Keurig Dr Pepper Inc. (KDP) Earnings Call Transcript & Summary

Good. Let me start with why DSD matters. Why it's so critical and then get to your question on what we're doing to invest and optimize our system. Fundamentally, in CPG, there's a basic growth model that says you need to make your brands mentally available and physically available. And I believe in that basic premise. We are a brand-led company. We are here to build our brands and both through mental and physical availability, that's how we'll achieve success. Physical availability is absolutely critical in beverage, right? You want that beverage at every channel, at every outlet whenever that consumer has a need or a demand space for a beverage. And so DSD is the critical and scarce asset to capitalize on that growth opportunity. You would know that at what will be BevCo, we are one of only 3 national providers of coast-to-coast DSD. We cover with our own system, 80% of the U.S. population and the balance through great partners. DSD gives distribution depth, breadth. It gives cooler space that's critical. It gives multiple points of interruption. It allows for superior merchandising and really influence at that local store level. DSD is also very local. It is not a national, again, one size fits all. So for us, to your question, it is about what's most important for me is access to and influence over the winning local DSD operation. When we look at any given territory, any given geography, we think about a few factors. One is scale. What is the scale required to run an efficient and effective DSD. Scale is the biggest friend to a DSD operation. There's a fixed cost associated, and so you need that scale. The second is the operator's growth orientation and importantly, their focus on our brands. So if it's my team, I know we're going to get the focus because it's KDP. But if it's a third party, are they going to give the focus to Dr Pepper's Canada Dry, et cetera, that it deserves that our consumers deserve. The third is obviously economics, deciding whether I want to invest in that locally and the capital required for that, will get a return versus through a third party, and then it's a margin game. And the final consideration Lauren, would be contractual rights because you would know as a long-term beverage student the labyrinth or mosaic of the contracts of refreshment beverage distribution is quite a thing. And so you need to -- and we will always respect the contractual rights that we have that have come before us. When you look at those 4 factors I've just outlined, I would tell you in majority of cases, favors our own ownership of KDP. And that's why you've seen us continue to invest. And to your question, I'd say we invest in 3 areas. Number one is adding additional scale. And that's through the organic growth of our own brands like Dr Pepper's, Canada Dry, 7UP whatever, as well as these new partnerships. The halo effect that Anthony just mentioned, adding the Electrolit, the [indiscernible], the C4, et cetera, as scale and helps that virtuous cycle grow. Second is new territories. You've seen us be opportunistic on new territory opportunities, and we will continue to be. We look at everyone when it comes available. We've done 25-plus since KDP has come to fruition in the last 8 years. I've done 3 or 4 in my tenure as well. Calio, Arizona would be 1 recent example. And then the third area of investment is around tools, digital tools, in particular, obviously, handheld system order taking, order fulfillment and selling tools so that our men and women are really focused on value add. In the end, our DSD philosophy is not just ownership for ownership sake. It is about investing in the strength of the local winning system at attractive returns for our shareholders.

Okay. Great. I wanted to talk a little bit specifically about the BevCo portfolio. You mentioned Dr. Pepper Zero Sugar growing nearly 30% this last quarter. Creamy coconut, LTO tracking ahead of its prior run. How do you think about the runway for the Dr. Pepper brand? And with so many like compelling brands in your DSDs -- your CSD portfolio, -- how do you think about driving success more broadly? What do you see as the highest return opportunities for incremental investment? And what determines which brands move to the front of the line?

