Keurig Dr Pepper Inc. (KDP) Q2 2024 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Keurig Dr. Pepper’s Second Quarter 2024 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] This conference is being recorded and there will be a question and answer session at the end of the call. I would now like to introduce the Keurig Dr Pepper's Vice President of Investor Relations, Jane Gelfand. Ms. Gelfand, please go ahead.

Thank you and hello, everyone. Earlier this morning, we issued a press release detailing our second quarter results, which we will discuss during this conference call. A slide presentation will accompany our remarks and can be viewed in real time on the live webcast. 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 Q2 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 Chief Executive Officer Tim Cofer; and Chief Financial Officer and President, International, Sudhanshu Priyadarshi. I'll now turn it over to Tim.

Thanks, Jane, and good morning, everyone. It's been eight months since I joined this great, young and dynamic company. I continue to be impressed with the caliber of the organization, the quality of our execution and the challenger mindset our people embody each and every day. Together, we delivered healthy second quarter performance while making important progress to advance our strategic agenda. With our first half now in the books, we're on track to deliver full year results consistent with our on algorithm outlook. The operating environment remains uneven with resilient demand from higher income consumers and value seeking behavior among low and middle income consumers. We are highly attuned to these dynamics and despite them, we still expect a top-line acceleration over the balance of the year. Thanks to several elements largely within our control including new partnership growth and traction from innovation. At the same time, our first half weighted EPS delivery outs taped the way for on planned performance as we also seed our multi-year growth agenda. In Q2, constant currency net sales growth sequentially improved to 3.4% and reflected a re-weighting of our top-line drivers with pricing moderating and volume mix accelerating to positive territory. We entered 2024 anticipating net price realization for KDP and the industry would normalize from the unusually high levels over the past few years and it has. It's encouraging to now see a more balanced top-line growth profile begin to emerge. At the same time, we remain focused on generating leverage throughout our P&L to fund reinvestments and drive earnings growth. In Q2, continuous productivity savings and cost discipline drove strong operating margin expansion helping to translate our top-line momentum to a solid bottom-line results with 7% EPS growth versus prior year. As we execute against evolved strategic framework, we registered a number of wins in Q2. Let me highlight a few that will continue to payoff throughout the year along with focus areas for the long-term. As you know, one of our key strategies is consumer obsessed brand building. Our innovation ramped significantly in the second quarter and as expected these new products are seeing good marketplace Traction. In U.S refreshment beverages, Dr Pepper Creamy Coconut is now our most successful limited time offering. Canada Dry Fruit Splash is also proving highly incremental to the brand. Together, these innovations are driving improved share trends across the CSD portfolio. Outside of CSDs, we're pleased with the initial response to our WonderWater restage, which is re-engaging consumers in its early days. In US Coffee, our new refreshers from The Original Donut Shop are on track to be the largest Keurig platform launch of the last several years. These coffee shop inspired cold beverages are bringing new occasions and younger consumers into the single-serve K-Cup category and are supporting market share gains for our owned and licensed portfolio. Outside the US, our Peñafiel Aced and Twist products are extending the powerful Peñafiel brand into new white space segments and contributing to market share gains for our Mexico portfolio. In total, these Innovations will continue to develop over the coming months with additional news and activation upcoming across the portfolio including in Powerhouse brands like Motts and Green Mountain. We also made progress with new partnerships as we focus on shaping our now and next beverage portfolio. With Electrolit and La Colombe now part of that portfolio, our excitement about each brand's future and the win-win collaboration models behind them continues to build. As anticipated, revenue contributions from these brands increased during the second quarter and should further scale over the balance of the year. The transition of Electrolit volume to our DSD network is ongoing with the handover expected to be complete in the back half. As we take on this distribution, we're beginning to unlock the brand’s untapped potential with outsized market share gains in KDP served regions and channels. This performance underscores our go to market capabilities and spotlights the growth opportunity for Electrolit within the Sports Hydration category. Similarly, we continue to cultivate our La Colombe partnership across both K-Cup pods and shelf-stable Ready-To-Drink coffee. Focusing on the latter, the La Colombe’s reformulated Draft Lattes are truly differentiated in this category and showed strong promise. As we speak, our DSD organization is focused on expanding this unique product’s availability and display to drive initial consumer trials contributing to strengthening marketplace trends. In May, we also announced a planned transaction with Kalil Bottling Company, another concrete step to amplify a route-to-market advantage, which is a key component of our strategic agenda. With one of only three nationwide direct store delivery systems for LRBs, we understand innately the competitive advantage of controlling last mile distribution in our industry. This particular transaction will grant us full control of our brands’ distribution in Arizona, a strategic and fast-growing state and with it the ability to optimize and extract even more leverage from our local DSD assets. We are moving quickly towards completing the acquisition of Kalil’s production, sales and distribution operations in Q3 and we are honored that the Kalil family has entrusted us to carry on the legacy of their multi-generational business. Perhaps less externally visible in any single quarter is the significant work we're doing to dial-up our productivity and fuel for growth engine. With consumer health mixed, pockets of inflation returning like in the case of green coffee and currency volatility increasing, we are reinforcing our attention on driving productivity, network optimization and structural cost discipline. These focus areas are essential to securing additional near-term flexibility and room for reinvestment and they are enablers of consistent delivery over the long term. We had an active agenda to support each element in 2024 and are laying the groundwork for meaningful further actions that will benefit us well beyond this year. Also woven throughout our strategic agenda is a commitment to corporate responsibility and being a force for positive change. I am proud of how our people corporate this focus into every day activities and decision-making, while also pursuing