Bob Gamgort - Chairman, Chief Executive Officer Ozan Dokmecioglu - Chief Financial Officer, President of International Maria Sceppaguercio - Chief Corporate Affairs Officer Chethan Mallela - Senior Director of IR Steve Alexander - Vice President of Investor Relations

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Keurig Dr Pepper’s Earnings Call for the Second Quarter of 2022. All participants will be in listen-only mode. [Operator Instructions]. 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 Keurig Dr Pepper's Vice President of Investor Relations, Mr. Steve Alexander. Mr. Alexander, please go ahead.

Thank you! And hello everyone! Thanks for joining us. Let me start this morning by introducing our new Senior Director of IR, Chethan Mallela who joined us in May. Many of you may know Chethan from his six years working on the sales side with Andrew Lazar of Barclays, followed by IR roles over the past few years at American Eagle Outfitters and Peloton. He is a great addition to our team and we believe you will enjoy working with him. Earlier this morning we issued our press release for the second quarter of 2022. If you need a copy you can get one on our website in the Investors Section. Consistent with previous quarters, today we'll be discussing our performance on an adjusted basis, excluding items affecting comparability. Beginning last quarter, you may recall that we began excluding the impact of foreign currency translation from our adjusted results. The company believes that the adjusted basis provides investors with additional insight into our business and operating performance trends. While the exclusion of items affecting comparability is not in accordance with GAAP, we believe that the adjusted basis provides meaningful comparisons and an appropriate basis for discussion of our performance. Details of the excluded items are provided in the reconciliation tables included in our press release and our 10-Q, which will be filed later today. Due to the inability to predict the amount and timing of certain impacts outside of the company's control, we do not reconcile our guidance. Here with us today to discuss our results are KDP Chairman and CEO, Bob Gamgort; and Ozan Dokmecioglu, our Current CFO and President of International, who is transitioning to the CEO effective tomorrow, at which time Bob will become Executive Chairman. Also with us is our Chief Corporate Affairs Officer, Maria Sceppaguercio. And finally, our discussion this morning may include forward-looking statements which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are subject to a number of risk and uncertainties that could cause actual results to differ materially and the company undertakes no obligation to update these statements based on subsequent events. A detailed discussion of these risks and uncertainties is contained in the company's filings with the SEC. And with that, I'll hand it over to Bob.

Thanks Steve and good morning, everyone! The second quarter was one of significant progress for a company in a macro environment that continues to be challenging on many fronts. Broad based inflation continues to impact industry margin as pricing continues to increase, but it's not yet caught up to inflation. The good news is our brand strength has held up well in the face of new pricing, with modest elasticity impacts across our portfolio during the quarter. With concerns having shifted to the potential for a recession, it's worth spending a moment on how our categories have performed during previous recessionary periods. During the last significant economic downturn in 2008, 2009, our lead segment, particularly carbonated soft drinks and coffee were among the CPG categories that held up best. These categories are true staples, with regular consumption behaviors and few direct substitutes, and they have the benefit from the trade down effect from out-of-home consumption to in-home consumption that frequently occurs during recession. As we've done successfully in the past, we will continue to manage KDP against a range of potential macro outcome and believe that the all-weather business model we’ve created positions us well as we continue to operate in a challenging environment with significant uncertainty. Since the formation of KDP, we have delivered great returns for our shareholders, with a four year total shareholder return in excess of 100%. Well above broad market indices and nearly all food and beverage peers. More notable is that these returns were delivered during our transition from a closely held company to a widely held one. With the public market absorbing approximately 675 million new shares into the fall, equivalent to $25 billion in market cap. With our inclusion last month in the S&P 500, along with our existing position in the…

