Keurig Dr Pepper - Earnings Call - Q2 2025

Executive Summary

• Q2 net sales rose 6.1% to $4.16B (7.2% constant currency), with strength in U.S. Refreshment Beverages (+10.5%) and improving trends in U.S. Coffee; adjusted EPS grew 11.1% to $0.49 while GAAP EPS was $0.40.
• Gross margin contracted 110 bps year over year on inflation despite disciplined SG&A, but adjusted operating margin held flat at 24.7% versus Q2 last year.
• Management reaffirmed FY 2025 guidance (mid-single-digit net sales; high-single-digit adjusted EPS) and now sees ~0.5 pp FX headwind; below-the-line assumptions updated to ~$700M interest expense, ~23% tax rate, and ~1.36B diluted shares.
• Execution catalysts: fast-scaling energy portfolio (Ghost, C4, Bloom, Black Rifle >$1B run-rate; ~7% share), DSD expansion (adding Dr Pepper distribution in parts of CA/NV/Midwest), and ongoing coffee pricing/productivity to offset commodity and tariff headwinds.

What Went Well and What Went Wrong

• What Went Well

  • U.S. Refreshment Beverages delivered 10.5% net sales growth, driven by 9.5% volume/mix (Ghost +6.6 pp) and 1.0% price; adjusted segment OI +8% to $781M, with strong CSD share gains and energy scaling.
  • Energy portfolio momentum: four brands now >$1B run-rate and ~7% category share; management targets double-digit share over time. “Our four complementary brands… now combine to represent over $1 billion in annual run-rate net sales… with 7% market share already”.
  • Innovation and marketing: Dr Pepper Blackberry (#1 new product), 7UP Tropical, Electrolit 30%+ retail sales growth; “Dr Pepper Blackberry ranks as the number one new product in the category this year”.

• What Went Wrong

  • Gross margin contracted 110 bps YoY from inflation; adjusted gross margin 55.0% vs 56.1% last year; management flagged mounting back-half cost pressure.
  • U.S. Coffee net sales declined 0.2% on −3.8% volume/mix despite +3.6% price; management expects subdued performance in H2 given tariffs and higher-cost hedges.
  • International reported net sales −1.8% (constant currency +5.7%) amid FX and softer Mexico backdrop; adjusted OI +2.6% but FX translation weighed on GAAP OI.

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Keurig Dr Pepper's earnings call for the second quarter of 2025. This conference call is being recorded, and there will be a question-and-answer session at the end of the call. I would now like to introduce Jane Gelfand, Senior Vice President Finance at Keurig Dr Pepper. Ms. Gelfand, please go ahead.

Jane Gelfand (SVP of Finance)

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. An accompanying slide presentation 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 Form 10-K and the latest 10-Q, which will be filed with the SEC later today.

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 material. Here with us today to discuss our results are Keurig Dr Pepper's Chief Executive Officer, Tim Cofer, and Chief Financial Officer and President International, Sudhanshu Priyadarshi. I'll now turn it over to Tim.

Tim Cofer (CEO)

Thanks, Jane, and good morning, everyone. We delivered strong second quarter results, closing out a very good first half of the year. Our resilient performance is a testament to our advantaged business model, execution, and agility while operating in a dynamic environment. Looking ahead, the balance of 2025 will present challenges in the form of rising cost pressures, including from tariffs that remain highly fluid, as well as continued consumer caution. Despite this, we remain on track to achieve our full-year outlook thanks to strong first-half delivery and well-calibrated back-half plans. While driving hard to deliver on our 2025 commitments, we continue to advance KDP's long-term value creation strategy. As a reminder, our strategic roadmap is focused in five areas. Our entire organization is galvanized around these goals, with forward progress being made each quarter. Let me share some examples from Q2. Starting with consumer-obsessed brand building.

In June, we published KDP's inaugural State of Beverages Trend Report, reinforcing our thought leadership in the beverage industry. Drawn from national surveys and our own proprietary data, this insight-rich report underscores the important role beverages play in consumers' lives and how evolving preferences are shaping demand. With consumers' ever-changing needs at the heart of everything we do, it's no surprise that this report captures many of the trends we have been actioning against. For instance, we know that nearly half of all Americans and almost three-quarters of Gen Z consumers try a new beverage every month. This year, we are satisfying their thirst and curiosity through a robust flavor-oriented innovation slate in carbonated soft drinks, which has been highly successful to date.

