Yahoo Finance Keurig Dr Pepper Inc. (NASDAQ:KDP) Q1 2024 Earnings Call Transcript
Keurig Dr Pepper Inc. (NASDAQ:KDP) Q1 2024 Earnings Call Transcript April 25, 2024
Keurig Dr Pepper Inc. beats earnings expectations. Reported EPS is $0.38, expectations were $0.35. Keurig Dr Pepper Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the Keurig Dr. Pepper First Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be opportunity to ask questions. [Operator Instruction] 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.
Jane Gelfand: 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.
For more information, please refer to our earnings release and the risk factors discussed in our most recent Forms 10-K and 10-Q filed with the SEC. Consistent with previous quarters, we will be discussing our Q1 performance on a non-GAAP adjusted basis, which reflects constant currency growth rates and excludes items affecting comparability. Definitions and reconciliations to the most directly comparable GAAP metrics are included in our earnings materials. Here with us today to discuss our results are Keurig Dr. Peppers Chairman and CEO, Bob Gamgort; incoming CEO and Chief Operating Officer, Tim Cofer; and Chief Financial Officer and President, International, Sudhanshu Priyadarshi. I'll now turn it over to Bob.
Bob Gamgort: 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-based margin expansion. The strong start to the year enhances our visibility to an unchanged on algorithm 2024 growth outlook. In Q1, we also advanced several strategic initiatives that position the company for multiyear success and demonstrate our confidence in the value creation opportunity ahead.
First, we unveiled a revolutionary future vision for the Keurig brewing system that has been years in the making. When launched, our new proprietary K-round plastic and aluminum free pods and Keurig Alta brewers will enable consumers to brew a wide variety of hot and cold Barista-style beverages from a single machine using a pod that can be easily and sustainably disposed. This system has the potential to redefine how consumers brew coffee for decades to come, and we're excited to begin beta testing later this year. At the same time, we are committed to growing our preeminent existing K-Cup system, including through a strong slate of innovation in 2024. Second, in Q1, we also took advantage of a highly-compelling and dislocated stock valuation by executing a $1.1 billion buyback of 38 million KDP shares.
This was our largest quarterly share purchase -- repurchase in our history, and we have progressively increased our buyback activity over the past several years. And with another $1.8 billion remaining on our authorization, we intend to stay opportunistic when we see attractive value in our shares. Third we introduced our evolve enterprise strategy, which we failed at an Investor Day hosted last month. This strategic framework combines many of the philosophies and practices that KDP has developed for the last 5 years with new elements intended to drive strong and self-reinforcing growth in our next chapter as a public company Many elements of this strategy will already evident in our first quarter results. Finally, this morning, we announced that Tim has been appointed KDP CEO and will join our Board effective tomorrow, marking the culmination of a robust transition process that began when he joined us in November.
I have worked closely with Tim over the past several months and have seen firsthand how our company is benefiting from his deep and diversified CPG experience, strategic vision personification of our challenger culture. I look forward to continuing to partner with Tim and the broader leadership team in my ongoing capacity as KDP's Executive Chairman and could not be more confident in their stewardship of the company's next chapter. With that, I will turn the call over to Tim.
Tim Cofer: 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. Now as Bob mentioned, we recently introduced an evolve strategy, which is anchored by 5 strategic pillars.
These are effectively a road map to guide each of our employees' actions every day, and it includes directives to champion consumer-obsessed brand building, shape our now and next beverage portfolio, amplify our route-to-market advantage, generate fuel for growth and dynamically allocate capital. This strategic framework will guide our company over the next few years and is designed to deliver a sustainable cycle of growth. Each element of this strategy featured in the first quarter, which represented a strong start to the year. Net sales growth accelerated sequentially with continued momentum in U.S. refreshment beverages and international and meaningful progress in U.S. coffee. Gross margin expanded significantly, driven primarily by robust net productivity, which funded reinvestment to support our future growth and drove strong earnings growth in the quarter.
And we flexed our capital allocation priorities toward direct shareholder returns, taking advantage of a unique opportunity to efficiently repurchase a large number of shares at an attractive valuation. Overall, our first quarter performance demonstrates the health of our business and provides enhanced visibility to our unchanged full year outlook for mid-single-digit net sales and high single-digit EPS growth. Taking a closer look at the intersection of strategy and Q1 results, we were encouraged by the quarter-over-quarter acceleration in net sales growth to nearly 3%. Though top line momentum remained pricing-led, volume mix improved to nearly flat, following declines during 2023. Consumer-led innovation leveraging our comprehensive demand space framework was an important contributor to this improvement.