Good morning everyone! Bob provided an overview of our successful growth strategy, and I want to spend a moment to highlight our quarter two results in the context of our overall strategy. On a total company basis, net sales advanced 13.5%. With net sales up more than 10% and volume mix up more than 3%, with all four segments posting strong growth. KDP adjusted gross profit increased 10%, while adjusted gross margin declined 180 basis points, reflecting the timing gap that remains between pricing and inflation. During the quarter we experienced cost of goods sold inflation across all inputs, including ingredient, packaging and manufacturing labor. In addition, we also experienced a much higher rate of inflation in transportation and warehousing. At the time of robust consumer demand and SG&A inflation was also significantly higher. Taken together, our total inflation for the quarter exceeded 17%, which was more than two percentage points higher than the 15% we experienced in quarter one. As a result, adjusted operating income declined slightly, a significantly higher cost to serve offset the 10% increase in adjusted gross profit in the quarter. All-in, adjusted net income increased approximately 3%, reflecting a lower adjusted tax rate and lower interest expense. Adjusted diluted earnings per share also increased 3% to $0.39, and we closed out the first half of this year very much as expected. Free cash flow for the quarter at $600 million continued to be strong, driving a free cash flow conversion ratio of 108%. Let's shift to a discussion of segment performance starting with Coffee System. I'm happy to report that our Coffee Supply recovery plan has been completed ahead of schedule, with part manufacturing output restored to levels that will provide full service to our partners and retailors. While that success came at a cost,…

We have built a business that has been pressure tested by macro volatility and prices, and has emerged stronger and nimbler than ever. In the past four years we had distinguished ourselves as strong operators, with the great majority of our team members solely focused on running the business with excellence. Value of that approach is reflected in our industry leading TSR since merger, and our attractive forward-looking organic algorithm. We also know we have an opportunity to enhance organic shareholder returns through the strategic deployment of our discretionary free cash flow. We have a proven capability to build new brands and create exceptional value for KDP and our partners by adding new brands into our growth machine. Look no further than the examples discussed during today's call such as CORE, Polar, Vita Coco and McCafé. Therefore it’s logical for us to consider M&A as our leading opportunity in capital allocation. We employ a disciplined and rigorous process in our deal evaluation, which balances risk versus reward and understands the true underlying value of any new business to us. We also consider a range of structures to enable us to expand our brand portfolio with M&A being one, but not the only past the filling white space. It's no secret that historically when our disciplined approach has faced lofty valuation expectations from sellers, the outcome has been fewer acquisitions and more strategic partnership for KDP. We are good with that as we know that no deal for an alternative partnership structure is far better than an overpriced acquisition. The environment for high growth companies has shifted in recent months and we are encouraged with the conversations that we're having with several potential partners. We believe that our proven success in creating value for our partners, combined with a more challenging investor environment for these entrepreneurs has begun to narrow the bid ask spread. Time will tell if that improves action ability. All potential M&A investments compete against the asset this team knows best, which is the value of our own equities. As noted in our press release, we repurchased approximately 2.5 million shares during the quarter at an average price of $34.51 per share. We see opportunistic share buybacks and investment in our internal growth projects as attractive uses of our capital. Finally, we believe the size of our discretionary cash flow, which is expected to be $5 billion over the next 3 years, distinguishes us as a unique investment opportunity. Ozan will now provide some commentary on our outlook for the balance of the year before we moved to Q&A.

As indicated in our press release, we are including our guidance for full year constant currency net sales growth to the low double digit range, while reaffirming adjusted diluted earnings per share growth in the mid-single digit range. We continue to expect adjusted earnings per share growth in the second half to reach the high single digit range, driven by strong performance in the fourth quarter, leading to meet single digit growth for the year. Supporting this guidance, we continue to expect the following unchanged assumptions. Adjusted interest expense is expected to approximate $430 million. Adjusted effective tax rate is expected in the 22% to 22.5% range and diluted weighted shares outstanding are estimated to be approximately 1.43 billion, assuming no additional share buybacks. Finally, given the current environment, I want to share some detailed perspective on our expectations for the second half. At this point in the year we are lastly covered on input costs and have good line of sight to price realization. Quarter four is expected to be the strongest of the year in terms of earnings per share delivery, while quarter three is expected to look much like quarter two. The primary driver of the phasing of our second half results is the timing relationship between pricing and inflation. You will recall that inflation in quarter one was 15%, which advanced to more than 17% in quarter two. We expect inflation to be even higher in quarter three, largely driven by our Green Coffee positions. Because we are getting the benefit of more pricing in our quarter three P&L, we expect to offset this incremental inflation to deliver EPS growth for the quarter. In quarter four we expect the rate of inflation versus the prior year to be roughly half the rate of quarter three. As…

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

Thanks operator. Good morning, everyone.

