Q2 2024 Earnings Summary
- KDP's international segment grew double digits, with constant currency net sales growth of 14.7% in Q2, driven by category expansion and market share gains in Mexico and Canada, particularly in low and no-alcohol beverages and Peñafiel line extensions; the company expects this strong performance and growth potential to continue.
- Core brands like Dr Pepper are performing strongly, with market share gains and contributing to overall on-plan performance, even in a mixed consumer environment; carbonated soft drinks are highly resilient, and KDP's brands are outperforming expectations.
- KDP's C4 energy drink brand grew approximately 30% in retail sales in the quarter, and with only 3% market share, it has significant potential for further growth in the highly attractive energy drinks market, which remains the fastest-growing major beverage category on a year-to-date basis.
- Keurig Dr Pepper (KDP) is experiencing an uneven and mixed consumer environment, with pressures on low and middle-income consumers leading to shifts in demand and more pronounced challenges in certain product categories like still beverages.
- At-home coffee volumes remain muted, with total category trends subdued, and the company does not expect significant improvement in the second half, anticipating only muted revenue contribution from coffee.
- Rising green coffee prices could progressively impact KDP's profits in the second half, creating headwinds as higher input costs coincide with promotional activities that are at odds with these cost increases.
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Organic Sales Guidance
Q: Can you discuss the drivers of H2 organic sales acceleration?
A: The company anticipates sequentially stronger top-line growth in the back half, primarily due to factors within its control. The main driver is the scaling of partnerships with brands like Electrolit, Black Rifle, and La Colombe, which will significantly contribute in Q3 and Q4. Additionally, innovation in the base business, such as Creamy Coconut, Canada Dry Fruit Splash, and the Bai WonderWater restage, will support growth. Improved international performance will also be a meaningful contributor. The current environment can hold, and no significant improvement in core trends is needed to hit the target. -
Green Coffee Prices
Q: How will rising green coffee prices impact your pricing strategy?
A: Rising green coffee prices are creating a headwind in H2, but this has been factored into the guidance. The company hedges for 6 to 9 months, so the impact is included. While promotional dynamics currently conflict with higher costs, the company intends to responsibly manage price gaps and protect its ability to fund high-quality investments. -
Coffee Pricing Strategy
Q: Where do you stand on coffee price gaps and promotions?
A: The company feels good about current price gaps after steps taken to position versus competition. The affordability strategy includes down counts from 12 to 10 in food channels and from 100 to 80 in club channels, helping to hit key price points. Value messaging and entry-price brewers are also part of the strategy. The initiatives are largely rolled out, with down counts in production and rolling through the marketplace. -
Energy Drinks and Coffee
Q: What's driving the slowdown in energy drinks and coffee?
A: The company observes that energy drink volumes have moderated, likely due to macroeconomic pressures on low and middle-income consumers. Energy drinks skew towards convenience stores and single-serve purchases, which are under pressure. Despite this, energy remains attractive long-term, with significant household penetration potential. The company is excited about its position with C4, which grew about 30% in retail sales during the quarter. In coffee, at-home volumes remain muted but the company is encouraged by sequential improvement in K-Cup volume trends. -
Operating Conditions and Pricing
Q: Are categories weaker than expected, and can consumers absorb more price increases?
A: Despite an uneven consumer environment, the company is pleased with Q2 execution and results. There is a bifurcation across income levels; high-income consumers remain resilient, while low and middle-income consumers are under pressure and seeking value. CSDs (carbonated soft drinks) are highly resilient, outperforming expectations with robust volume and value growth, led by Dr Pepper gaining share in Q2. Challenges exist in still beverages and channels like convenience stores. The broad portfolio allows the company to navigate both opportunities and challenges. -
International Business Growth
Q: What are the key drivers for international growth, and how will you enter new markets?
A: International growth reflects growing categories and share gains, with expansion in low and no alcohol in Canada and Mexico, and Peñafiel line extensions in Mexico. Investment in route to market and coolers in Mexico are driving execution. The company focuses on both organic and inorganic strategies, using a buy, build, and partner model to unlock potential. While the main focus is on driving growth in existing markets, there is interest in inorganic entry into new markets. -
Coffee Pod Volumes and Pricing
Q: Will coffee pod volume improvements continue, and what about pricing?
A: The company is encouraged by four consecutive quarters of sequential improvement in K-Cup volume, with shipments stabilizing in Q2. It expects H2 pod shipment trends to improve further, particularly in Q4, supported by owned and licensed business progress and innovation. Regarding pricing, the company plans to responsibly manage price gaps while protecting margins amid rising green coffee costs. Promotional activity will be closely monitored, aiming for sustainable growth in the single-serve category.