In fact, Dr Pepper Blackberry ranks as the number one new product in the category this year, while iconic 7UP is enjoying renewed momentum on the back of winning flavors like Tropical, as well as a refreshing Endless Summer limited-time offering. Our second pillar is reshaping our now and next portfolio, and we continue to increase our exposure to attractive white spaces. Energy is a major focus for us, and I'll speak more about our early success in that category in a moment, but we have also made exciting progress in other adjacencies. In sports hydration, Electrolit is the fastest-growing scaled brand in the category, benefiting from strong velocities, DSD-enabled distribution expansion, and product and packaging innovation. The brand registered over 30% retail sales growth and gained more than a point and a half of share in Q2, yet has still only scratched the surface of its potential.

We're also beginning to build a presence in new categories and segments. During the second quarter, we took 100% ownership of Dila Brands, a key player in powdered drink mixes and liquid water enhancers. This small tuck-in builds on our productive multi-year partnership as a minority investor. Now, with full ownership, we will leverage Dila's know-how and capabilities to expand our presence in an attractive and growing category, including by extending more KDP brands into the space. Prebiotic CSDs are another fast-growing area of interest, having quickly captured nearly 3% market share of the $46 billion carbonated soft drink category. In Q3, we're entering this subsegment with the launch of Bloom Pop, a great-tasting soda combining bold, bubbly flavor with gut health benefits.

This launch builds on our successful energy partnership with Bloom, which has rapidly scaled to nearly a share point in energy drinks and has strong crossover potential into prebiotic CSDs. Consistent with our third strategic pillar, we are amplifying our route-to-market advantage, particularly in DSD. This starts with investing in our existing system, including through enhanced digital tools, and continues with selected network expansion opportunities. Last year, we acquired bottling and distribution operations in Arizona, and I'm pleased with the high standard of execution that our teams have brought to this important geography. Later this year, we are capitalizing on a unique opportunity to add Dr Pepper to our DSD portfolio in critical parts of California and Nevada, as well as certain areas in the Midwest.

Our teams are actively preparing for this transition, which will enable us to directly influence point-of-sale trends, drive greater efficiencies across our DSD network, and generate halo effects that benefit our other DSD brands. Our focus on generating fuel for growth is ongoing and has taken on even more importance in the current inflationary environment. We have a robust productivity program that delivered strong efficiencies in Q2, and we remain on track to achieve the high end of our 3-4% savings target this year. We also continue to manage overhead costs with discipline, as was evident in our quarterly results. Finally, our capital allocation approach remains balanced and dynamic. During the second quarter, we generated strong free cash flow and fortified our balance sheet by refinancing a portion of our debt. Moving to Q2 results, we delivered strong enterprise growth with net sales increasing 7%.

Growth included contributions from both price and volume mix, reflected continued momentum in our U.S. refreshment beverages and international segments, and illustrated encouraging sequential progress in coffee. We managed operating expenses with discipline, protecting our margins and helping to translate our top-line gains into double-digit EPS growth. Let's dive deeper into the segments and begin with U.S. refreshment beverages. Net sales grew almost 11% in the quarter, driven by a combination of core strength and rapid expansion in recently entered white spaces. Starting with the core, our CSD performance was strong, and we again gained market share in a growing category led by Dr Pepper, as well as 7UP and Canada Dry. When it comes to Dr Pepper, our multi-year momentum is underpinned by many sustainable growth drivers, some of which were apparent in Q2.

These include innovation and renovation, with Dr Pepper Blackberry proving highly incremental to the franchise, and a recent graphics refresh for Dr Pepper Cherry, driving a meaningful acceleration in sales growth, velocity, and buyers. Distribution and merchandising, particularly in Dr Pepper Zero, where we drove a double-digit increase in total distribution points and enhanced display activity, contributing to 35% retail sales growth in the quarter. Consumer engagement, including a successful marketing tie-in with the summer blockbuster Jurassic World Rebirth, which we amplified through media and in-store activations. Other core brands are also benefiting from the same playbook. For example, marketplace growth in Mott’s, our powerhouse mom-and-kid-focused brand, accelerated in the back half of 2024 behind product and packaging innovation and a new brand campaign.

Mott’s has sustained this momentum into 2025 with more exciting news on tap for the fall, including the introduction of Mott’s Fruit Smoothie Pouches in time for the back-to-school season. Beyond the core, recent portfolio evolution is beginning to more substantially move the needle at the segment level. This is most evident in energy, where we believe our multi-brand approach will be the key to winning in this attractive high-growth category. Our four complementary brands, Ghost, C4, Bloom, and Black Rifle, now combine to represent over $1 billion in annual run-rate net sales for KDP and are scaling rapidly. Each of these energy brands contributed to our Q2 results. The Ghost acquisition was a meaningful top-line driver, and brand momentum continues to build under our ownership. Ghost’s point-of-sale trends markedly accelerated since we took over distribution in late Q1, as evidenced by our market share gains in Q2.

