Keurig Dr Pepper's Vice President of Investor Relations and Strategic Initiatives, Jane Gelfand, introduced the company's Earnings Call for the Second Quarter of 2023. Gelfand discussed the company's performance on an adjusted basis, which excludes items affecting comparability and uses constant currency growth rates. The company believes the adjusted basis provides meaningful comparisons and an appropriate basis for discussion. They also spoke about the concept of underlying performance, which removes the impact of non-operational items in the current and prior years.

In the second quarter of 2021, KDP demonstrated resilience and was able to meet total company commitments. The results were healthy with revenue growth, expanding gross margins, and increased marketing across all segments, despite cost pressures in transportation, warehousing, and labor. The company expects to see more visible margin recovery in the back half.

In Q2, KDP saw double-digit revenue growth and strong operating margin expansion in the U.S. refreshment beverage category, driven by pricing and limited volume elasticities. KDP is confident it can maintain its organic growth by investing in core brands, filling portfolio white spaces, and enhancing its omni-channel selling and distribution system. Dr. Pepper was the largest share gainer in the CSD category, driven by the success of Strawberries & Cream and Dr. Pepper Zero Sugar. KDP has raised its 2023 net sales growth outlook to 5-6% and expects minimal non-operational items in 2023.

Keurig continues to experience success due to its multicultural appeal and unsweetened sparkling waters, and their partnership with Polar has helped them become the #2 volume share nationally. They have also seen success in the wine puncher category. Their C4 distribution transition is progressing well, with total points of distribution increasing by nearly 60%, and weeks on display across large format food outlets up by nearly 50%. This has led to revenue growth and an attractive partnership model for other companies such as La Colombe. Customer service levels have also improved and market share momentum is increasing. In the US Coffee segment, they have seen encouraging developments that will likely benefit them in the coming quarters.

In the second quarter, the at-home coffee category began to recover, with Keurig compatible Pod volumes declining by less than 2%. In the last four weeks, the category has been flat to slightly up, with even stronger performance in non-track channels such as e-commerce and Unmeasured Club. This positive trend is a leading indicator for Keurig's business, and they expect to see a sequential improvement in net sales growth in the back half.

In Q2, Keurig Dr. Pepper (KDP) focused on optimizing profitability by adjusting pricing and exiting lower-margin private-label contracts, while also driving incremental household penetration through cold coffee innovations. This included the national expansion of the K-Iced Brewer platform and Ice K-Cup pods, as well as a strategic partnership with La Colombe, which includes an equity investment, a sales and distribution agreement, and a K-Cup pod licensing agreement.

This paragraph discusses the partnership between KDP and La Colombe and how it has value creation potential. It also discusses how the U.S. coffee segment is expected to experience margin improvement in Q3 and Q4 due to factors such as pricing, commodity costs, and productivity. KDP will work to further enhance these elements going forward with the expected back half margin inflection.

In Q2, the International segment continued to perform well despite a decrease in double-digit growth year-over-year. This was driven by growth in non-alcoholic and low-alcohol beverages, as well as the KDP manufactured Pods gaining market share in Canada and the strengthening of the DSD network in Mexico. Additionally, the Pen UCL and CSD brands also performed well. The company is raising its 2023 outlook for net sales growth to 5-6% and reaffirming its adjusted EPS growth of 6-7%, with minimal non-operational benefits.

In the second quarter, KDP reported strong sales growth with an increase in gross margin and significant reinvestment in marketing. Despite cost pressures, SG&A as a percentage of sales deleveraged 40 basis points year-over-year. Adjusted operating income grew 4.4% and adjusted EPS was $0.42, 7.7% above prior year. KDP has repurchased 22 million of its shares and returned $1.9 billion to shareholders over the past four quarters. The company has also increased its public float from 13% in 2018 to 73% today, with Mondelēz completing its final sale of its strategic equity stake.

KDP invested $300 million in La Colombe, and U.S. refreshment beverage sales grew 11.8%. Segment operating income increased 18.1% and margins expanded 150 basis points. In US coffee, sales declined 0.7% due to positive pricing offset by anticipated volume expression. Pod shipment declines had yet to reflect any improvement due to a category volume recovery beginning later in the period.

Keurig experienced a difficult shipment compression last year due to disruptions, resulting in a 11% year-over-year decline in brewer shipments. Despite this, demand for Keurig products is still higher than it was in 2019, prior to the pandemic. In Q2, brewer shipments declined 10.9% due to softer discretionary demand and inventory adjustments. Keurig gained share of all coffee makers sold in Q2, and will continue to support their new brewers and ice bars in the back half.

In the second quarter of 2023, US coffee operating income contracted 14.6%, but the company forecasts a gradual recovery in revenue growth with improved margins in the back half of the year. International segment performance was strong with net sales increasing 10.9% and operating income growing 11.5%. Free cash flow totaled almost $300 million and the company expects consolidated net sales growth to be 5-6% and adjusted EPS to grow 6-7%.