Good morning, Bryan.

Good morning, Bryan.

Two questions for me. One, Ozan as we’re kind of looking into the back half of the year and just thinking about pricing and inflation, are there plans for further price increases [Technical Difficulty] or cold beverages in the back half of the year or have you pretty much [Technical Difficulty] put in all the price that you need to cover inflation, then I have a follow up.

Yeah, good morning and thanks Bryan for the question. I mean, first of all it is also important to note that – because as you know pricing obviously goes hand-in-hand with inflation and what's going on in the macroeconomic environment. So we are largely covered on the input cost side and also we have a good line of sight into the price realization for the remainder of the year, so it's a very clear for us. So at the same time, as we have announced several times, there is starting throughout 2021 as well as early this year, as well as early quarter too. We have taken several pricing actions across our portfolio, both in the Coffee Systems, as well as the Cold Beverages. So those pricing activities went through and as you know, we don't necessarily talk with regards to future action plans in terms of the detailed pricing action plans, but as we have done previously, depending on how the macroeconomic situation is going to trend, along with the inflation, we are ready to take further action plans as well as activate several other levers that we have been managing our business. As you know, we don’t necessarily just focus or fixate on one lever. We have multiple levers in our business starting with the volume, combined with the mix management and obviously productivity delivery in relation to the pricing and our business investment. So we have several levers available for us in order to pool and continue to weather the storm as we have been doing the last four years. Therefore if the macroeconomic situation changes along with the expectations that we have, we will take the necessary measures in order to put further pricing.

Thanks Ozan. And then Bob, just a question for you. Just to pick up on the comments you made about the M&A environment, and you know I guess my question is, when you're thinking about or looking at high growth companies you know a year ago or two years ago, you know there’s a lot of focus on revenue model, revenue multiples, TAMs and like profit and cash flow were sort of taking a backseat I think in terms of a lot of the valuation discussions that were being had. So has that changed also? Like if you're looking at high growth companies, is there may be more of a consideration now in terms of profitability and cash flow than maybe where those seller's expectations were and how they were trying to value the businesses before.

Yeah. I mean Bryan from our respective we've always focused on profiting cash and what we looked at in any potential partnership where there’s an acquisition or a seed investment is what's the long term growth of that business, and then in our business model, what kind of profit and cash could we generate off of that once we put it in place and have the synergies and access to the resources of those companies. For us, the valuation has always been based on long term profit and cash. Having said that, we were in theory competing against people who were just looking at revenue multiples, and you know as recent as a year ago we had conversations with potential sellers who are talking about valuations they were getting from stats or the fact that they could go out to the IPO market. Those are very different valuation models in what we're looking at. So as we said, we remain disciplined, we always have – we'd rather have an alternative partnership structure as we’ve done with Polar and Vita Coco and McCafé. We're up for acquisitions and we've done some of those which have performed well in our business, but we’re not going to overpay and we've never been caught up in valuing anything on a multiple sales.

Alright, thanks Bob! Thanks Ozan!

Okay, thank you.

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

Thank you. Good morning, everyone.

Good morning!

I have a question on your coffee business. I guess I'd be curious to hear you know some more color on the consumer and whether you're seeing any signs of down trading within the home actually that could affect your pod attach rates going forward. You know during the quarter I think your pod attach rate decelerated a bit. So wondering you know how big of a risk you see for lower coffee pod consumption in an economic slowdown with you know thinking about the possibility that consumers start brewing ground coffee in their homes, even if they do owned you know one of your brewers, or you know Bob thinking about your comments. Do you expect you know something like that to be more than offset by incremental consumers switching back to consuming coffee in their home. That’s it for me. Thanks.