C4’s core performance platform also continues to outpace the category, propelled by innovative new flavors like classic lemonade and healthy base velocities. Meanwhile, Bloom is scaling at an impressive rate. It has garnered nearly a full point of market share just a year after introduction and has quickly established its credentials in the female-forward energy space. Together, our brands are well-positioned to achieve our goal of a double-digit share position within the fast-growing $26 billion energy category. With 7% market share already, KDP’s energy portfolio is making quick progress against this target. For comparison, just a few years ago, our share was below 1%. A combination of strategic portfolio construction and excellent KDP execution has powered these gains, including nearly one point of market share growth in 2025 year-to-date and 30%+ retail sales growth in Q2.

Given the robust runway for further growth, we are allocating meaningful resources to support our category ambitions, led by a dedicated internal organization focused solely on energy. Simply put, we are confident we have the right brands, commercial playbook, and go-to-market prowess to continue to win in this important space. The Q2 results demonstrate how KDP is successfully building out a broad-based refreshment beverages portfolio beyond our core CSD stronghold. As we capitalize on the expansion opportunity for our emerging brands in categories like energy and sports hydration, we expect these areas to become increasingly important growth drivers for our U.S. refreshment beverage business and for KDP as a whole. Moving to U.S. Coffee, the second quarter demonstrated sequential progress for the category and KDP.

Starting with the category, both at-home and single-serve sales growth accelerated from the first quarter as incremental pricing to offset inflation flowed through and volume remained resilient. The manageable category elasticity to date is encouraging, particularly as additional industry pricing actions have been announced, including our increase that will take effect during Q3. KDP's U.S. coffee business also exhibited sequentially improving trends in Q2. We made encouraging progress in pods with a better relationship between pricing and volume mix. In brewers, though shipments remained pressured, point-of-sale consumption was stable. Looking to the back half, the U.S. coffee segment will need to manage through impacts from higher commodity inflation, increased tariffs, and consumer uncertainty in the face of additional pricing. As a result, we expect segment performance to remain subdued for the balance of the year.

Even as we navigate some quarter-to-quarter volatility, we continue to advance multiple initiatives designed to return our coffee business to consistent long-term growth. To provide a few examples, we continue to expand our premium and cold offerings into consumer-preferred subsegments. In the premium set in Q2, we began rolling out Lavazza, flavored K-Cup varieties inspired by classic Italian desserts like Tiramisu. Already a best-selling premium brand, Lavazza's entry into flavored coffee extends the brand into an attractive category subsegment that over-indexes to frequent consumers. We are also seeing strong results in ready-to-drink coffee, one of our key cold initiatives. The superior La Colombe brand continues to generate triple-digit retail sales growth as it attracts new and younger consumers to the category. In brewers, we are innovating at both opening and premium price points.

During Q2, we launched K-Minimate, our smallest brewer ever, featuring a new consumer-preferred visual identity with a more modern and colorful aesthetic, all at an affordable entry-level price point. Next month, we will introduce K-Crema, a premium brewer with the ability to produce crema-topped coffees from traditional K-Cup pods. Both brewers address unmet consumer needs and will help attract incremental households and occasions to the Keurig ecosystem. Finally, we are making great progress advancing our next-generation vision with the Keurig Ulta Brewer and K-Rounds plastic-free, aluminum-free pods. Ongoing in-home consumer beta testing is providing valuable user feedback while validating that the new system delivers a premium, best-in-class at-home coffee experience. We are applying the learnings from our beta test to our commercial plans in support of a targeted launch in late 2026.

These initiatives across pods, brewers, and next-generation systems are all indicative of our sharp strategic focus in the U.S. coffee segment. Combined with encouraging category trends, we are confident they will help return our structurally attractive business to sustainable growth over time. In our international segment, Q2 performance remained quite solid, particularly considering tough year-ago comparisons and the softer backdrop in Mexico. Net sales increased 6%, led by pricing and operating income return to gross. We continued to drive strong relative performance across our business with market share gains in key categories such as mineral water in Mexico and K-Cup pods in Canada. Our CSD portfolio also remained healthy across markets, benefiting from new campaigns and zero franchise gains for brands like Dr Pepper and Crush, as well as high-quality execution.

As we look to the back half, we expect to maintain our relative momentum in international thanks to strong base plans, our entry into the Canadian ready-to-drink tea category with Nestea, and additional pricing to help offset inflation and tariffs. Overall, I'm pleased with our enterprise performance during the second quarter. We're building a track record of delivery by executing with excellence and agility while remaining focused on the strategic framework that will position KDP for sustainable multi-year growth. I'll now turn the call to Sudhanshu, and I'll return at the end with some closing thoughts.