Here are two quick examples. In U.S. refreshment beverages, we launched Canada Dry Fruit Splash, a flavor extension of our second largest CSD brand. The innovation is performing well during the early launch phase, proving incremental to the Canada Drive franchise and driving market share gains. In international, we introduced Schweppes mocktails as the first can mocktail product in Mexico, securing distribution with several large customers and generating very strong initial consumer acceptance. The launch is already exceeding our plan, and we have yet to turn on the advertising. Innovation activity ramps across our portfolio in Q2, and we're excited to build on our initial momentum as we move through 2024. Our top line growth during the first quarter also reflected the continued successful execution of our partner strategy.
Electrolit sales and distribution commenced in the quarter, and lock alone ready-to-drink beverages are now ramping through the system with smooth distributor handovers and early traction. C4 energy also continues to grow strongly, and we achieved further key performance milestones in Q1. DSD execution is a key enabler to this success and we continue to invest to drive greater efficiency throughout the system. Improving first quarter trends in U.S. coffee owned and licensed brands illustrate our commercial and route-to-market effectiveness. Our owned and licensed market share began a recovery, which steadily strengthened throughout the quarter. Distribution growth, increased display activity, price gap management and increased marketing all contributed, and this better trajectory has sustained quarter-to-date with more high-quality activation to come later this year.
Total KDP gross margin expanded 350 basis points in the first quarter, and gross profit dollars grew approximately 10%. This strong performance reflected an enterprise-wide focus on productivity, which yielded meaningful benefits during the quarter and more than offset persistent inflation as well as the benefit from an additional C4 performance incentive. Our gross profit progress provided important fuel for growth funding reinvestment, including a double-digit increase in marketing and also contributed to the very strong bottom line results in Q1. Specifically, operating income grew an impressive 17.5% year-over-year and earnings per share advanced 12% ahead of our ingoing expectations. With top line momentum expected to build from here, I'll now spend a few minutes discussing each of our segment's Q1 net sales performance and why we have confidence in the balance of the year.
Let's start with U.S. refreshment beverages. Revenue momentum remained healthy with mid-single-digit net sales growth in the quarter. Our performance was led by solid growth in CSDs and our expansion in energy and sports hydration, partially offset by softer trends in certain steel beverage categories. As anticipated, segment growth moderated from Q4 as we lapped year-ago pricing measures and due to innovation timing, which phases later in '24 when compared to 2023. In Q1, we anniversaried the launch of Dr. Pepper Strawberries and Cream, which was a standout success and went on to become the number one CSD category innovation of 2023. Looking ahead, we expect an exciting 2024 innovation and brand activation slate to drive a larger sales contribution in future periods.
Our Dr. Pepper Creamy Coconut limited time offering is launching as we speak, just in time for the summer season, and it capitalizes on the popular dirty soda social media trend. The complete restage of by WonderWater is just beginning to roll out, and our core hydration partnership with U.S. Gymnastics will be activated during the summer Olympics. We expect these collective activities will have a larger impact in the back half. In addition, our partnership with C4 should continue to enjoy good momentum, and our sales and distribution of Electrolit will build over the course of the year. While the magnitude of overall U.S. refreshment beverage pricing should moderate going forward as we increasingly anniversary year ago activity, some modest incremental pricing across CSDs was announced earlier this year and will contribute to growth.
We also continue to optimize price pack architecture to fit consumer needs across the portfolio and various channels. Moving now to U.S. coffee. As expected, net sales strengthened considerably relative to the fourth quarter and decreased at a more modest low single-digit rate in Q1. Notably, volume mix was basically flat, improving from a high single-digit decline last year. There were a number of green shoots in the quarter for U.S. coffee. Let me outline 5 key elements that bolster our confidence in continued top line recovery in this segment. First, our pod shipment trends improved sequentially. Though at-home coffee category consumption growth remains muted, the trend modestly recovered relative to Q4. More importantly, Keurig's own volume momentum accelerated throughout the quarter.
Second, our owned and licensed brand market share momentum is building, which is a mix accretive trend. In Q1, we grew owned and licensed total distribution points at a double-digit rate. We increased display activity and supported our brands with higher marketing. In addition, we made tactical adjustments to appropriately align our promotion strategy. This is already having an impact and will allow greater innovation, marketing and activation to shine through in the balance of the year. Owned and licensed share momentum progressively strengthened throughout the quarter, and we expect the trend to continue supported in part by upcoming price pack architecture changes to strengthen the value proposition. Third, within the coffee maker category, Keurig and Keurig compatible brewers also continued to gain share in Q1, extending a multiyear track record of outperformance.
And exciting innovation like K-Brew and Chill, which has not yet launched and will hit retailer shelves later this year should further support our performance. Fourth, as our volume in U.S. coffee improves, so does our ability to manufacture at a more attractive cost profile. We generated strong productivity during the first quarter, which drove healthy segment margin expansion and funded reinvestment. We're also beginning to optimize our manufacturing footprint to favor high-efficiency locations like Spartanburg, where capacity is ramping and unlocking further network optionality, which should also generate fuel for growth. And finally, fifth, the Keurig partnership proposition remains very strong as evidenced by multiple recent brand additions to our ecosystem.