Yeah, so the first part is household penetration is the biggest driver of growth in our coffee system more than attachment rate. So as we’ve talked about, we had 3 million households per year for the past two years. We saw that as above our long term trend of 2 million households and so our expectation you know continues to be that 2 million is the right growth rate for us on household penetration. Attachment rate has been remarkably consistent over the long term. The only difference is during COVID we saw an increase in attachment rate that has been working down gradually from that peak to pre-COVID levels, and there's a little bit of noise even in this quarter of a bigger re-opening where people are going out of homes, and that's actually been – as strong as our business has been, that's actually been a negative factor that's been weighing against our strong growth that we've had and that's just about – in our opinion that’s just about done. We're almost back to fully open. Interestingly the one area that hasn’t reopened fully are offices, and so still in front of us is the opportunity to recapture even more growth in our office coffee business. With regard to tradeoffs, we have studied this a number of different ways and I referenced in our prepared remarks that we went back and looked at the last recession across all CPG categories. Coffee and CSDs are among the most resilient if not the most resilient in all of CPG for the reasons that I talked about, and we don't see any tradeoff in between coffee, forms of coffee within the home. You see over the quarter, a slight increase in private label pods, and some reduction in premium pods. If you recall during COVID the reverse is true. So it's almost a reversion back to the long term trends, and even if that does happen, remember, we make the great majority of private label pods, so this is a business that’s well protected against all forms within single-serve and honestly, we do not see tradeoffs between other forms of coffee. And if there is a real recessionary impact, we know that people go from out-of-home consumption to in-home consumption, which would be a net positive for us.

Alright, it makes sense. Thank you so much.

Okay, thanks Bonnie.

The next question comes from Kevin Grundy with Jeffries. Please go ahead.

Great! Thanks. Good morning everyone.

Good morning, Kevin.

You must have touched on SG&A – good morning Bob. SG&A came in a bit higher. I think there was some mention of higher marketing spending in PB [ph], I think to a lesser extent in coffee, so sort of a near term dynamic to that. Maybe talk about what you're coping with in that line item SG&A and then within that investment levels. And then Ozan and for both of you, Bob as well, what's the right level for advertising and marketing. I mean you guys reduced as did many others within the industry during COVID. At one point it was 6% as a percent of sales. We’re still kind of stacking in the low 4% area. Maybe just comment on what the right level is longer term and when you expect to get back to that? Thank you.

Yeah, thanks Kevin. So I will start with the first part of your question. When you look to our SG&A line, in fact there are quite a bit of pluses or minuses, and it's a line that a lot of cost elements actually get together and we consolidate. So let me try to expand a little bit, provide for or shedding a little bit further light. First of all, we have the transportation and warehousing expenses that are included in that line, which obviously has been one of the most volatile and inflationary spending line item for us, and TNW, Transportation and Warehouse represents almost the biggest increase factor in the SG&A line that you are looking at. And the second big bucket that we have in that SG&A line is as you said, advertisement and promotion, and we had some good levels of increase in our investments behind our brands, so that also included in that line. And also the whole labor across our company with the exception of manufacturing or production related, which is core elements of cost of goods sold. That leaves us with all the frontline employees we have, including our DSD, including our merchandizing, including our white collar, and as you know labor especially on the frontline has been one of the most pressurized line items throughout the year starting last year, so that increase is also included. And the remainder of all the overheads, whatever left that are included in that line that tended having any inflationary factor. And as you see, there are so many pluses or minuses in that line, but I think these are the four factors that do explain the majority of the increase in that line. Bob, onto you.