Sudhanshu Priyadarshi (CFO and President of International)

Thanks, Tim, and good morning, everyone. We delivered strong second-quarter results, capping off a very healthy first half in a fluid operating environment. Robust commercial plans, coupled with sharp execution, are driving our business momentum, and we continue to target an unchanged full-year outlook. Second-quarter net sales increased 7.2% in constant currency.

Our top-line momentum was broad-based with double-digit gains in U.S. refreshment beverages. Solid mid-single-digit growth in international. And encouraging sequential improvement in U.S. coffee. Net sales growth was supported by multiple drivers. Net price increased 2.2%, with positive contributions across all three segments. Pricing reflected the continued impact of actions taken to combat rising inflation, particularly in U.S. coffee and international. Volume mix grew 5% in the quarter. We experienced growth across our core liquid refreshment beverages portfolio, and the Ghost acquisition also added 4 percentage points to the top line. Gross margin contracted 110 basis points versus the prior year due to inflationary pressures that more than offset pricing and productivity savings. Strong SG&A leverage served as a counterbalance to the gross margin compression, reflecting disciplined expense management across the organization.

All in, our top-line gains translated into 7% operating income growth as operating margins held steady with the prior year. EPS grew double digits in the second quarter, bringing first-half growth to nearly 10%, consistent with our expectation of a front-half-weighted year. Moving to the segments, U.S. refreshment beverages delivered another good quarter with net sales growing 10.5%. Volume mix was the primary driver, increasing 9.5%, including a 6.6 percentage point contribution from Ghost. Net price realization also added 1% to the top line. Our base business trends remained solid with positive momentum in Dr Pepper and 7UP in CSDs, Electrolit in sports hydration, and across our energy portfolio. We are gaining market share within overall liquid refreshment beverages and have compelling back-half commercial plans to sustain our strong relative performance.

Segment operating income increased a healthy 8%, fueled by top-line growth and productivity savings, which were partially offset by cost pressures. In the U.S. coffee segment, net sales declined modestly. Down 0.2% in the second quarter. Our top line demonstrated notable sequential improvement from the first quarter, underpinned by the encouraging category trends that Tim discussed earlier. Net price realization strengthened to 3.6%. This primarily reflected a building contribution from the early 2025 price increase across our own and licensed portfolio, which was taken in response to escalating green coffee costs. We expect a further step up in net price realization in the back half, as additional, already announced pod and brewer pricing actions flow through in the market. Segment volume mix declined 3.8%. Trends in pods improved sequentially, reflecting manageable category elasticity and effective commercial programming.

On the other hand, tighter inventory management by retailers weighed on brewer results, pressuring shipments despite stable consumer sell-through. Segment operating income grew 2%. Building net pricing benefits and continued strong productivity helped to offset commodity inflation, though operating income also benefited from some cost phasing. With tariffs and higher cost coffee hedges due to play a larger role in the coming quarters, and given uncertain future category elasticity, we continue to expect some segment operating income pressure in the remainder of 2025. In international, net sales grew 5.7%. This was driven by net price realization of 5.3% and a volume mix increase of 0.4%, with the latter against a very difficult year-ago comparison. The macro backdrop was challenging in the quarter, particularly in Mexico, where unfavorable weather was also a factor.

Despite this, our international portfolio as a whole maintained good relative market momentum, supported by innovation and activation, strong in-market execution, and ongoing investments in route-to-market. Segment operating income increased 2.6%, reflecting an improving balance between pricing, productivity, and higher costs. On a go-forward basis, while we aren't immune to marketplace realities, we have well-constructed plans for the back half and expect to deliver healthy international top and bottom-line growth. Moving to cash flow and capital allocation, we generated $325 million in free cash flow in the second quarter, which sequentially strengthened from the first quarter. We expect cash flow to accelerate further in the second half, and we remain on track for healthy cash generation for the full year.

Our capital allocation priorities are unchanged: 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. Improving cash flow generation enables us to dynamically action against these priorities based on the most compelling opportunities we see. Our current balance sheet also provides ample near-term flexibility, with today's leverage at a comfortable 3.3 times, though we remain committed to our long-term goal of 2.5 times or lower over time. Shifting now to our 2025 guidance, our constant currency outlook is unchanged. We continue to expect mid-single-digit net sales growth with a bias towards the high end of the range, and high single-digit earnings per share growth.

Based on current rates, we now anticipate that FX will represent approximately half a percentage point headwind to the top and bottom line for the full year, which equates to about a penny impact to EPS. Below the line, our guidance now reflects the following assumptions. Interest expense of approximately $700 million. An effective tax rate of approximately 23%. And approximately $1.36 billion diluted weighted average shares outstanding. Taking a step back, the operating backdrop continues to actively evolve, and certain external factors, most notably trade policy, remain uncertain and outside of our control. We are actively evaluating proposed future tariffs, potential mitigation steps, and implementation timelines for those strategies, all oriented around delivering solid full-year performance. Specific to the balance of year, our guidance assumes our top-line momentum sustains, but cost pressures mount.

