me take the first one so Brian no I'd be upset beginning a b or ktbs focused on delivering best in class CPG performing this also includes.
Enhancing of composition of earning profile.
Last year, we had a lot of nonoperating item when we started the year with targeted 50 per cent reduction, but as you can see from our first half performance. Our underlying business performance is is great. You'll also seeing the module recovery and coffee and second half. So we haven't enhance the humidity.
So we believe that now we will have a minimal non-operating and we will deliver a better underlying operating performance this year.
Also help us entwined twenty-four because we will not have this roughly 50% of headway and from last year. It was roughly.
I think it was.
More than 150 160 million dollar and we had a half of that was to see her we don't expect that to to to do that and that will help us to like 24 and beyond so there's no change. It's just our strong operating performance that'd be planned all along.
Ah Brian on the 2 million households, yet still our target for 2023.
As we talked about a number of times rumour sales are really a great predictor of household penetration. So the 2 million is is still where we're trending the one thing I would point out as as you know that we are heavily fourthquarter loaded holiday season gift thing we've done well in.
[noise] environments that different difficult economic environment around that gift thing because people go for more functional gifts during that time period. Our innovation pipelines are the promotions the retailer support that we're getting for the fourth quarter, all looks terrific, but got a lot of game left to be played in the fourth quarter, but as we sit here today, we are targeting 2 million.
Our next question will come from <unk>, most seeming endless Morgan Stanley .
You May now go ahead.
Hey, good morning.
So on the coffee side, you were very clear and comprehensive in your remarks on the second half improvement and what drives the improvement versus the first half but in theory, it's a it's a pretty big dichotomy. So.
I guess it would just be helpful to hear how much visibility you think you have at this point and coffee, particularly relative to some of the first half disappointment, maybe rank order. Some of the factors you mentioned in terms of driving that sequential improvement, but also just longer term broader context for the volatility we're seeing this year and what you think it sort of <unk>.
For future growth prospects as we look out longer term.
And then B M sure coffee will get a lot of the airtime as usual, but you know we probably be remiss. If we didn't touch on the U S refresh with international strength in the first half of the year. How sustainable do you think are are the factors there that have driven the strength as as you think about go forward trends from here. Thanks.
I'll I'll take both of these I think it's always helpful and I feel like I've I've I remind everybody. This on many of our calls but I do think it's helpful to step back and look at the coffee category over the longer term that gives you. The best context, there's always short term volatility, particularly in the <unk>.
Covid and post Covid world, but if you go back and it's in our press release. If you go back and you take a look at pre Covid 2019 to our latest period. The keg pods is mid single digits take her up rowers about mid single digits and so there is a lotta bumpiness and it's been tough for all of you to navigate through the pluses and minuses over the past couple of years.
But that context is always helpful and they're always surface really well to look at the longer term trends, which is this is a growing category driven by consumers converting from burrowing by the pot to burn by the Cup. We are the drivers of that.
Benefit from that of retailers benefit for Matt soda secure because we participate in the 80 per cent of those transactions. So that's the most important thing for everyone to always take away. When you look at any quarterly results. All the business terms of the back half of the urine and visibility is really good question you know the area. That's been most challenging for us over the past couple of years is predicting.
Consumer mobility, and it's not a concept we even thought about prior to COVID-19, so be able to match up consumer mobility against in home coffee consumption, we had to learn a lot there.
And then also being able to predict it is really a difficult thing to do given the economists are having a tough time doing that but I think that noise is largely behind us which is the most important take away from this conversation and we should see a normalization in category growth as behavior from consumer perspective also normalizes. The one area, where we have had and still have the most visit.
Ability to as our market.
And I know that's been another area, where there was pressure on the business that as we explained.
We look forward, we understand coffee pricing in advance we understand our pricing and we also knew that the agreements that we had with our partners in our private label partners as well.
Is that we.
We have the ability to recover inflation, but it had a lag effect to it and there's only so much that you can talk about before you Wanna see the proof and you're seeing the proof of that now flow through and we have great visibility to that in the back half of the year. So put it on the table or assumptions for the back half of the year is continued slow and gradual recovery.
Of the category in total we have and continue to gain share of total at home coffee a single serve and then in improving margin and that's driven by pricing flowing through the P&L moderation and inflation and our ability to focus on productivity now that our supply chain as in really good shape.
The board our customer service on coffee has been fantastic.
So let me talk a little bit about refreshment beverages, and it's a it is a fantastic story that I'm glad you raised because we we certainly don't take it for granted nor should anyone else what's been working for us as three factors, we've been gaining share in a growing category.
And I don't mean to make light of it because it's really each one of these is important double-quick, but it's driven by marketing innovation and really Ah important.
Importantly, outstanding retail execution, so [noise] gainey sharing growing category is always a positive thing our pricing and productivity, having catching up to inflation. There was you know we were chasing inflation for a long period of time, and we were able to narrow that gap I think importantly, consumer resilience has allowed the category to withstand all the pricing that was required to <unk>.