Yeah, talking about the marketing piece, you know COVID forced a wide number changes in the way we do business and obviously I’m not going to recap all of those. Some of those experiences were good learnings that we want to continue in the future, some of them are saying, okay, we want to go back to the way things were. So I think it's really reset the level of marketing spend that’s required. We were all forced to work with lower marketing spend. It caused us to be much more sensitive about return on investment and dial up our understanding in terms of a precision marketing perspective, and I think the best evidence that we were able to do that successfully is the strength of our brand portfolio. I mean that's really where the proof is in the end. So for us it became much more a focus on which brands we want to support in the portfolio at critical levels, what tactics do we want to use, and then how do we use all of the data that’s now available, to be able to target more precisely and course correct and it's worked pretty well. As we say all that, if you think about the strat plan that we took you through in Investor Day, our long term plan is to continue and increase marketing over time. The reason is because we have more ideas for growth than we're supporting right now and that's a great position to be in, and so I think as we continue to whether all of the pluses and minuses of inflation and recession and the volatility over the – you know the past three years is nothing like any of us experienced over our careers, we will increase our marketing spend overtime. But as we sit here today, the strength of our brands really speaks to our ability to navigate this environment.

Very good. Thank you both.

Okay.

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

Great! Thanks! Good morning, everyone.

Good morning.

I wanted to talk a bit about brewer sales and you called out the brewer volumes were down 4% versus that, I think it was 29% comparison, so you know to some extent very much as expected, but of course retailers have been signalling you know challenges with small household appliances, discretionary items of the sort. So just wanted to get your perspective on brewer sales for the balance of the year, knowing again you've got some pretty big comparisons. What you're seeing if anything from retailers in terms of push back on inventory and you know about – I know you referenced again the traditional run rate of 2 million households per year, but does that still feel feasible? Is it an on average rate over time. Is that really a feasible addition in this economic environment, thanks – for this year in particular.

Yeah, let me start with the last part, because that is the most important part, which is household penetration, and it feels like every year we get asked questions about why this is the year we can't do 2 million households. And so I would say there's no indication, whether it's COVID, COVID recovery, recession, inflationary environment that our ability to add 2 million households per year is very steady, its strong and we have a ton of confidence in that, and that leads us to more than 10 years of household penetration growth at the size of the available market, so that area I think we're in good shape on. The second point I would make and we say this even when we have incredibly strong brewer sales quarters. The correlation between brewer sales and household penetration is loose. There's some correlation over time; it's not what you might think, and clearly on a quarter-to- quarter basis there's zero correlation. And we did point out just last year, we added 3 million new households to the system and we sold more than 11 million brewers. That tells you that the majority of brewers sold are replacements or upgrades and we certainly have been giving people reason to upgrade with the addition of new features and benefits and new design. So with that in context, when we said 3 million household a year ago, 2 million this year, 11 million brewers a year ago, year-to-date our brewer sales are down approximately 5%, and we’re up on a two year basis or at the same time period in the 30% to 40% range. You know we're taking pricing on brewers, but we see inflation there like everything else. Would I expect some elasticity effect? Definitely! But I see it not impacting household penetration. I see it as impacting some of the upgrade cycles, which we’re perfectly fine with. As you know we don't really make money on brewers. It's really in service and household penetration and coffee consumption, so all of our core assumptions are very much intact.

Fantastic! Thank you! And then just the one question though on retail inventory levels, pushback from retailers and get to just topical, would love to hear your perspective on that.

Yeah, it is definitely an issue, and as you know the shift in consumer behavior caught many of them by surprise and so they are overstocked with goods that have long lead times that are not selling, but we're in a category that sells incredibly well. As I said, we're talking about 5% volume change off of 11 million units. This is still a very good growth and profit opportunity. Again, most of the brewers – most of the retailers that sell brewers also sell pods and they know that every time they convert household over from drip coffee maker to single-serve, the great majority of those future pod purchases go to the retailer who sold the brewers, and is a significant trade up in profitability for them. So this is not the area they are looking to cut back on the inventory right now. This is one – still one of the best growth and profit drivers in their entire store, but this is not where they are focusing.

Okay, fantastic! Thanks so much!

Sure.

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

Hi! Good morning.