a set of ambitious multi-year targets. We highlighted this important work once again in our 2023 corporate responsibility report published just last month. I encourage you to give it a read to track our progress and to witness how we live up to our Drink Well, Do Good progress. Now, let's turn to our Q2 segment top-line performance. Sudhanshu will then discuss segment performance in more detail including the strong margin expansion we delivered across the board. Starting with US Refreshment Beverages, revenue grew at a low-single-digit rate in the quarter. Our performance was led by CSDs which remain an outperformer in the liquid refreshment beverage space by offering compelling everyday value and variety. Within the CSD category ,and as expected, our relative market share trend improved as Q2 progressed and as our 2024 innovations slate and brand activations layered into the market resonating with consumers. Brand Dr Pepper maintained its long-term track record of market share growth. On the back of this year's dirty soda inspired Creamy Coconut LTO and the marketing excellence behind our new “it's a Pepper thing” campaign. Our ability to steadily grow Dr Pepper by staying on top of trends and continually tapping into the cultural zeitgeist is a defining characteristic of the brand. It’s on track for its eighth consecutive year of market share outperformance and yet there is still substantial untapped opportunity to further expand its preferred status. Beyond CSDs, we also delivered another strong quarter of growth for C4 Energy. Despite the energy category’s recent moderation, it remains a highly attractive space with consistently faster volume growth in all major beverage categories including on a year-to-date basis. With C4, we also have a uniquely positioned brand that is gaining share with meaningful growth runway still available for us to realize. In some parts of these still beverages portfolio, we continue to see a more pronounced macro impact leading to softer category growth rates. As a result we're taking steps to ensure our brand’s value propositions are clearly resonating. This includes targeted channel-specific promotions, price pack work like smaller bottles and multi packs and a focus on value-oriented channels like Club and Dollar. Simultaneously, we are investing to drive demand through innovation and brand activations such as this year's rollout of reformulated Bai WonderWater and the Summer Olympics Gymnastics tie-in for core hydration Moving to US Coffee, we made further progress against key priorities during the quarter. While overall at-home coffee category trends remained subdued our relative performance is strengthening with pod shipments improving to flat year-over-year in Q2. This outcome reflected market share gains across our owned and licensed brands including initial traction across our three focus areas, affordability, premiumization, and cold coffee. Together, these initiatives reflects a barbell strategy intended to highlight value for those consumers who are feeling stretched and provide premium options for those with more spending power. When it comes to affordability, during Q2, we began rolling out smaller pack sizes intended to optimize the cost per package of K-Cup pods. Because of its multi-serve nature, coffee is one of the highest dollar ringed food and beverage categories and these price pack adjustments enable us to hit more attractive every day and promoted price points across grocery and club channels. At the same time, we launched digital campaign that emphasized the affordability of consuming coffee at home instead of at coffee shops which we see as particularly resonant messaging in the current environment. Our Q2 affordability strategy also extended to brewers where we drove sizable Keurig share gains led by entry price machines and supported by some targeted value investments. Shifting to premiumization, the combination of brewer innovation in an increasingly well-developed set of super premium pods is strengthening Keurig’s system credibility with coffee connoisseurs and tapping into more affluent consumers. This includes our work with Lavazza, now a licensed brand within our portfolio as of Q2. With greater commercial influence, we have already secured expanded distribution for the brand and are just getting started on the activation agenda. Moving to cold coffee, we are actively pursuing the significant number of ice occasions currently occurring away from home. Cold Coffee represents less than 20% of at-home occasions, while at certain coffee shops, cold beverages account for upwards of 70%. One way we are pursuing this white space is through K-Cup innovation with significant activity during Q2, including refreshers cold brewed pods. These items performed well in the quarter with wider distribution and support slated for the back half. We're excited to further address the cold opportunity through brewers including the upcoming launch of our new K- Brew + Chill brewer in Q3, as well as through the continued expansion of La Colombe Ready-To-Drink coffee. All in, we're encouraged by the progress we are seeing from our multiple coffee initiatives which is visible in improving market share for both K-Cup pods and brewers. Even so, and as with many food and beverage categories today, demand trends across the larger at-home coffee category are soft. In single-serve, a promotional environment that is at odds with significant green coffee inflation also persists. This softer demand backdrop supports why we constructed our 2024 outlook assuming a muted revenue growth contribution from U.S Coffee, which remains an appropriate planning stance. Turning now to International, impressive segment performance continued in the second quarter with double-digit constant currency growth on the top and bottom-lines and broad-based momentum across the portfolio. In cold beverages, strong in-market execution in both Mexico and Canada powered our results. Compelling Peñafiel the outline extensions momentum behind Clamato and Canada Dry and ITP share gains in the low and no alcohol category led the growth. Our Canadian Coffee results were also robust in the quarter driven by our owned and licensed brands and supported by nuanced portfolio management. With exceptional strength in the International business in Q2, we also seized the opportunity to reinvest in our brands and capabilities to see the future growth adding to our confidence in sustained segment momentum. In closing, we are pleased with our overall second quarter performance and remain on track to our full year outlook. At the same time, we are activating our strategic agenda. Our consumer-centric approach to brand building is resonating in markets. Successful portfolio expansion into higher growth categories like energy, sports hydration and ready-to-drink coffee continues. And multiple initiatives to strengthen and already potent route to market are underway including our pending transaction with Kalil Bottling. We also remain highly focused on furthering our enterprise-wide efficiency and cost agenda which will underpin our visibility for the balance of the year and our ability to invest in the future. And throughout our capital discipline is unwavering and with a strong balance sheet and improving free cash flow, our ability to strategically deploy our cash is robust. With that I’ll turn the call to Sudhanshu.