KDP's EPS growth is now projected to be in the double-digits, with minimal non-operational items included in the forecast. The company expects interest expense to be in the range of $470 million to $475 million, equity method earnings from Nutrabolt of $40 million to $45 million, an effective tax rate of 22% and an average of $1.4 billion in diluted shares outstanding. For the rest of the year, KDP expects modest EPS growth in quarter three and strong results in quarter four. Robert Gamgort encouraged all to read the 2020 corporate responsibility report, which highlights KDP's work towards sustainability.

Q2 was a successful quarter for KDP, with strong performance in US refreshment beverages, international markets, and gross margin stability. The company is expecting double-digit underlying EPS growth with an even stronger top-line outlook. The success of the quarter is largely attributed to the recovery of the away-from-home and at-home channels, resulting in improved visibility and margin recovery for the US coffee segment.

Robert Gamgort discussed the impacts of COVID-19 on the coffee industry, noting that the decrease in at-home coffee consumption was largely due to mobility changes. He also mentioned that supply chain recovery and pricing realization lagged, leading to a challenging year. However, he noted that the category is rebounding due to normalized mobility and that away-from-home consumption has not changed significantly. He also mentioned that office occupancy is gradually improving.

Keurig is focusing on category growth and its 80% share of all Pods, and is expecting to see a rebound in category consumption. It is making decisions to prioritize margin recovery in a recovering category, which is causing a short-term separation between consumption and shipments. Yet, Keurig is confident that the long-term indicator of category consumption will remain consistent with its long-term shift and trends.

Sudhanshu Priyadarshi and Robert Gamgort addressed two questions in the morning meeting. Sudhanshu discussed the reduction of non-operational gains and the improved underlying business performance, which will result in minimal non-operational items and a better operating performance. Robert noted that their target for 2023 is still two million households, as brewer sales are a great predictor of household penetration.

Robert Gamgort addresses the dichotomy between the first and second half of the year in the coffee category, ranking the factors that have contributed to the improvement. He also provides insight into the factors that have driven the strength in US refreshment and international markets, and emphasizes the importance of looking at the coffee category over the longer term for the best context.

Keurig has seen mid-single digit CAGR on their Pods and brewers, despite the volatility of the COVID-19 pandemic. The company has had difficulty predicting consumer mobility and in-home coffee consumption, but they are confident that the noise is behind them and that the category growth should normalize. The one area that they have had the most visibility to is their margin, and they understand their pricing and coffee pricing in advance.

The company has seen success in the refreshment beverage category due to their marketing, innovation, and retail execution. Additionally, they have been able to catch up to inflation with their pricing and productivity. Lastly, the consumer resilience has allowed the category to withstand the pricing that was necessary to offset inflation, and the elasticity of the category has held up well, though some segments within it may require further adjustment.

Sudhanshu Priyadarshi explains that the company's second half growth is expected to be loaded in the fourth quarter due to investment spend, pricing, and productivity relative to inflation. He also explains that the forecast for quarter three EPS is modestly higher year-over-year due to three key components: U.S. Beverage volume growth, improved mix, and pricing.

Robert Gamgort discussed the company's refreshment beverage investments, noting that there has been a slow and gradual recovery in the at-home coffee category. The company is lapping year ago pricing and has exited private-label contracts in order to rebuild margins. For the year, coffee revenue is expected to be up 1% in revenue and 3-4% in OI, with margins expected to strongly inflect in the second half which will lead to accelerated OI growth.

The company is managing the margin profile of their own and licensed brands within pods to be comparable to that of partner brands. This has caused a decrease in share for owned and licensed brands in the Nielsen data, which has caught the attention of the investment community. The company is expecting to see an increase in pricing from partners and private-label in the second half of the year, which should lead to an improvement in margin. They also have good visibility to improving margin going forward.

Robert Gamgort discussed the importance of managing an ecosystem that involves their own brands, partner brands, and private-label brands. He emphasized that the focus of the company is to have a growing system and constructive dynamics for everyone. He also mentioned that they manage their own brands separately from their partners to avoid conflicts of interest. Finally, he mentioned the opportunity for more pricing within their brands and the category.

The speaker discusses the pricing gaps between their coffee and other forms of coffee. They believe the pricing is at a point that is not driving category growth, but they are more restrained in the promotional environment to protect their margins. They also point out that owned and license brands may be losing some share, but they are looking at pricing inflation and productivity to make up for it. They do not believe that destocking of pods will be a problem.

Steve Powers asked Sudhanshu Priyadarshi about KDP's free cash flow conversion, and Sudhanshu responded that they are still generating a lot of cash and expect to have a significantly higher conversion rate in the second half of the year, though it will still be below 100%. They have made some proactive changes to their supplier financing program due to the less attractive rate environment, and may make further changes depending on where rates go.

Sudhanshu Priyadarshi explains that while the company's goal is to reduce its leverage, they are looking at each case individually to determine whether supply chain financing would be beneficial. It is a gradual process and the company is making the right economic decision. They do not expect to reduce everything this year, but it will continue over the next few years.

This summary was generated with AI and may contain some inaccuracies.