As a result, we continue to expect some margin pressure in the back half, which should contribute to a moderating EPS growth rate relative to the first half. In closing, we are pleased with how our teams translated robust plans into strong execution and results in the first half of the year. Our focus remains on delivering the full year while building a foundation for attractive long-term performance. With that, I will turn the call back to Tim for closing remarks.

Tim Cofer (CEO)

Thank you, Sudhanshu. With our strong first-half results in the books, we remain on track to deliver our 2025 outlook even in a highly dynamic operating landscape. At the same time, we continue to advance our long-term value creation strategy with steady progress year to date across each of our strategic pillars.

In an environment that places a premium on operational excellence, we're proud of our team's ability to balance near-term executional rigor with long-term oriented thinking. We strongly believe that operating with this sort of discipline should support consistent and compelling results for KDP over time. With that, we're now happy to take your questions.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. We ask that you limit yourselves to one question and one follow-up. At this time, we'll pause momentarily to assemble our roster. And the first question comes from Chris Carey with Wells Fargo Securities. Please go ahead.

Chris Carey (Analyst)

Hi. Good morning, everyone. Hey. Good morning, Chris. I wanted to ask about the U.S. refreshment portfolio with the split between kind of partner assets and core. Regarding the partner side, which I would actually include Ghost in this bucket, can you just talk about how you see the evolution or the relative contribution of these businesses a bit more medium term, say over the next 12 to 18 months, and where you're most excited about incremental contribution? You're talking about Electrolit doing over 30% growth. You've got Bloom and Bloom Pop coming. Bloom is still scaling. Ghost POS is accelerating. Can you just give us a sense of where we are in the journey of these parts of the portfolio and where they could go? Just connect it on the base business with Dr Pepper.

You've been so successful with share gains on the base and also innovation. Do you think that the brand is starting to see any ceiling, or do you still see some runway for incremental LTO or permanent innovations? You got the move on DSDs. Where do you see the runway on the base Dr Pepper business? Thanks for the split of the U.S. refreshment portfolio along those lines. Thanks.

Tim Cofer (CEO)

Thanks, Chris. Yeah. I mean, look, overall, you see our Q2 results in U.S. refreshment beverage, and I think performance was strong. You break it apart and you see really solid contributions from both the base business and the new partner additions. As you said, certainly the Ghost acquisition. It's pretty broad-based momentum. We'll start with CSDs, carbonated soft drinks, robust growth continued in Q2, underpinned by market share gains led by flagship Dr Pepper.

By the way, this year we are on track for our ninth consecutive year of market share growth with brand Dr Pepper. We also saw share growth with 7UP behind some of the new innovation I spoke to in the prepared remarks and market share gains in Canada Dry. It starts with a really healthy base, and quite honestly, we expect that to continue. Next, I would speak to energy. We're seeing rapid expansion in energy. I spoke to it in our prepared remarks that this has been probably the best example of portfolio transformation in the last few years. Just a few years ago, we had less than one share.

Now, as of Q2, we have a seven-share, and that full portfolio of brands—Ghost, C4, Bloom, and Black Rifle—I think are a winning combination in energy, and we expect that to be an even more meaningful contributor to the overall U.S. RV growth profile going forward. Electrolit is next on the list for sure, a new partner addition for us, growing 30% in the second quarter. In the subsegment of sports hydration, that is the most dynamic, and that is rapid hydration, and you see us take share through our KDP DSD excellence distribution expansion, strong innovation, growing TDPs. Really strong Q2. I think those are the key components to speak to. As you look at the back half, going forward, as you said, the operating environment's going to stay dynamic, but we expect U.S.

RV segment growth will remain robust, and we expect, as you saw in the first half, it will be a balance of both solid base business growth as well as new partner growth, and importantly. Contribution from Ghost and the energy portfolio. All of this will support that MSD contribution from U.S. RV to our long-term algorithm.

Operator (participant)

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

Peter Grom (Analyst)

Thanks, operator. Good morning, everyone. I was hoping to get some perspective just on coffee. Some solid sequential progress, the best organic performance in a couple of years. Maybe just to start, when you look at the second quarter, how did it compare to your expectations? Just as we think about the balance of the year, Tim, you mentioned subdued performance. Can you maybe put some guardrails around what that means from a top-line perspective?

I think the prior thought was for sequential improvement in the segment as we move through the year. Just curious if that's still the case from a sales growth standpoint. Thanks.