Good morning.

My question is specifically on coffee pricing. So just looking at pricing in the coffee segment in the quarter, it does look like partner and private label pricing remains pretty minimal to KDP even though we can see these partner and private label operators raising pricing much more substantially and track channels. Can you maybe just give any commentary on when you think the overall pricing within the coffee segment will be more consistent with the pricing that we're seeing in the overall category, which is quite a bit higher? Then I just have a quick follow up.

Sure, thanks for the question Chris. Probably it would be verified focus on our own, let’s say owned and licensed products in terms of the pricing and how much we are seeing through the realization. As I was articulating a couple of minutes ago, we have taken a few pricing actions across our portfolios and in coffee, which is owned and licensed brands that we control obviously the pricing and the full – for the economics of it, including our brewers as Bob just that. So we have taken a few pricing actions last year which was in 2021 and early this year in quarter one and towards the end of quarter two as well. And when you look to the numbers that we have announced for example on the quarter, you would see that almost 6% of the price realization that we have successfully achieved across our coffee portfolio. And when you look to the either IRi or recent data you will see several action plans that the other industry players decided to take place. And when you look to the private label part, which is also important, but as Bod said, let’s make sure that we remind ourselves that we still produce for the most part of the private label category, that we also contribute to the economic benefits off that at the same time. Private label initially was a little slow to take the pricing actions, but when you look to the latest data, it is – that path also has gone up. Therefore, overall we are very happy with the resiliency of our owned and licensed brands that have shown and how the consumption is moving across the portfolio with regards to the pricing actions. And as we have seen, there are – besides the single-sever, the other segments or the sub-segments of coffee have also taken the pricing in line with more or less what's going on, especially with regards to the coffee bean prices.

Let me just add one things to it, just as a reminder of a concept that we discussed in the past which I will admit is a bit complex, and that is the fact that our pricing realization on our P&L understates that gap between what you're seeing at retail and what we're seeing, in large part – not the only reason, but in large part because we're not responsible for the Green Coffee purchases of our partners. So the biggest inflationary impact within coffee right now is the Green Coffee impact. Our partners take that on their P&L. We are just doing the conversion for them and so what happens is, it understate what feels like our pricing realization relative to the market, because a big part of the cost structure does not flow through our P&L.

That’s very helpful. Then just a quick follow-up on coffee as well. The expectation last quarter was for pod shipments to remain below consumption. It does feel like high volumes came in out of expectations this quarter. Did you catch up quicker than you had thought? Are you in a better position going into the back half than you were thinking at the end of last quarter, and is there any over shipment dynamics that we should be keeping in mind as we go into the back half as well. So thanks for just contextualizing the supply chain and the pipeline as well.

Yeah, it’s means the good news is, as we said in our markets is that our coffee recovery was accelerated. We made an investment to do so. It cost us on the P&L to do so, but we're in a position as we exited Q2, where we have good inventories, full service to our partners and our retailors, and what that enabled us to do is to catch up in the second quarter on some of that missed opportunity in the first quarter, and so we said that we were going to be below consumption in the first half, and then above consumption in the second half. We’ve largely caught up in the second quarter as a result of that. So going forward our consumption and shipments should be largely balanced.

Okay thanks a lot.

The next question comes from Brett Cooper with Consumer Edge Research. Please go ahead.

Thanks, just two questions from me. On coffee, can you update us on South Carolina, how much capacity that opens up to you and how that fits into your ability to bring new customers? And then second question Bob, you company M&A is just focused primarily on portfolio expansion relative to prior comments, which were large. Just wanted to check in on how [Audio Gap] relative to just an example? Thanks.

So, thanks for the question Brett. So let me take the first part with regards to the South Carolina coffee plant that we have been building. As we said previously, Spartanburg is now planned for 2023 and as a reminder, as we also spoke before, we begun in fact production of the cake-up on our first line in June 2021. But let’s make sure that this is a large facility that will take multi-year startups due to the several lines that we are putting. And as we discussed before, there was some slow ramping up due to 100% related to coffee – COVID, excuse me, issues that primarily our line manufacturer that ran into in Europe that we have agreed to buy. Therefore, lowest times are being catching up as we speak right now, when we are still in schedule to put the lines, some of the lines into service, starting 2023 onwards, which was in-line with our expectations.