Thanks, 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.

Thanks, Sudhanshu. Now halfway through the year, 2024 is progressing well and according to plan. We knew that our top-line momentum would build quarter-over-quarter and it has improving market share trends and strengths of execution should support further net revenue acceleration in the back half. We also knew that margin and EPS gains would be tilted towards the first half and we delivered. With 9% EPS growth in the first six months of the year, we have good visibility to delivering on algorithm performance in 2024 while solidifying our focus on the strategic initiatives that will fuel consistent growth over multiple years. Before moving to Q&A, I'd like to take a moment to recognize our greatest source of competitive advantage, our talented people. I am thankful to our 28,000 colleagues for the hard work and dedication reflected in our Q2 results and in the strategic agenda we are simultaneously activating that will benefit us in the future. Thank you for your time and we're now happy to take your questions.

[Operator Instructions] The first question comes from Bryan Spillane with Bank of America. Please go ahead.

Hi, thanks operator. Good morning, everyone. Tim, I wanted to just pick up on maybe some of the comments you made about and some of the things that have changed like inflation the dollar strengthening a bit. Just can you give us a perspective on what the operating conditions or what the segment or category dynamics are today versus maybe where they were at the start of the year when you set your plan? The guidance isn't changing, but I guess it feels like the categories have a little bit and I know one major theme that we've seen across earnings season is just demand in the US across a lot of categories not as strong as expected and we've got some companies rolling back on price. So just want to kind of want to get your perspective of is it accurate that maybe the categories maybe not as strong as you all thought at the start? What have that patience you've made and maybe if I can slip into that in CSDs US in particular, if needed the - that the consumers’ ability to maybe absorb or take on more and more price increases. I know there's a lot there, but thanks.