Yes. Good. Well, let's definitely start with Dr. Pepper, our largest brand in the portfolio, $6 billion retail sales brand. You would know, Lauren, 2 summers ago, we passed another brand and are now the second largest brand in the CSD category, and that's a leadership position that's only strengthened in the last 2 years. We are the #1 brand Dr Pepper, among teens today. That's a good indicator of future health vitality of the brand. And we're a brand that very much invest in continuous recruitment and continuous to really fortify that share. In fact, Year-to-date, Lauren, we're on track for share growth. And when we achieve it, it will be our 10th consecutive year of market share growth on brand Dr Pepper's. So when you say, okay, what's behind that? I'd point to a few things. One is very distinctive positioning. A brand needs great positioning. It needs to be distinctive, Dr. Pepper is, right? What is Dr. Pepper? It's not a cola. It's Dr. Pepper. It's a unique blend of 23 flavors. And not only does that come through the liquid itself, but it's the brand personality. We talk about we're a unique one-of-a-kind brand. And I think for use and a lot of our consumer cohorts, they identify with that because they're unique in one of a kind, too, and that brand speaks to them. So a distinctive positioning, really strong marketing and marketing that we're investing to get even better, more precise and more personalized, but it's a hell of a platform. Right now, I don't know if there are college football fans here in the room in Boston, but college football is back Dr Pepper's is one of our biggest platforms, College Football, Fansville, 9th season, our strongest season yet, a lot of surprises coming if you're a football fan. Winning innovation, you mentioned. This year was Creamy coconut, blockbuster success. Last year was BlackBerry, we've done strawberries and cream, Zero Sugar. Big success. So winning innovation. And then finally, the last element of that success toolkit for me is the strength of sales execution at DSD, whether it's our own or our partner brands. So that's really the playbook that has worked on Dr. Pepper. To your question, then we now have the opportunity to extend that playbook to other brands. And we're doing that. And I would say we're in the early innings of that, which is why I'm bullish on continued growth potential on US RB. Let me give you 2 examples. First, Canada Dry. Canada Dry, billion-dollar-plus brand, far and away leader in ginger ale, distinctive positioning, all about the demand space of a relax and rejuvenate time kind of kick your heels up after a tough chaotic day with the kids at work, whatever it's your time, time to relax with a refreshing Canada dried ginger ale. Really anchor the brand there, understanding the occasion, the demand space, the consumer. Great marketing. We launched a campaign earlier this year. We call dry time is my time, right? It's your time to unplug and relax, that's seen great returns significantly better than what we've seen before. winning innovation, part of the playbook. We launched this Fruit Splash platform 2 years ago, Chris delicious taste of ginger with a splash of cherry juice, a splash of strawberry juice, finding that platform to be highly incremental to the base business, driving overall trademark sales, great sales execution. The other shout-out I'm going to give to in our brand portfolio is 7UP. And 7UP -- if you think about Lauren, 7UP from when we were kids, the young colo, right, the big lemon line brand. Our marketing group has really come up with a clever relaunch. It's our largest relaunch of 7UP in at least 15 years. It just broke a couple of weeks ago, actually here at Barclays Boston and the coolers out there, if you haven't tried it, we've got the new 7 up formula. I encourage you to try. But we're having a little fun, Lauren. And if you indulge me for 30 seconds, you know that, that segment is lemon-lime soda. Well the clever idea the marketing guys came up with is, why does lemon get all the love here? What is it about lemon, right? Lemon pastries, lemon cleaning products, lemon lime soda. Why isn't it line lemon? And we've done a lot of work around lime over lemon. There's this whole campaign. You know who's keeping lemon on top the Illuminati. But we are leading the resistance for a lime lemon soda. So we've got an all-new formula. Lime over lemon. We've got a new visual ID. We've got a really clever marketing campaign. I think that's part of the success formula you're going to start to see employed across these brands. All told, got a lot of confidence that we can continue to grow, not only Pepper, but many of our other brands as well.

Okay. Great. Let's shift gears to coffee. So starting with U.S. coffee business disappointed in the second quarter. How should we distinguish issues that are cyclical, like elasticity to elevated pricing because of green coffee inflation and tariffs or issues that are actually more strategic like format competition or the rise of private label in pods?

Yes. So if you look at the most recent print in Q2, I think coffee in aggregate delivered a solid quarter, but you definitely see a diverging trends between legacy JDE Peet's Coffee and U.S. coffee. And since your question was U.S. coffee, let's go there. Q2 was a little weaker than we had anticipated. Our profit declined at a rate similar to what we saw in Q1. Why? The primary factor was cost, a highly unfavorable cost envelope. You would know that last year sea-price hit an all-time high. And we've also shared that given our inventory positions our hedging forward buy strategies, there's quite a lag between sea price when it hits the market and the P&L impact about 6 to 9 months. And so we saw peak unfavorable green coffee price pressure in the second quarter. Second, tariffs. Tariffs were quite a headwind for us in Q2 as well. In addition to that, there was volume mix pressure. And the volume mix pressure manifested in 2 ways. And I think it all comes back to a bit of a pressured consumer, particularly low and mid-income who is exhibiting a bit more value-seeking behaviors. In aggregate, but I would say, in particular, in coffee, given that coffee is a high dollar per unit ring in the grocery store and has experienced multiple years of inflationary impact. And so these 2 factors were: one, we saw a bit of occasion leakage from our single-serve U.S. coffee stronghold into other more affordable formats like instant coffee, like a big pot of black drip coffee. The other dynamic is you saw a little bit of growth in private label. And while we actually manufacture both private label and brand in our K-Cup line, no doubt, our share position is stronger in branded and our margin position is stronger. So you saw that unfavorable mix. When you hear all of that, Lauren, I do think, to your question, we would say this is cyclical, not structural. This is a response to a highly inflationary environment, hit our P&L in the front half, and that is temporarily impacting consumer behavior. I've been in coffee for decades in a past life as well. And you see that especially on the tail end of an inflationary period. So what about going forward in the back half I expect a very different picture. Let's start with costs. I think the headwind you saw in Q1 and Q2 on green coffee, costs as well as tariff cost turns far more favorable and begins to present itself as a tailwind. Second is, you will see good brewer shipments in the back half, a good early indicator of the future. We will grow household penetration again this year of Keurig installed base, and you will see a far more favorable pod trend. Next, you're going to see early synergies floating through the U.S. coffee P&L as U.S. coffee and legacy Peet's Coffee come together for one U.S. coffee business. And then finally, Anthony said this on the earnings call, the K-Cup business will shift from a reporting segment standpoint, from JDE Peet's and U.S. Coffee. For all those reasons, PAUSE we're anticipating a much improved back half on U.S. coffee relative to front half.

