Keurig Dr Pepper Inc. — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Good day, and welcome to the Keurig Dr Pepper First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to introduce the company's Vice President of Investor Relations and Strategic Initiatives, Jane Gelfand. Please go ahead.
Thank you, and hello, everyone. Earlier this morning, we issued a press release detailing our first quarter results, which we will discuss during this conference call. We have also added a slide presentation to our earnings material. The slides accompany our prepared remarks and can be tracked in real time on the live webcast. They will be archived on our IR website afterwards. Before we get started, I'd like to remind you that our remarks will include forward-looking statements, which reflect KDP's judgment, assumptions and analysis only as of today. Our actual results may differ materially from current expectations based on a number of factors affecting KDP's business. Except as required by law, we do not undertake any obligation to update any forward-looking statements discussed today.
Thanks, Jane, and good morning, everyone. It has been a busy and exciting start to the year at KDP. First quarter performance was strong, with solid consolidated sales growth and double-digit EPS growth. Momentum in our U.S. refreshment beverages and international segments remained healthy, and U.S. Coffee results showed meaningful sequential recovery. We invested in marketing and capabilities across the business while also delivering attractive broad -- the strong start to the year enhances our visibility to an unchanged on algorithm 2024 growth outlook.
Thanks, Bob. And good morning, everyone. Let me start by once again expressing my appreciation to Bob and our Board of Directors for the honor and privilege of leading this dynamic company into the future. I'm energized to partner with our 28,000 colleagues across the globe to build on KDP's strong track record and to guide our next chapter of growth and value creation. I see a tremendous amount of upside ahead. At our recent Investor Day, I shared the many elements behind my conviction and discussed how we intend to unlock this future opportunity. If you've not yet had the chance, I would encourage you to watch the replay of that event.
Thanks, Tim. And good morning, everyone. Our Q1 results were strong, demonstrating sequentially improving net sales growth, continued meaningful gross margin expansion and incremental investments in marketing and capabilities. With EPS ahead of our plan, we intend to use Q1 upside as additional pool for reinvestment to support revenue growth over the balance of year and as buffer against pockets of reemerging commodity inflation.
Thanks, Sudhanshu. Before we move to Q&A, I want to thank our KDP colleagues for embodying our company's challenger mindset every day. In Q1, we collectively put the business on an accelerating path in a dynamic macro environment. Strong execution was visible across our results and in every country end market in which we compete. We intend to keep building momentum as the year progresses. Bob, Sudhanshu, the broader executive team, and I, feel the team's energy and enthusiasm for KDP's Evolved strategy, which was particularly evident at this month's annual summit of the company's top leaders. Together, we're excited to activate this strategy to unlock considerable future value for our shareholders.
[Operator Instructions] The first question today comes from Bryan Spillane with Bank of America.
Tim, congratulations on the new role. And Bob, hopefully, it sticks this time, right? I don't want you to come back.
I'm confident it will, Bryan.
So Sudhanshu, I just wanted to pick up on the comment you made about inflation and understand green coffee cost. If you could also give us a perspective on aluminum, just there's given the headlines about the sanctions and just the potential increases in aluminum cost, how we should be thinking about that? And Tim, maybe just on the coffee point, if we're going to see green coffee inflation, but we've also been discounting to get price points in line with where consumers see value, how do we just think about managing margins in coffee if we do see a sustained increase in green coffee costs?
Let me take the first inflation question, and then Tim will take over -- take the next question. So our inflation, we continue to expect some inflation in 2024 overall, but at a more moderate level than in recent year. We talked about green coffee. We're also seeing inflation in aluminum, but as you know, we manage it within our guidance, within our range of outcomes, and we have factored all of these inflation and commodity. We also had some stuff for 6 to 9 months in our guidance. So our overall guidance for the year, which is mid-single-digit top line and high single-digit EPS factors in all of these scenarios.
Yes, Brian, I'll take the second part of your question. I mean stepping back on coffee, obviously, as the pioneers of single-serve, coffee here in the U.S. and the steward of the category with almost 80% share of manufactured pods, our primary focus is on growing the entire ecosystem. And that's quite honestly more important than maximizing market share of any given brand. We aren't particularly interested in competing on price. But at the same time and to your point, we did make some decisions of late to protect, particularly our owned and licensed brand portfolio when we felt that our competitive positioning was impacted based on some competitive movement that we saw in the back half of last year. So we did make the decision to adjust the pricing really a couple of points around price gaps.
The next question is from Lauren Lieberman with Barclays.
I wanted to talk a little bit about marketing in coffee because one of the things that I've been thinking about recently is that the messaging that you've shared with The Street, the messaging on affordability, some of the advertising you've shared, all feels very spot on. And yet, perhaps over the last 12 months, you haven't had the reach to consumers or the impact to consumers that you might have hoped on some -- communication of some of messages. And so as we're thinking about affordability still being very much a concern and I would think a selling point of single-serve Keurig Coffee and also the launch of iced -- sorry, the chill machine.
Absolutely. So we are seeing and we saw it this quarter an increase in our total marketing investment on coffee. And I think as we've realigned back to the question that Brian asked making sure that from a price point standpoint, we feel good about our owned and licensed brand. It's an opportunity now for our marketing and innovation to work even harder. I think there's -- we're employing what we characterize as a bit of a barbell strategy, reflecting both the opportunity to reinforce value on our pod business as well as drive on the premium side.
The next question comes from Chris Carey with Wells Fargo.