Yeah, I think on the M&A question, your point is correct, and that the conversation that we just had was primarily on portfolio white space, but I would say that our total landscape that we’re looking out across the whole M&A opportunity is portfolio white space, new platforms, geographic expansion and new capability that’s very consistent with what we talked about Investor Day, still is the case. And you know my examples of our two most recent small, but very strategic add-ons into peak is both filling in white space, it’s also Canada and we've got these great Canadian Mexican businesses that we can add to through M&A. And then Tractor is a great example as well, because again it’s a while space yeah, but it really leverages new capabilities and new strength in our fountain foodservice business. We’ve got the capabilities that we can built with scale. So we look across that entire landscape and are finding that you know as I said in my remarks are in quite a few I think very productive conversations.

Was there a follow-up Mr. Cooper?

No. Thank you.

Alright, thanks Brett.

Thank you.

The next question comes from Andrea Teixeira with JP Morgan. Please go ahead.

Thank you. Good morning. I have a question and two follow-ups please. First for Bob, how are the pod rates of growth away from home versus home phasing. And then, can you speak about the volume mix, but now more focused on the Packaged Beverage business. Are you seeing any signs of a more cautious consumer on the premium water side, and as you exit the quarter any signs of increased velocity. And I understand you don't break down volume mix, but in this environment perhaps mix is running faster than volumes in this scenario and in any signs of reversal ahead of us. And the one for Ozan, just so I'll put it out there, on the phasing of margins that you provided, the mass of the guidance implies that obviously both gross margin and EBITDA margin will likely down in Q3 year-over-year, but perhaps you know to make the math work for the guidance you mean flat in Q4. Just want to make sure that we got it right. Thank you.

Yeah, let me start with the cold beverage, right, in terms of any trade down or any change in behavior, we are not seeing anything right now. I mean theoretically as we move into recession you would see small outlets, convenient channels being more pressured, gas prices always do that and you know you’d see more sensitivity around packs and sizes. But if there's any change its very, very small right now. So nothing that we would be able to report that’s concrete based on the data. It's all things that may happen in the future. With regard to coffee, we don't specifically break out our away from home business as the side, but it's been a heavy drag on our business since the beginning of COVID. In fact we gave some to you back. We gave some very specific numbers about how much it was down and how much of a drag that put on our total growth. The recovery on that has been incremental quarter-by-quarter, but we’re still well below pre-COVID levels on your away-from-home business, so that represents a future upside to us. And the mobility that I was talking about before is really people consuming In-Home versus consuming out-of-home, in other words like a coffee shop, and that’s still recovering back to the COVID levels, but it's all built into our expectations and all of our guidance reflects everything I just talked about there.

You want to talk about the margin piece?

Yes exactly. So it's important to reiterate what I just said a few minutes ago, that we are on the input cost size, we are largely covered for the remainder of the year, which we do also have a good line of sight with regards to the price realization, so these are three important points. And when we step back and look at it, because you asked the question on the margins, this is important in relation, the inflation and the pricing and the whole productivity equation. In quarter one, inflation came in at 15%. As we just spoke, quarter two inflation came in at 17% and we also expect quarter three to be the, to be a little higher than in quarter two. So we are getting a more pricing benefit in Q3 due to the actions that we have successfully implemented, that would be – that would help us to offset these further inflation headwinds that we are expecting to happen in our business. At the same time, we also expect quarter four inflation to be more or less half rate versus what we have seen in Q3 versus last year. Why? Because last year in quarter four, in 2021 we have seen a significant spike across the board in most of our input costs that drove a big inflationary number, so we are lapping against that one. So that’s very important to figure that out as well. So what does this leave us? This leaves us that we will realize the full benefits of pricing that we have already taken, which will enable us to offset the inflation and the deliver the margin growth in quarter four. That would be our expectations in order to sum up by second half, as well as they split it in quarter three and the quarter four.