Lavazza will transition from a partner to a licensed brand during the second quarter. Also in Q1, we reached agreements to welcome Brooklyn Roasting Company, Shark Tank favorite Kahawa 1893 coffee and Canadian super premium brand ticking horse to our roster. And just this morning, we are announcing the addition of Black Rifle Coffee as a new partner. Black Rifle Coffee's success in the coffee industry is already well established, and their decision to evolve to a Keurig system partner speaks to the full view proposition of our stewardship of the single-serve category. Our lock-alone, ready-to-drink coffee partnership is yet another proof point and is just now beginning to scale. In total, these exciting partnerships will begin to contribute to U.S. coffee segment volume growth later in 2024.
Moving on to international, which is becoming an increasingly significant part of our business and is a core part of our strategic agenda. The segment's strong sales performance continued into the first quarter with high single-digit growth on a constant currency basis and broad-based strength across categories and markets. Our cold beverages portfolio performed particularly well in Latin America, reflecting continued strong DSD execution. Performance was led by our Powerhouse Penafiel brand, which continues to enjoy strong base momentum even as we extend the brand into new adjacencies. For instance, we recently launched Penafiel soft seltzers, which offers sparkling mineral water with a refreshing touch of flavor, no calories, no sugar and with 100% natural flavors.
We also further grew our segment presence in the low and no alcohol alternatives category, with continued share gains for Atypique in Canada and strong retail and consumer reception for our launch of Schweppes mocktails in Mexico. In our Canadian coffee business, market share grew for Keurig brewers and for our owned and licensed pod portfolio led by the Van Houtte brand. As in the U.S., we continue to strengthen our international route to market. And earlier this month, we announced a multiyear partnership with the Toronto Blue Jays for poor rights at their ballpark. We're excited to expand Canada Dry, Dr Pepper, Clamato, Crush and Atypique, within the on-premise channel and we’ll continue to seek out opportunities to thoughtfully build the distribution of our brands outside the U.S. In short, we're pleased with the promising start to the year.
We demonstrated sequential top line progress in the quarter and delivered broad-based growth in adjusted operating income and margins across our segments. We did this while simultaneously funding high quality reinvestment in our brands and capabilities. Sudhanshu will speak more about our margin progress and our intention to continue balancing growth and reinvestment in the coming quarters. We're confident this approach will reinforce our 2024 outlook for on algorithm, top and bottom line growth, which remains unchanged while also powering a virtuous cycle of growth over a multiyear time frame. And with that, I'll turn the call over to Sudhanshu.
Sudhanshu Priyadarshi: 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 intent to use Q1 upside as additional full-full investment to support revenue growth over the balance of year and as buffer against pockets of reemerging commodity inflation. First quarter net revenue grew 2.8% in constant currency. Healthy momentum continued in our U.S. refreshment beverages, and International segments and we our encouraged by the sequential top line recovery in U.S. coffee. On consolidated basis, realized positive net pricing up 3.1% year-over-year.
This was driven by favorable pricing in our U.S. refreshment beverages and international portfolios, balanced against previously flagged targeted price investments in U.S. coffee. Importantly, consolidated volume mix improved to nearly flat year-over-year, showing a modest 0.3% decline in the quarter. Gross margin expanded significantly up 350 basis points, driven by the favorable combined impact of productivity, pricing and normalizing inflection. Gross margins also reflected a performance incentive related to strong commercial execution of our C4 partnership. This benefit contributed slightly over 100 basis points to the gross margin in the quarter and now offers us extra flexibility to drive future investment. SG&A deleveraged 50 basis points in Q1 due in part to a double-digit increase in marketing.
All in, total company operating income grew very strongly up 17.5% year-over-year with EPS increasing 12%. Moving to the segments. U.S. refreshment beverages net sales grew 4.3%, led by 5.6 percentage points of pricing. Elasticity remains manageable across most categories and volume mix decline 1.3% including an initial contribution from our Electrolit partnership. As expected, our relative market share and net sales performance reflected a later innovation cadence relative to 2023, particularly in CSDs. These calendar differences will normalize as new products get introduced and our innovation gains traction. In other words, segment net sales drivers should rebalance further towards volume mix as market share performance improves and as a magnitude of pricing contribution moderates considerably from here.
Segment operating income grew an impressive 22.4% in the quarter, and margins expanded 440 basis points. Tailwinds included pricing, strong productivity, and the C4 performance incentive I mentioned earlier. This combination of factors helps fund higher marketing in the quarter. All in, we have good line of sight to continued operating income gains in U.S. refreshment beverages over the balance of the year though not at the same magnitude as we experienced over the last couple of quarters. U.S. coffee top line trends significantly recovered relative to Q4 as expected, while net sales declined 2.1% volume mix was close to flat down a modest 0.3% year-over-year. All shipments continued to multi quarter improvement trajectory and decreased 1.1%.