Yeah. Thanks, Brian. I'd say - I'd start by saying we are pleased with our execution and our results in Q2 despite an uneven I think was a word I used earlier uneven or mixed consumer environment. And I think when you ask about how the categories are evolving, obviously, it starts with the consumer. And we continue to see, I mentioned this in our last quarterly call, we continue to see a bifurcation across income levels. So we're seeing the high income consumer continuing to be resilient in their purchases and their demand and we're seeing a low and middle income consumer that's under pressure and seeking value. And that manifests in many ways as it relates to the beverage industry. Consumers are being more selective around when they're buying, where they're buying, we are seeing a little bit more of the purchase in key categories around holiday periods, waiting to stock up for that Memorial Day or July 4th period for example. We're also seeing the shifting in spending to more value-oriented channels like club like a dollar and value. And I would say over the course of Q2, these dynamics became a bit more pronounced. But the way we look at it given our broad portfolio across liquids refreshment beverage is this drop creates both opportunities and challenges. And I think on opportunities I now connect it to the end of your question, I’d start with CSDs. CSDs right now are highly resilient and it's clear that CSDs continue to offer value to consumers. This category is outperforming even our expectations that when we created the plan for the year. We're seeing the robust category both on value and dollars and on volume and within that of course we're seeing a strong performance from KDP brands led by brand Dr Pepper which grew share again in Q2. I also think on the coffee side, while we are seeing a more muted total coffee contribution, it's a great opportunity to bolster at-home coffee consumption through value-oriented tactics. I talk about affordability as one of our three key tactics. Thanks to opening price point brewers, value messaging versus coffee shops which we put out there in Q2 and so on. There are challenges as well in certain parts of our portfolio and the one that I speak to is still beverages. I think still beverages and some of the other categories perhaps even energy that skew themselves towards C-Store, towards single bottle or can purchase, those were seeing a little bit more pressure. So that's how we're seeing it. The great news is when you look at the entire basket of our portfolio, I would say it is on plan and that's why that gives us the confidence that and the strength of our ramp in the back half around partners give us the confidence to continue to confirm MSD on the top-line.

Thanks, Tim. Appreciate it.

The next question comes from Peter Grom with UBS. Please go ahead.

Thanks operator and good morning, everyone. Hope you're doing well. So, I was hoping to get some color on the organic sales guidance for the back half of the year which implies a pretty decent acceleration. You both touch on this acceleration being driven by areas where you have controls of partnered brands and innovation. So maybe can you just speak to how we should anticipate this contribution building and then just on the underlying business obviously a lot of moving pieces. Can you just touched on a lot of those as to Bryan's question, but you do you need any improvement in core trends and orders to hit this target or can this current environment hold and you would still see this acceleration?

Yeah, thanks, Peter. Yeah, I tell you we have good line of sight to sequentially stronger top-line growth in the back half in Q3 and Q4. And the good news for us is it reflects factors largely within our control. I would say it is not predicated on a need for a significant change in terms of consumer health or macro. The single greatest driver of that top-line acceleration does lie with these partnerships that are continuing to scale. Lead among them is Electrolit. Electrolit will continue to ramp in Q3 and Q4. We’re very pleased with the distribution hand over that we've had so far and that is continuing to ramp on a geographic and an account level and will be a meaningful incremental contributor in Q3 and Q4. Shifting to the coffee side of the house, I’d point out Black Rifle. Black Rifle is a new brand that we signed on I think I mentioned it at the tail end of last call and that will continue to ramp into Q3 and Q4. La Colombe is another that will contribute more to the top -line in the back half. So, partnerships is a big part of it. On the base business side, I mentioned some of our innovation, we're really pleased with what we seen on for example Creamy Coconut, Canada dry Fruit Splash, the Bai WonderWater restage and then we have more to come that actually will begin to hit in Q3, think core hydration Olympics sponsorship with US Gymnastics. We've got a big program for Mott’s at back-to-school, I'd say one of our biggest in years and I stand to hesitate to tell you about another season of Fansville. I’ve seen that the team’s work on Dr Pepper Fansville and I am telling you if you're a College Football and Dr Pepper fan, you're going to be excited about what. And I remind you we've got an extended season of College Football this year. So, we feel good about it. The last one I talk about is International. International right now strong double-digit growth in Q2 and we expect international to continue to be a meaningful contributor. So, it is not an easy operating environment. It is mixed and uneven. But we're confident about our plans and really focused on strong execution to deliver on our outlook.