Tim Cofer (CEO)

Yeah. Thanks, Peter. Look, I am pleased with the sequential improvement you see in U.S. coffee in the second quarter. That performance was really underpinned by a strengthening pod category that translated to improving pod revenue and pod shipment trends, as well as healthy cost efficiencies. While I'm encouraged by the progress in U.S. coffee in the second quarter, there's no doubt as we roll into the back half, the segment will face some challenges. Some of it's ongoing, some of it's incremental. Commodity inflation will build as we roll into the back half and we roll into our higher cost hedges on green coffee. The tariff impacts will become prominent.

We all know that that tariff situation is a bit fluid. We have included all tariffs as implemented as of today. We know that those tariff impacts will be more prominent and put some additional pressure. I also think our retail partners will likely continue to manage their inventory levels tightly, in particular on brewers. Finally, you know we did a round of pricing at the beginning of the year. We've announced another round of pricing that will take effect next month. We'll need to closely monitor how that elasticity evolves. We feel good about the elasticity response we've seen so far, but rolling into the back half, we'll keep a close eye on that. I think we have good plans in place to manage through these dynamics, but we still expect some impact. That's why we are planning for some segment OI pressure in the second half.

At the same time, of course, that is captured as part of our enterprise guidance. I think overall, the business is on the right track. The path may not be completely linear, but we feel good and confident that over a long-time horizon, we'll get U.S. coffee back to its rightful role of LSD contributor.

Peter Grom (Analyst)

Great. Thanks so much. I'll pass it on.

Operator (participant)

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

Bonnie Herzog (Managing Director and Senior Consumer Analyst)

All right. Thank you. Good morning. I. Had a question on your outlook for top-line growth. Once you left the Ghost acquisition, which was another nice boost to your net sales in the quarter, I guess, how should we think about the levers and maybe confidence you have to continue to hit your mid-single-digit long-term growth algo without another acquisition?

Despite the strong top-line growth in the quarter, you're still seeing a fair amount of operating to leverage or just not much leverage. How should we think about that in the back half of the year? Maybe what initiatives or cost savings do you have or could realize to mitigate some of these pressures? Thank you.

Sudhanshu Priyadarshi (CFO and President of International)

Bonnie, this is Sudhanshu. Our long-term algorithm is MSD sales and HSD EPS. We delivered that last year, and we just guided that we will deliver—we reformed our guidance—we will deliver in 2025 too. Basically, it's made up of—we have talked publicly—U.S. refreshment beverages will grow MSD. That's the expectation. That's the role they play. U.S. coffee, LSD sales growth. I know we are behind slightly, but that's our long-term growth algorithm for U.S. coffee and internationally HSD sales growth.

If you look at the last four or five years, this is consistent with what these businesses have proven they can deliver over time. Obviously, operating income that drives the EPS is to outpace our top-line growth. We have the opportunity to expand margin across all of these segments. The typical levers are price, productivity, mix, and overhead. We're doing higher end of our productivity target. We are also focused on SG&A and overhead. All of those things will help us continue to deliver MSD sales and HSD EPS. Your question about the second-half margin—yes, in Q2, gross margin contracted, but we were expecting it as price realization and healthy productivity did not offset inflation on a margin basis. The relationship was more favorable on a dollar basis, and we grew gross profit dollar.

I talked about we're managing cost with discipline, and that's supporting our healthy operating income growth and a stable OI margin. I talked on the prepared remark, second half, we expect some operating margin pressure, but we will still grow profit dollar. You all know the second half, we have some incremental cost headwinds like commodity inflation. Tim talked about tariffs beginning to more prominently impact our results. We also had some one-off last year in Q3 and Q4 with some earlier Q2 gains. On the flip side, pricing should build. Productivity will be strong in the back half. Those are the regions that will support profit dollar growth.

Operator (participant)

Your next question comes from Kaumil Gajrawala with Jefferies. Please go ahead.

Kaumil Gajrawala (Analyst)

Good morning. Congratulations on the picking up of the Dr Pepper brand in California and some other places. Can you maybe just talk about the infrastructure within your existing DSD network? Do you have as much infrastructure as is necessary to be able to take on a brand of that size? Is this the beginning of perhaps the turning over of the Dr Pepper brand to more and more regions over time? Thanks.

Tim Cofer (CEO)

Hey, good morning, Kaumil. Thanks for the question. Look, you've heard me say this many times. I'm a big believer in the power of DSD. I think direct store delivery is such a critical and really scarce asset in beverages. I believe as we strengthen it, it provides our business with a sustainable competitive advantage. Accordingly, we prioritize investments in our DSD to further strengthen our network, build our capabilities, and really improve how we serve our customers and our consumers. You see that in what we've done over these last few years.