Offset that inflation that last point is an area that we continue to watch very carefully and we're seeing in general elasticity hold up nicely, but we're seeing some greater elasticities and some of the segments within L. R. B that we we won't watch it adjusts too, but you know if I were to summarize the cold beverage business growing margin and share and a growing.
<unk> certainly a formula for success.
We plan to continue to do everything I, just said plus add new partnerships as we've done with C. For most recently and then more recently lock Hall.
Our next question will go through Andrea took Sierra with J P. Morgan you.
You May now go ahead.
Thank you for Marnie I have a clarification to <unk> send in a question to Bob in the pot first on the flight to pass Grill outlook for Q3, what would be the underlying Cruz accident information items for the quarter, because we understand there were no oh.
<unk> items in Q3 last year and a question for Bob and the pod so would it be the the shipment uhm inflection should we expect shipments two <unk> two two consumption in queue for or kind of like the embedding while the the outlook that you gave for them.
Fourth quarter, Oh could you breached named packed with a private label exit which is one of the factors that was a headwind.
In the quarter and also in the second half and sorry for two part that question, but on this on the on the pricing improve makes sense you accept this this this terrified of manufacturing should we not that department with the private label actually they expect pricing to lap in Q3.
Oh are you expect to still have some benefit on pricing for parts into the second half of the year. Thank you.
So let me take the first one first I would urge you to think about back Hoffman toward tool with the Kid is between <unk>, just a natural facing our second half growth is expected to be largely cooper loaded, reflecting they expect it to fill up investment spend and the cadence of pricing.
Productivity relative to inflation.
And in forecasting quarter P. B S last year, we had no non-operating items and lost in Q3 Ah we had in queue for which we expect that to be minimal.
But now he's going to be a modestly hired a year over here. There are three key components. One is U S. A freshman beverages were lapping the ear to go pricing and it'd be a poor casting a heavier investment U S. Coffee positive I why God as margin begin to infect in quarter, three and then more to come.
[noise] waterfall.
So those are the two main reasons, mostly driven by.
<unk> Ah decision to invest more in quantity, but I said, let's look at the second half and you will see that they'll have a strong EPS.
Grilled.
Yeah, I mean, I'll reiterate what I said before which is under the longterm consumption should equal shipments, there's no reasonably it'd be different.
As is often the case you see some separation between the two on a quarter to quarter basis.
Clearly you're dealing with.
I've heard where had supply chain issues.
Issues in which we were under shipping than we were over shipping to cut to to catch up on that what's happening right now in the back half of the year is exactly what he said is we're seeing a consumption basis, a slow and gradual recovery.
And the total at home coffee category single serve continues to gain share of at home coffee occasions, which is important and then there's two things that are a couple of things I should say that are unique to us.
That's causing our shipments to be slightly behind consumption. One is how we're laughing some of the year ago timing of shipments due to recovery, we talked about on the license pricing and we also talked about some private label contracts that we exited all in the Ah Ah direction of making sure that we're rebuilding margin.
And that that will play out so we had talked previously about for the ear coffee being about one per cent in revenue in 3% to 4% in Hawaii and if I look at the way things are playing out and it's hard to forecast it differently.
We've got great visibility to margins. So we expect that strongly inflect in the second half at all and that's going to lead to accelerated ally growth I'll talk about that in a moment I think the revenue number may come in somewhat but what was that on a reported basis.
I don't think it's it's it's that big of a deal but the other thing to think about though on the Oh I growth projection, if even if that comes in slightly below that on a report in basis.
Pursued arches comments the without any.
Not operational impacts the adjusted segment on the underlying basis is even stronger than we talked about before so you add it all up and you'd say the back half of the year. There may be some puts and takes here, but the underlying strength of the business is really really improving and anything that's off any of these projections is really driven by some attentional strategies.
We put in place and then the last thing I would talk about a coffee margin is you know, they're they're for drivers of that margin, which the pricing inflation productivity and mix and clearly we're seeing the pricing flow through you asking about in the second half for his first half.
We have virtually no pricing coming through you know from partners in private label in the first half that's just starting to flow through in the back half of the year and that will wrap up and yeah. There's some tradeoffs and mix in some of the other parts on here, but we have good visibility you know appropriate margin Gulf War.
Our next question will come from Lauren Lieberman with Barclays.
You may not go ahead.
Great. Thanks, good morning.
I was hoping we could maybe take a step back and do something about educational on coffee so [noise].
In the in the Nielsen data I know you guys are more oriented toward Iraq, but in the Nielsen data you can see that only been licensed brand within pie pumpkin, losing sure and I think that's garnered quite a bit of attention from the investment community. So.
I was hoping you could talk about it and I know that is that historically you manage them margin profile of owned and licensed to be comparable flat a partner.
But was curious if you could talk about why we should or shouldn't worry about that from a dollar profit contribution over time and how you manage.
Sort of the.
