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Sudhanshu Priyadarshi
Director
Keurig Dr Pepper Inc.
US, Burlington [HQ]
CIK
1808355
Data Source
We automatically created this profile. The information was aggregated based on earnings call transcripts, insider forms and DEF 14A statements.
Transcribed
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Q2 Earnings Call (July 25, 2024)As 3rd Text PassageThanks, Tim, and good morning, everyone. Our solid Q2 financial performance speaks to KDP’s strength of execution. Net sales growth sequentially accelerated with margin expansion powering double-digit operating income growth and high-single-digit EPS growth. Free cash flow conversion also strengthened. We are pleased with our progress year-to-date and have visibility to our full year outlook. Our constant currency net revenue grew 3.4% in the quarter. Performance was led by strong double-digit growth in our International segment and healthy trends in US refreshment beverages balanced against continued muted performance in US Coffee. Consolidated volume mix grew 1.8% year-over-year inflecting back to growth as new partnerships failed and our innovations gained traction in the marketplace. We saw broad based volume mix progress across the business with positive growth in each segment. 1.6 points of pricing also added to consolidated net sales growth. This reflected a more normalized level of net price realization in US refreshment beverages relative to recent quarters and ongoing gains in International. This was partially reduced by the impact of previously discussed price gap adjustments in US Coffee. Gross margin expanded strongly, up 130 basis points versus prior year driven by the favorable net impact of productivity pricing and inflation. [Indiscernible] grew at a slower rate than net sales, resulting in approximately 30 basis points of leverage in the quarter. All in, total company operating income grew strongly up 11% versus prior year. Even with some offsets from below the line items, EPS growth was a healthy 7% in Q2. Moving to the segments. US refreshment beverages net sales grew 3.3% in the quarter led by 2.9 percentage points from net price realization. The pricing contributions reflected increases in CSDs taken in early 2024 slightly offset by targeted value investments across other parts of the portfolio. As expected, segment volume mix returned to growth in Q2 increasing 0.4%. This performance reflected a ramping benefit from the successful transition of Electrolit volume to our DSD network, as well as our Q2 weighted innovation calendar. Our new products are resonating in the marketplace as evidenced by improving share trends for brands like Dr Pepper and Canada Dry. We expect the building benefits from partnerships and innovation over the balance of the year to yield accelerated volume `mix growth in the back half. Segment operating income grew 11.9% in the quarter and margins expanded 230 basis points primarily reflecting tailwinds from net pricing and productivity. We continue to expect healthy operating income growth in US refreshment beverages for the full year to notch at the same magnitude as we saw during the first half. In US Coffee, net sales declined 2.1% with volume mix growth of 0.8% offset by the 2.9% net pricing declines. We have made sequential progress in driving improved take up trends over the past few quarters and we were pleased to pod shipments stabilize in Q2 with 0.2% growth. As Tim described, owned and licensed share gains were a major driver with tractions across our strategic initiatives. Our market share momentum should sustain into the back half. At the same time, we’ve built our full year balance assuming only muted at-home coffee category trends which is what we have experienced year-to-date. We are expecting similar category dynamics for the balance of the year. Brewer shipments increased 2.1% in Q2, with the rolling 12 months trend improving to 1.4% growth. Our innovation in commercial strategies are driving meaningful share gains particularly for our value brewers we expect this share momentum to persist in second half. Segment net pricing decreased 2.9%. Similar to last quarter, this reflected investments to appropriately managed price gaps in a competitive single-serve environment. US Coffee operating income grew modestly versus prior year and margins expanded 70 basis points with productivity savings and cost discipline effectively neutralizing the profit impacts of price investments. As expected, our year-over-year margin trend is moderating as we calibrate our growth drivers to achieve greater balance between our top and bottom-line delivery. This will likely pay out to an even greater degree in the back half as we lapse more difficult competitions and combat inflation, though we still expect segment margin expansion on a full year basis. International net sales grew 15.5% on a reported basis points and 14.7% in constant currency. Segment growth was comprised of very strong 10.4% volume mix growth and up 4.3% increase in price. Our performance reflected growth across markets and categories, including Canada Coffee and Latin American LRBs driven by excellent execution. Segment operating income advanced significantly increasing 30.2% in constant currency terms. Growth was driven by net sales gain and net productivity, which more than offset a significant increase in marketing. We will continue to make high quality investments as we execute our strategy to capture the outsized growth opportunity in our International business. Moving to the balance sheet and cash flows. In Q2, we generated $543 million in free cash flow reflecting a combination of difficult seasonality, capital discipline and a more modest impact from our supplier financing program reductions. For the first half in total, free cash flow grew roughly 50% versus prior year and conversion improved. We expect back half free cash flow conversion to improve further relative to the first half. The accelerate in free cash flow profile supports an unchanged capital allocation agenda. Our priorities remains 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 via opportunistic share buybacks. We dynamically manage these options in the short-term with a balanced approach over the long term. For example, following our significant share repurchase activity in Q1 we had more modest free cash outlays in the second quarter resulting in a slight reduction in management leverage during the period. We remain committed to our long-term leverage target of 2 to 2.5 times though by comfortable following a non-linear path. 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 to invest, and net sales acceleration over the back half of the year which is based largely on factors within our control like partnerships and innovation. Even so, we are cognizant of mixed consumer involvements and are focused on strong execution to secure full year delivery. Even as revenue growth accelerates, we do expect back half EPS growth to moderate sequentially. That is, the strong first half EPS profile provides us with sufficient flexibility to manage through accelerating inflation, product headwinds, and ongoing investments in the back half of the year while delivering on full year expectations. From a phasing perspective, we expect roughly similar rates of EPS growth in quarter three and quarter four. Our full year 2024 outlook embeds the following unchanged below the line assumptions. Interest expense in a $625 million and $645 million range and effective tax rate of approximately 22% to 23% and approximately $1.37 billion diluted weighted average shares outstanding In closing, we are quite pleased with our second quarter results and feel good about our ability to deliver the year, while also advancing clear strategic initiatives with multi-year payback windows. With that, I will now turn the call back to Tim to close.
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