Okay, great. And when we think about coffee more broadly, the combined entity, what should investors look for over the next year to believe this is becoming a stronger coffee platform rather than just a larger one? And what do you think is the time line to realize some of the revenue synergies for the broader coffee business that you've talked about?

Yes. Look, ultimately, I expect the strength of this new platform to be evident in the results that we produce. And I'm going to start with the category here again. Global Coffee is a $400 billion TAM it is a consistent growth category. In fact, if you look over the last 4 decades, you would see round about a 2% volume CAGR and a value or sales CAGR even stronger. It is a ubiquitous habit, a wonderful habit. I can't imagine starting the day with Elk coffee every day. And in fact, here in North America, it's the #2 most consumed beverage behind water, mostly tap water. And globally, it's the #3, which also presents a growth opportunity. It's behind water, tea and then coffee. And when you see a lot of the emerging world in global coffee, you see a step-by-step shift culture to coffee culture among youth. Another tailwind in addition to premiumization. So we know what it takes to win in this category. Scale matters in global coffee, brands matter in coffee, and a set of capabilities oriented around consumer orientation. The platform we're building, this new global Coffee Co is built for purpose to capitalize on that attractive category and really fortify those advantages. We will have leadership positions #1 or #2 in 35 markets around the world. We will have the scale in supply chain, in coffee procurement. I've already mentioned, #1 buyer of the coffee bean globally. We will have 4 billion brands and a host of $100 million to $500 million brands kind of taste of the nation brands around the world. And we will have the breadth of the portfolio playing in every format every major geography, channel, at home, away from home to really fortify that look. As it relates the combination benefits that you mentioned at the end of your question, there's definitely growth or revenue opportunities, and there's cost. Let me quickly hit on growth in revenue, and I'll ask Anthony hit on cost. I'd point to 3 or 4 key areas right out of the gate. The first is Peet's. Peet's here in this country, it's a great brand, $1 billion-plus brand. California Origin Providence brand, really one of the ones even before another brand you might know from Seattle that pioneered coffee here in the U.S. in the early days. And there is an opportunity to extend that brand nationally on the back of the curing national footprint and the great partnerships and scale we have with our retailers. Second is the opportunity to take legacy Keurig brands, Think Green Mountain, Think Donut Shop, licensed brands like McCafe and extend those brands across all formats because here to for legacy Keurig, we basically played in one swimlane K-Cup singles. We now have the set of capabilities to play in every across our brands. The third revenue opportunity I'd speak to is around our systems or our brewers. One of the spice of excellence of legacy Keurig, we know brewers. We do our own brewers in-house, right? We lead that innovation, and we do it in a profitable way. There's a lot we can bring to the JDE Peet's side as it relates to brewers in that area. And then the last one I just shout out here on stage that's timely is Alta right? Alta to, you know, Lauren, is that new system. We're on track to launch that in a targeted way here in time for holiday '26, great new system, brews, every cup of coffee you look for, eye pressure Espresso, Capuchino, latte, et cetera, long drip black cup of coffee and do it in a very sustainable way, plastic-free aluminum-free. We'll launch that here, but now courtesy of this combination, we can consider taking that on the road beyond the U.S. You want to touch on cost synergy?

Sure. We're targeting $400 million in cost synergies over a 3-year period post acquisition. They come from 3 buckets. The first is IT and SG&A. We'll look to optimize the organizational structure. We'll look to consolidate IT systems and vendors we'll look to increase the use of digital tools, including AI. The second area is procurement. Obviously, we have significant coffee green coffee buying scale that will leverage. We see efficiencies in other areas like packaging and media. Tim mentioned brewers will look to consolidate our brewer design as well. And the third area is supply chain. There's significant opportunities to consolidate manufacturing and distribution, particularly in North America across Peet's and Keurig. And that activity is already happening. In support of these individual work streams, there are dedicated teams across KDP, JDE Peet's, third-party experts as well that are all contributing. There are specific accountabilities and timetables and there's a management review process supporting the whole thing. So we're very confident in the delivery of the synergies. We started to see some in Q2. This will step up in the back half and improve into '27 and '28. And synergy attainment is an important part of the HSD EPS algorithm for a future coffee Co.

Okay. Great. We're going to have to end there, and we're going to go to breakout. But please join me in thanking KDP and also for the cooler of beverage and all week.

Great. Thank you.

Thank you.