Let's call it the potential conflict of interest with partners versus what's owned in terms of market Cherry and so on and and and you know how many how you manage that relationship.
Also just thought he had mentioned pricing on owned and licensed and I just wanted to be clear if that was new pricing. That's recently gone in the market or if that's still to come.
And then finally I know that inventory destocking for pie at retail had been a potential watch point that hasn't come up soon assuming it's a non issue, but I just wanted to check in on that front as well. Thanks sure Yep. Thanks for the opportunity for me to talk about the the the way the system works. So again go back to the very beginning and say that.
He manages an ecosystem Ah that involves our brands are partner brands and and private label brands or retailer brands.
And it's really important that retailers are considered to be a partner in this whole ecosystem as well because conversion up ruined by the cop a pot to buy the cup benefits all of the interested stakeholders in this.
Our objective is really focus that hasn't changed which is we want to have a growing system. We want the category to continue expand and we want the dynamics of that category to be constructive for every body.
Part of that is managing our own brands, which we manage very separately from our partners. So there is no conflict of interests, we manage those as a separate group within our organization that has no visibility into what our partners or private label are doing.
And it allows us just to maintain focus on the category for us.
We see the opportunity for more pricing within our branch within the category. If you take a look at our price gaps versus other forms of coffee, even though there's been pricing in the single serve segment.
Price cap versus all forms of that home coffee right now are the narrows they have ever been.
In fact, I do believe there at a point, where it's actually not doing anything to drive category World partners and that includes some or retail partners in their private label brands Oh cause sometimes they have short term objectives that are more shared driven so you see some of that that you know promotional carpet competition and that shift share between one brand to another but it really does.
Nothing for the category, which is our focus and so that's why when I take a look at our pricing. It comes back from being more restrained in the promotional environment, which allows us to protect margin and again, if you go back to the highest level.
The rational decision for us to make is to improve our margins and a growing category and then you do point out something about you.
You know if owned in license brands are losing some share it might have some negative him mixed impact.
Fair enough that mix it isn't as great as some people think it is as we said before but I would also point out that we're looking at pricing inflation and productivity and the reason that people should believe that we're not concerned about that difference of chairs the visibility that we're giving you to improving margin going forward. If it were a heavy negative impact on our business we wouldn't.
Be able to do that so we understand all the flavors of pricing inflation productivity, a mix and sometimes you have to trade out one for the other but you do that for the long term health of the system and the growth of the category wishes or focus on and then your last one is about destocking on parts not something that we've seen at retail and nor do we expect to see.
[noise] anything of that nature.
Our last question will come from Steve hours with Deutsche Bank.
You may not go ahead.
Yes, hey, good good morning, Thank you [noise].
I wanted to ask on free Cashflow conversion. So about you you you you talked about the the improvement to come which is which is great. I guess is there a way to frame where do you think you'll land on conversion for the year and.
And that is we think ahead is there any reason.
Return to 100 per cent free cashflow conversion or thereabouts.
Is too ambitious for for 24 and beyond and I guess within that if there's any cause any changes that you're thinking about or that you implemented more structurally with with regards to supply chain financing that'd be useful or no too. Thank you.
No. It's a great question as you know KDB has been a highly cash generating since most here and we expect to continue to generate significant got slow going forward.
And I'll first half hour cast floor generation, but lore, primarily due to fact that was the last one was the lapping on some discrete items and also other proactive choice to selectively introduce a portion power supply financing program in a less attractive naked woman.
The creak as broken version of it will be significantly higher in second half, what's the second quarter and also Puss top.
Do it for the you gotta get a bit improved some somewhat below 100 per cent for the full year.
But.
As you know.
We Ah look beyond 2023, we continued to target industry, leading levels of pre cast look on version so did not.
Too many changes to be is to generate a lot of a lot of cats. It's a second how business, we will see it but we are making some proactive choices they supply chain financing that'd been very attractive and Lori environment, but now it's not that attractive.
That last point are you.
Through with those changes or do do you anticipate there may be still changes to come given where race are and where they may go.
No. So we look at more of a as the overall capital allocation policy I became in in December that'd be how outgrew it tastes a ghoulish too.
They had little leverage, but when you read a lot of cash so we make those decisions case by case, so I wouldn't say that's up like in financing will all of the the number of it becomes zero, but yeah. If you are looking at case by case, it's a gradual ah.
And be looking at the benefit of office also had the benefit of operating income. So it's fussy in the in the beginning you feel the most pain is the working capital has a short term pain, but in the long run it's beneficial and we make the right ignore me because he is you don't take the case by case, the black and financing.
Proactive choice would be making the decision based on where B C is better economic benefit.
But it's a gradual it will not happen everything this year like we will not reduce everything to D C or it will continue for the next couple of years it will be a gradual reduction.
This concludes our question and answer session I would like to turn to comes back over to James Gelfand closing remarks.
Thanks, Anthony and thank you everyone. We appreciate your time and attention on what we know as a busy morning, and the Investor Relations team is available should you have any follow up questions have a great day.
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