Thanks and maybe just one quick follow-up. You mentioned green coffee prices starting to move higher. How should we think about this dynamic impacting your pricing strategy in coffee? And maybe what you'd expect from the category more broadly as we move forward here?

Well, Peter, this is Sudhanshu. Good morning. You are right, the green coffee green coffee price is higher and we've talked about before that it will factor in our guidance. We hedge for six to nine months. So we are factoring as part of the guidance. So our top-line and bottom-line guidance includes that. Your question about pricing as a category, there is two words, we always focus on high quality activity to drive category growth. Tim mentioned in the call. Right now we are seeing the promotional dynamics that play in the category which is as odds with where the green coffee prices are. But we have continued to accept to appropriately position ourselves versus the competition. But as I said before, we are monitoring the situation. It's part of our guidance we have factored in. But yeah, it does create a headwind in H2. But our intent is to continue to responsibly manage our price gaps. But we must protect our ability to fund high quality investment on behalf of these categories and our brands.

The next question comes from Lauren Lieberman with Barclays. Please go ahead.

Great. Thanks. Good morning. Just coming back to coffee again, I mean, it seems like great timing that you had a a plan already in place and underway to address affordability is what given what we're seeing call it accelerate in the consumer environment. But I was curious, I guess, given the mentions on the promotional environment, and Investments already made to-date, where do you stand on price gaps? So are you feeling good about where you are? Is there incremental investment needed in price gaps to narrow them or in promotions specifically? And then, on the more structural sort of invest - strategic elements here where you can - how fully rolled out on those smaller packages more affordable price points or is that something that also keeps building as we move through Q3?

Yeah. Thanks, Lauren. As mentioned, when we think about driving our coffee business, we're really focused in three areas, affordability, premiumization, and cold coffee. And I think those first two do reflect this barbell strategy as we've called it and the bifurcation we're seeing in across the consumer landscape. Your question primarily was in that affordability area and indeed pricing and absolute price and price gap is one element of that. I would say specifically to your question and how we're feeling on price gaps, we feel good. We feel good. The move that was made late last year did put us more at historic price gap levels. I do think as Sudhanshu said and as we said in the prepared remarks, with green coffee going up right now, it is a little bit at odds with the current promotional dynamic that's going on. We're going to closely monitor that and obviously take a measured and nuanced approach. But our affordability strategy is much more than that. And one of them is the down counts so that was part of your question as well specifically on two of our key sizes 12 count at Food channel, we downsized to 10 counts. That is done in terms of from a production standpoint. So you'll continue to see a little bit of that 12 count still out in the marketplace. But it's rolling through as we speak, some retail some channels are already fully in 10 others are still working through 12. We've seen a good response from that Lauren, in terms of volume response as we would expect and obviously that allows us to hit an everyday price point and a promoted price point that is more in line with what consumers are looking for especially at that low and mid income level. I’ll remind you that as you look at total food and beverage, 40 is actually a top five dollar per unit outlay because of its multi-serve nature. And these down counts 12 to 10 and then I’ll reference the other big one in the club channel it was a 100 count and that's down to an 80 count and that also allows us to hit key price points. So you've got the pack down counts. You’ve got the value messaging, I think In the last quarter Lauren, I remember you asked me a question on that and indeed we went live with that feeling good about that. I think that is very resonant and compelling messaging positioning our coffee single-serve at-home, the quality, the variety in a broader frame of coffee shop and away from home. And the last thing I’d point to on affordability is entry price brewers. We're seeing that we're growing the Keurig system within the total coffee maker category and part of that is entry price brewers. So that's the affordability. I will stop there, but I remind you and others that there's also a great premium strategy as well, as well as a big push into cold coffee.

The next question comes from Dara Mohsenian with Morgan Stanley. Please go ahead.