We're building capabilities. We're investing in digital tools to drive greater efficiency, drive our in-store effectiveness. We're broadening our geographic footprint. I'll speak specifically to the example you gave, but you've seen us over the last many years expand our network through opportunistic expansions of geographic territories. Last year, we did that in Arizona, picking up that acquisition. Now we've got our trucks rolling, and we've got manufacturing and warehousing in that key growth state.

The other thing to keep in mind is as we enhance our portfolio, as we bring in the Electrolit in sports hydration, the La Colombe in ready-to-drink coffee, the Ghost and C4 in energy, we are increasing our scale by adding high-quality, high-velocity volume to our portfolio, which allows us to make that DSD economic flywheel and that virtuous cycle of growth turn even faster because that scale allows us to then have greater drop sizes, greater store frequency, improve the efficiency and economics of the fixed cost associated with DSD. Now, to the specific case that you referenced, we are capitalizing on a new opportunity. That opportunity is to add the distribution of Dr Pepper in critical parts of California, Nevada, certain areas in the Midwest. I will say this is a unique opportunity. In this case, we certainly believe it was right for us to pursue.

It gave us an opportunity to build on a scale that we already had in that region. We had existing operations there, and this added more scale to that DSD operation. Obviously, adding flagship Dr Pepper is a unique opportunity for us to build out that scale. In this case, it was, I would say, a unique contract structure that gave us the option to repatriate or not. There's, in this case, a lot of work underway to ensure a successful transition. Our teams are energized to do this right. Distribution transitions like this do come generally with some short-term disruption and clearly some initial investment. We're prepared for all of that, as you'd expect us to. We've captured that in the outlook. We're confident long-term you'll see us continue to unlock substantial commercial and financial outcomes as it relates to DSD expansion.

Operator (participant)

Your next question comes from Rob Ottenstein with Evercore. Please go ahead.

Rob Ottenstein (Analyst)

Great. Thank you very much. I was just wondering if you could talk to us a little bit about the pricing dynamics in the U.S. on liquid refreshment beverages. I get a sense from the results that some products are probably up a lot, others may be down, so maybe a little bit of a better understanding there. And then how you're seeing the consumer. We've heard from other companies that affordability is becoming more important, maybe how you're pulling on various RGM levers to address that. Thank you.

Sudhanshu Priyadarshi (CFO and President of International)

The U.S. RB, first of all, as Tim said, we are very happy with the first-half performance for U.S. RB. It was strong, high-quality. Our growth reflected a combination of Ghost-based business, of volume mix and net price realization.

In the back half, also, we expect the segment performance to remain robust with contribution from the same factors. Specific to net price, we have seen positive contribution year to date, primarily been driven by CSD. We also announced a typical CSD price increase that took effect in Q1, which should continue to flow through our results for the entire year. There are always—you will see some quarterly variability in actual net price realization of our P&L, but you should look at more in first-half, second-half basis. We feel good about where we are in H2. Tim, you want to talk about the consumer?

Tim Cofer (CEO)

The consumer, sure. Yeah, Rob, I'll take the consumer part of the question. I mean, we put the consumer at the center of everything we do.

As you'd imagine, we monitor their health closely, and that's everything from the public data you would see, our own proprietary data. The other thing, back to Kaumil's question, is we have a real-time feedback loop in the form of DSD where every day we get a good sense of in-store shopping behavior and trends in real time. I would say for us, we're seeing a fairly resilient consumer, even in this backdrop of an inflationary and somewhat uncertain environment. At the same time, there is some caution out there, and our consumers are being selective in how and where they shop. I think this is particularly true for the lower-income consumer, where that purchasing power is most constrained. You see this manifest in a couple of different ways. First is there are some pullbacks in certain more discretionary channels, QSRs and our away-from-home fountain business, a little softer.

Convenience, slightly softer, especially in the first part of the year towards the end of Q2. You're seeing that come back a bit, and you see consumers instead gravitating towards those more value-based channels, right? The dollar value channels, the club, big mass CDLP formats, and a little bit around deal periods and promotional periods. I think for us, we feel good. I think we have many advantages where we have shown time and time again that in an environment like this, we can continue to deliver strong growth. Our categories remain durable. These are essential categories for consumers, and we think less sensitive to macro changes. Our beverages continue to offer great value for our consumers, and a simple indulgent pleasure of a carbonated soft drink or health and wellness-oriented beverages from energy to sports hydration. I think our portfolio is demonstrating strong momentum.

Innovation is a big part of it. Despite some areas of concern on the macro environment, we feel good overall about our portfolio and our ability to continue to deliver on that MSD sales growth.