So 2 quick questions. First on the coffee business. So adding Black Rifle, very interesting development. Can you just talk about how that partnership came to be and whether this makes you more confident on your ability to continue to see sequential improvement in your coffee volumes into the back half of the year and perhaps into 2025, just given the momentum around that business? And then if I could, just on the cold side, Sudhanshu mentioned some of the innovation timing dynamics of the underlying cold business. Would you expect those to start looking better as innovation comes to market? And can you just remind us on timing of the innovation suite specifically with Creamy Coconut.
Sure. So first on Black Rifle, as I mentioned in my prepared remarks, we are excited to welcome Black Rifle into the Keurig ecosystem. I think Black Rifle's coffee success, I'm sure you know what, Chris, is already well established in the coffee industry. And I think their decision to evolve to a Keurig system partner really reinforces our full value proposition and our stewardship as the single-serve category leader. So pleased with that development.
The next question comes from Peter Grom with UBS.
So maybe building on the partner brands, I was hoping to get some color on C4. Maybe first, I would just love to get your perspective on kind of what you're seeing from the category more broadly. Trends have moderated quite a bit across the board. So just any thoughts on what you think could be driving that. And then just on C4 specifically, continued strong growth, some share gains here. You have visibility on where you're sourcing these share gains from? Do you think it's coming from kind of the legacy brands like a Monster or Redbull? Or do you really think it's coming at the expense of maybe some of the other performance energy drink brands?
Yes. Yes, absolutely. Well, we continue to be really pleased with our partnership with C4. I think I shared at Investor Day as of that moment with since KDP took the distribution partnership with C4, and we made that minority investment stake. TDPs are up close to 60%. Sales are up 65%, and we continue to see growth potential for C4. C4 has got some exciting innovation this year around flavor extensions and around sizing and packaging configurations as well. Indeed, the Energy segment broadly, as you have mentioned, Peter, has seen some softening versus what was a multiyear run.
The next question comes from Steve Powers with Deutsche Bank.
Congrats, Tim and Bob as well, from me. Tim, I wanted to play back what you said just a couple of minutes ago on the cadence of sequential improvement in underlying refreshment beverage performance. It sounds like with the innovation you're launching now in CSDs and then the Bai relaunch, et cetera, it sounds like we should see sequential improvement in market share this quarter as we're looking at consumption data, but the full financial impact is going to be more skewed to the second half. I just want to make sure I got that right.
That's correct.
Okay. Great. And then if I could take a longer-term perspective with respect to the Alta brewer system. As you pursue that, I was just curious as to the engagement you expect from some of your partners. And as you beta test and scale, do you expect to do that with a relatively full brand assortment? Or is that more of a longer-term endeavor?
Yes, Steve, it's Bob. On the Alta system, obviously, we're excited about its potential to continue to drive growth in the total single-serve category. And as Tim, I think, nicely said earlier, that is our top priority. We previewed the system with all of our partners, and they've been involved every step in the way.
The next question comes from Robert Ottenstein with Evercore.
Two kind of follow-ups. First, on the pod business, could you remind us or maybe update us just in terms of what the business mix looks like between owned, licensed partner, private label, so we just kind of level set where we are on that. And related to that is there any change in strategy in terms of how you're looking at those categories and your emphasis? Or is it just pretty much as it has been?
Yes. I'll take that first question on pods, and then I'll defer it to Sudhanshu on the second part of your question. I mean broadly, and you see this in the syndicated data when you look at the full estate around pods, you're looking at roughly I'll do round numbers here, Rob. 50% is our partners, 25% owned and licensed, 25% -- well, 20% private label. So that's the broad makeup of the mix. And our strategy hasn't changed. As I said at the beginning, we are stewards of the entire category. Our responsibility is to grow the category and grow the entire ecosystem.
Yes. So regarding the share buyback, as you know, we had $4 billion worth of authorization, and it is opportunistic for us. Our #1 priority in capital allocation and investment in our own business, organic and inorganic growth. Number two is maintaining the strong balance sheet, our long-term leverage target of 2x to 2.5x. But we keep it very dynamic in terms of how we manage quarter after quarter, year after year. So you saw us, we saw opportunistic pricing with JAB secondary sales, and we purchased 38 million shares in 2024. 2023, we purchased close to 22 million shares. And 2022, we purchased 11 million shares. We still have $1.8 billion remaining on our share repurchase, but we will continue to be opportunistic when we see value in our stock price, we will go and buyback shares.
The next question comes from Andrea Teixeira with JPMorgan.
So my question is on consumption. First on coffee, can you comment on the exit rate of pod consumption? And how should we think about the cadence of innovation, you had a lot of, in this call, in terms of that cadence in particular. And also Alta, I understand this is beta testing, but when we should expect that to conclude and to start commercializing. And for cold refreshments on the Creamy Coconut Dr Pepper, how can we pretty much eclipse with the Strawberry Cream lap and how we should be thinking about that? And if I can squeeze the marketing commentary that you had about the A&P investments, how we should be thinking in the cadence of the quarters.
Andrea, thanks. Let me make sure I can get through all these. I think first on pod shipments and consumption, as referenced, we saw sequential improvement in our pod shipment trend during Q1, and that was underpinned by better trends at POS. So we've seen both a modest improvement in the at-home coffee category broadly. And then as mentioned, a real acceleration in KDP specific volume driven by the recovering share trends, particularly on owned and licensed. So feel good overall that minus 1%, near flat pod shipment performance in Q1 is obviously significantly above what we saw in Q4 and the back half of last year.
This concludes our question-and-answer session. I would like to turn the conference back over to Jane Gelfand for any closing remarks.
Thank you, Betsy. And thank you, everyone, for participating this morning. As Tim said, we are available all day to answer any follow-up questions and look forward to continued engagement. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.