Good morning. So, I just want to get a bit more granular on the take-home coffee category. Obviously, there’s been a slow down in the last year and a half, which seems to be improving. But more recently now we've seen a pronounced slowdown at the same time in their strength. So the broader energy, let's say caffeine complex seems to be a bit under pressure. So, A. would just love your perspective on that what's driving that? Is it more short-term macros? Is it the lot of middle-end consumer pressure you mentioned or other longer-term factors? And just B, is there opportunity in coffee to source greater share from energy here as you think about share of stomach. And then also maybe you can just touch on any shifts you're seeing in away-from-home coffee to at-home coffee and in brewing versus ground coffee and at-home just as you move through Q2 and here so far in Q3? Thanks.

Thanks, Dara. No doubt, at-home coffee volumes remain muted in Q2 and I'd say at a similar level to what we saw in Q1. I would also say it's not all that different from many food and beverage categories today. Importantly, within at-home coffee, the single-serve category outperformed as it has the last many years and did as well. We're feeling good about the progress we've made across a number of initiatives, the ones I mentioned to Lauren, affordability, premiumization, and cold coffee. But I think we have a - an appropriate outlook for the balance of the year in terms of expectations and our guidance contemplates that muted revenue contribution from coffee. In tougher macroeconomic times, we have seen shifts in consumption from away-from-home channels, to at-home channels. And that does tend to benefit our business on the coffee side, as well as on the liquid refreshment beverages side. Obviously, more of our business is in at-home business than away-from-home. So I think in general, if as we see that trend and certainly based on some of the actions we're taking around price promotion, around down counts, around value marketing in the broader frame, I think that conserve as well. You also referenced energy and let me give you a few comments on that. Energy in my view is a highly attractive space. It is over time, over these last many years consistently faster volume growth than really any other major beverage category. That is also the case on a year-to-date basis. On a year-to-date basis from volume standpoint, energy remains the fastest growing as it did in ‘23 and in ’22. Now within that, we have seen a slowdown of late and the volumes have moderated. I do think that is related to the broader macro and some of the pressure we're seeing of consumers, particularly in low and mid income energy obviously skews to C-Store. It skews to single bottle purchase and that’s where you're seeing a little bit more pressure in certain channels like gas and convenience. But for me, that doesn't change what I characterize as a constructive view on the energy category. Energy. addresses a clear set of needs for consumers. It occupies clear demand spaces. I think there's a lot of interesting nuances and opportunities within energy to build out sub-segments and you're seeing that today in terms of challenger brands that are coming in relative to the big large historic incumbents. And I look, tell you Dara that you that there's significant helpful penetration gains still for the energy category as it relates other beverage categories, think CSDs. Last thing I’ll tell you on energy is, we continue to be excited about our position with C4. C4 has strong momentum. I think in the quarter, our C4 business on a retail sales basis grew about 30% and at only 3% market share we believe we have meaningful runway for growth.

The next question comes from Chris Carey with Wells Fargo Securities. Please go ahead.

Hey, good morning, everyone. So, I wanted to just follow up on some of the back half commentary, which has been well covered. But in the U.S. Coffee business we’ve seen this stabilization. There is a sequential improvement and a pause specifically, I know you're talking about muted performance for the full year. But is there any reason to believe that going to the back half of the year this stabilization to your mind would not sustain and maybe even continue to improve as you fold in partners? And similarly, is there any reason to your mind that the pricing that we've seen which did down a little bit should be materially improve into the back half? So it’s a bit of opposite questions between the two and if I could sneak this as given we are at the end of the call, but the half in US refreshment improvement, is there a way that you'd frame the contribution from the distribution partnership ramp relative to innovation, is it mostly distribution and innovation is the kicker? So you know thanks for those two on coffee and US refreshment in the back half.