This progress was driven by a steady recovery in volume and market share momentum across our owned and licensed portfolio during the quarter. With multiple elements underpinning this trend, including greater distribution and display and a more appropriately aligned promotional strategy, we expect innovation and activation to begin having an even greater impact in the balance of the year. Brewer shipments increased 26% in Q1 due to a combination of improving trends in the coffee maker category, continued Keurig market share gains and timing benefits. On a rolling 12-month basis, which smooths out some of the inherent quarterly brewer volatility, shipments are still down just under 2%, representing an improving trend versus the double-digit decline we experienced in 2023.
Segment net pricing decreased 1.8%, primarily due to previously discussed promotional adjustments across our owned and licensed portfolio. This is in response to competitive activity began in Q3 last year and continues today. These recalibrations more than offset the continued benefit of pricing we are realizing through partner contracts while improving segment mix. U.S. coffee operating income advanced 1.4% and margins expanded 110 basis points versus the prior year driven by productivity savings and easing cost pressures, partially offset by higher marketing spend. As expected, the rate of segment margin expansion moderated versus the back half of 2023 as we are managing towards a more balanced top and bottom line outcome in this segment in 2024.
We are pleased with the progress we made during quarter one. International segment net sales grew 11.8%. On a constant currency basis, sales increased 7%, with very solid volume mix growth of 4.8% and pricing up 2.2% year-over-year. Our performance included growth across market and categories with particular strength in Latin American LRBs. Segment operating income advanced very strongly, up 25% in constant currency terms. Volume mix growth, pricing and productivity netted favorably against inflation and higher marketing. We also continued to invest in route-to-market capabilities including the on-premise expansion in Canada that Tim mentioned and by strengthening our DSD network in Mexico. Given its outside growth potential, investing in our international business is a significant priority and should support an increased top and bottom line contribution from the segment in 2024 and over time.
Moving to the balance sheet and cash flow. Our Q1 free cash flow represented a use of $73 million. Cash generation is seasonally lower during the first quarter, and the year-over-year difference in free cash flow versus Q1 2023 was largely a function of a front-loaded cadence to our CapEx investment this year. In absolute terms, free cash flow also remained weighed down by roughly $400 million of reductions in supplier financing arrangements. We expect the impact of the carryover effects of these changes to moderate over the coming quarters and for free cash flow to accelerate with full year conversion projected considerably ahead of 2023 levels. This will support our capital allocation agenda. Our priorities include making organic and inorganic investments to further our growth continuing to strengthen our balance sheet and returning cash to shareholders through a steadily growing dividend, and we are opportunistic share buyback.
We will remain dynamic in managing across these priorities at any point in time with a balanced approach over the long term. For example, in Q1, we repurchased 38 million shares for a total of $1.1 billion, taking advantage of an attractive valuation and the liquidity event presented by JV secondary offering. Though our management leverage ratio increased modestly as a result, we remain committed to our long-term target of 2 times to 2.5 times. Moving now to our 2024 guidance. On a constant currency basis, we continue to expect mid-single-digit net sales and high single-digit EPS growth in 2024, both consistent with our long-term financial algorithm. Our plans continue to embed strong top line momentum in our U.S. refreshment beverages and International segments with a relatively muted growth contribution from U.S. coffee.
We expect productivity savings to help offset a more normal level of inflation. There are however, pockets of reemerging commodity inflation, for instance, in the green coffee price. We will need to monitor and manage these, particularly in the back half. Throughout the balance of the year, we also plan to continue to deploy investment dollars behind brands and capabilities to support our top line growth. The incremental flexibility afforded to us by our Q1 outperformance should enable us to balance these concentrations. As a result, we continue to anticipate healthy operating profit growth and full year operating margin expansion on a consolidated basis. Consistent with our original guide, we expect some of this operating momentum to be offset by a net headwind from below-the-line items, constraining operating profit flow-through to EPS.
Our '24 outlook embeds the following below-the-line assumptions, which now reflect share repurchase and financing activity from Q1. Interest expense in $625 million to $645 million range for the full year, and effective tax rate of approximately 22% to 23% and approximately 1.37 billion diluted weighted average shares outstanding. In closing, we are pleased with the stronger-than-anticipated start to the year which bolsters our confidence in our ability to deliver on our full year guidance while filling a virtuous cycle for the long term. With that, I will now turn the call back to Tim to close.
Tim Cofer: 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 intent 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 evolve 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. Thanks for the time, and we're now happy to take your questions.
See also
24 Profitable Outdoor Business Ideas to Start In 2024 and
12 ChatGPT Penny Stock Picks Right Now.
To continue reading the Q&A session, please click here.