Operator (participant)

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

Dara Mohsenian (Managing Director of Equity Research)

Hey, good morning. Tim. Tim, you made some changes recently on the marketing side with a new CMO appointed last year, including a heightened digital focus. I just was hoping you could give us a review of the biggest changes you've put in place, how you think that might drive demand and impact ROI going forward, and if you're seeing any fruits from those efforts so far, or that's more going forward from here. Thanks.

Tim Cofer (CEO)

Yeah, thanks, Dara. You guys know our first strategy here at KDP is consumer-obsessed brand builders.

Marketing excellence will be foundational to the growth model and remains a top priority. Dara, we talked a few weeks ago when we were together. We did make a change on the Chief Marketing Officer and feel very good early days about what we're seeing in terms of a bit of a marketing transformation here at KDP. It is one where we are putting data, technology, and digital at the center of the marketing flywheel, and that's really to enable more powerful real-time insights, create more precise consumer segmentation, consumer targeting, generate more effective, sometimes AI-enabled marketing content. I think you'll begin to see this show up as early as Q3 and Q4. A place to start seeing some of this show up will be brand Dr Pepper.

We're about to embark on our eighth season of Fansville, and this year, not only is the work great—I saw the work just a couple of weeks ago—really excited about the new season of Fansville, but you're going to also see it materialize in a more personalized, digitally-enabled consumer engagement. You'll also see it on the coffee side. You'll see us, the way we're leveraging the new digital approaches in marketing to identify and to target higher-value households, both existing Keurig users and new high-value households, to really drive that lifetime value and get the most out of new Keurig household placement. I'm optimistic overall, Dara, on what we're going to see from marketing as we take this next step. I think what you should expect is higher ROIs and more impactful spend.

Operator (participant)

Your last question will come from Filippo Falorni with Citi. Please go ahead.

Filippo Falorni (Director of Equity Research)

Hi, good morning, everyone. Tim, I wanted to get your perspective just on the protein beverage space. You talked in the past as an area of opportunity. Maybe give us context in terms of how you're planning to play in the category and also given in the context of the Dila Brands tuck-in acquisition, how that fits into your strategy. Thank you.

Tim Cofer (CEO)

Absolutely. Two parts. First around wellness and protein and then around Dila. One of the great things about beverages is the way consumer preferences are ever-changing. By the way, I'll do a plug here. We issued our state of beverages report back in June last month, and it really underscored this health and wellness mega trend and how it's impacting consumer behavior and beverages. I think it's the single most significant consumer trend impacting beverages. Consumers are really looking to beverages to provide a wide array of health and wellness benefits.

It ranges from your question on protein to fiber and gut health, hydration, zero sugar, energy, and alertness. We're all over this, as you would expect, as consumer-obsessed brand builders. I think what you've seen from us is we've done a good job responding to these health and wellness trends broadly in beverages. We will continue to evaluate those places which are more white spaces. I believe protein is one of those. No doubt, consumers are looking for more functional attributes in the beverages, and protein is part of that trend. We think that KDP can and will participate in that over time. As we have done in other spaces, we will evaluate that through a buy-build or partner lens, right? Is this something we can extend to organically from our own shop here in KDP, potentially leveraging our own brands?

Is this something we want to partner with someone else? Is this something we want to do an acquisition, full ownership, or minority? Nothing to announce today, but you can bet that we're looking at all these health and wellness spaces, including protein. I think overall, we feel good about our track record there, including how we've been creative and capital-efficient in how we go about that. On your second question on Dila. Dila acquisition really was an opportunistic tuck-in. It allowed us to penetrate an attractive category of $4 billion drink mix and liquid water enhancer category and do it with a relatively modest financial outlay. This is a business that's had a double-digit growth CAGR for the last many years. Previously, we were a partner and minority investor in Dila, and we thought now was the right time to go ahead and do the full acquisition.

We like this team. We like the capabilities. We like the R&D here. By the way, back to the health and wellness point, 60% of that portfolio, 60, is functional. Around ingredients and great claims around hydration, energy, immunity, etc. We took advantage of this opportunity. We can leverage Dila's know-how and extend additional KDP brands. We think it is a nice small tuck-in transaction. It is unlikely to move the needle on enterprise trends, but we are excited to welcome our new friends from Dila, the talented team there, and to partner closely to further expand our beverage industry leadership.

Operator (participant)

This concludes our question-and-answer session. I would like to turn the conference back over to Jane Gelfand for any closing remarks.

Jane Gelfand (SVP of Finance)

Thank you, Michael. Thank you, everyone, for joining us this morning. We appreciate your interest and your support. Please reach out to the investor relations team with any questions, and we wish you a great day.

Operator (participant)

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