Yes. Hi, Chris. So, let's start coffee back half and then we'll go to ref bev. As you said we're encouraged by the slow and steady progress we're seeing. in K-Cup volume trends and I will point out that we've now had four consecutive quarters of sequential improvement in K-Cup volume. And we were pleased to see our K-Cup shipments stabilized in the second quarter flat - I think up 20, 20 basis points. So this slow and steady improvement trend is clearly there. There's always going to be potential for quarter-to-quarter lumpiness, but I would expect that the H2 second half pod shipment trend will improve versus H1 in particularly in Q4. And indeed, that improvement has been underpinned by the progress we're making in our owned and licensed business, the market share progress we are seeing I referenced some successful innovation, the work we're doing again in the three areas around affordability, premiumization, cold coffee. And a big push into cold coffee the back half. That’s pods, that’s refreshers, that’s also our new Brew + Chill brewer and that'll be the first brewer that actually brews out a cold cup of coffee. So feeling good about the progress in coffee in the back half. As it relates to refreshment beverages, I'm pleased with both the base business and the new partners. And they will both play a meaningful role in the back half. The ramp, as I said earlier will be more around what we see from partner contribution, Electrolit, La Colombe, C4, et cetera. And I think we’ve said earlier then on a full year basis we expect those new partnerships to add about 200 basis points to total company net sales and I would tell you we continue to feel good about that number.

The next question comes from Bonnie Herzog with Goldman Sachs. Please go ahead.

Alright. Thank you. Good morning everyone. I am I have a question on your International business. It's clear you've been making a significant push. So curious to hear what you believe, are the key drivers that are going to allow you to continue to win internationally? And second, how will you evaluate whether it's best to enter new markets or organically or possibly through acquisitions? And then finally what percentage of your sales, do you think your International business could ultimately represent? Thank you.

Bonnie, good morning. So, you're right, we have - International is doing well. We said that this will be a growth driver for our business for overall KDP and we are very pleased with the momentum in our International segment. This performance basically reflects combination of growing categories as per their share gains. So it’s geographic and category-wise expansion and we are seeing low and no alcohol in Canada and Mexico. And we are also seeing line extensions in Mexico. We are investing in route to market and in cooler in Mexico and we are seeing the execution there. And also the local team they understand the market consumer. You are seeing the on and licensed pod momentum in Canada and we continue to have confidence that this growth actually give contribution from International will continue. Regarding your question on the future markets, plus we have a lot of work to do in our bases in basically in Mexico and Canada. And we have significant opportunity to drive outsized growth, but we do look at both inorganic and organic strategy to unlock this potential. We have the similar model in those markets what we have in US, buy, build and partner model. And we will look at into some international markets to see whether we can make some inorganic entry, but mainly focused right now is driving what we are driving in Mexico and Canada. And while I don't have a number to give that what will be the mix of it, but the math you could see last five years, International has grown close to double-digit CAGR and we expect similar type of growth coming to the business.

Our last question today will come [Indiscernible] with Citi. Please go ahead.

Hey, good morning, everyone. So, Tim I wanted to go back to US Coffee and the second half outlook. Obviously, good to see the volume improvement in pods and the total segment but obviously pricing came in more sequentially. So should we expect this level of promotional activity to remain consistent in the second half? Would you think about maybe reducing a bit the promotional intensity? And do you need that level of promotional activity to get further volume improvement in the second half? Just to get some context that will be will be helpful. Thank you.

Thanks [Indiscernible] As the pioneer here in the single-serve and the category’s steward, we're most focused on high quality activity should drive sustainable single-serve category growth. And that’s of course for us, but for all our participants and all of our partners in the Keurig ecosystem. And that includes our work on innovation, in consumer marketing, value messaging, both on brewers and on pods. That said, right now there are some promotional dynamics at play in the category and in response to that, at the end of the year and early this year we did take some steps to appropriately position ourselves versus competition. I think inherent in your question is this tensions leave all that. The building backdrop around green coffee prices is a bit at odds with some of the promotional activity and I would say over long term it does not appear to be sustainable. So from our standpoint, of course we're doing the right thing around striking that balance around protecting our positions and making sure that we also have the margin structure we need to continue to drive the entire ecosystem. Obviously, part of that is the way that we manage commodities and our hedging position which I think we’ve shared in the past, that’s usually six to nine months out. And so that means the higher green coffee could begin to impact our P&L progressively over the course of H2, second half. So, we're going to continue to closely monitor that situation. Our intent here is to responsibly manage our price gaps while also protecting our ability to fund high quality reinvestment to drive the single-serve category.

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, Drew and thank you, everyone for participating this morning. We appreciate your support. Investor Relations is available all day to answer any follow-up questions you may have. Appreciate it and have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.