Super helpful. Just one classification, the rate or the index that Bob had said away-from-home, is that still about 80% of what it was back just prior to COVID?

We haven’t talked about that specifically, so.

Okay, that’s fare. Thank you, I’ll pass it on.

The next question comes from Steve Powers with Deutsche Bank. Please go ahead.

Hey! Thanks, good morning. Two questions from me. The first one, the first one of Beverage Concentrates, maybe a little bit of clarification. I was hoping you could parse out more of the underlying run rate in realized pricing versus the trade of accrual impacts this quarter. You know a clarification if that trade accrual impacted something that we should expect will reverse or if it's discreet this quarter.

No, hi Steve! Let me take the Beverage Concentrates unit specific trade accrual question. First of all, it would be helpful to talk about that. The trade accruals are basically part of our normal daily lives. Some quarter is plus, some quarter is negative. And obviously we do our best in order to estimate as close as possible, but as you know, because of all these ever changing macroeconomic situations, really making it difficult to get almost 100% procession, first of all that’s the reason of the trade accrual. And the trade accrual timing also accounted, let’s say for more than or around half of the price realization that we have experienced in quarter two and as we have seen in our numbers. Do we expect this to trade, to come back as a negative in the other quarters? No, absolutely that's not the expectation or that’s not the reality of what's going to happen.

Okay, perfect! That's helpful. And then I guess, I think Bob or Ozan either one, just to build on Lauren’s question on household penetration, I think you addressed 2022 comprehensively. As you said you get asked every year, so just looking ahead to the extent that consumer confidence and discretionary spending continues to come under pressure. I guess I'm just curious how the playbook changes on household acquisitions in a truer recessionary environment? Whether that comes in terms of just a more precise value messaging, a different emphasis on the assortment of brewers you might bring to market or however you think about that playbook in a recession to the extent that it is different.

Yes, excellent question. You see that our capabilities here, we have a wide range of price points on brewers and we have a wide range of price points on pods and we cover the entry level price point all the way up to now Super Premium as we talked about on the call, dollar per pod coffee all the way down to entry level price points which is around $0.30 per cup. And the same applied to brewers, where we have brewers that are now around $50 right, they used to be below $50, but due to inflation around $50, all the way up to about $200 to $250. So we are able to take that range and have the right mix by retailer and target consumers with the appropriate price points. The other point is that, if you think about these new brewers that we are introducing, that are much more capable of producing specialty coffee and actually iced coffee, we're able to deliver messages that you have a valued message to them. Because the price comparison between cups and ground is one things, but the price comparison between cups and out-of-home coffee is dramatic; it's 5x to 10x, the cost to go out-of-home. So the more that we’re able to allow consumers to replicate the coffee shop experience in-home, it actually allows us a dial up that’s away from home to in-home value messaging in our communications is very compelling. So we have a number of options within our tool kit and it's exactly the way we’re thinking about it, the way that you laid it out.

Yeah, okay, thank you very much, that helps. I appreciate it.

Okay.

The last question today will come from Robert Ottenstein with Evercore. Please go ahead.

Great! Thank you very much. Just wondering if you can give us an update on the CFO search and maybe remind us you know what you're looking for in terms of experience and skill set. And then there's also been some other management changes, maybe just kind of give us a sense of you know what the team looks like today? The kind of changes that you've made and how you see the organization from a senior management perspective going forward? Thank you.

Yeah, good morning, Robert. So let me take the CFO part and a couple of follow-up to your questions on that line. First of all, we are aware, we wanted to be with regards to the CFO search, and as we said before, we are looking forward to recruit a world class CFO that not only will manage the today’s complexity and the size of our business for the – but for also the future that we are building, the modern beverage company. So that’s important and it’s going well. At the same time, I am also happy to say and we are fortunate to have a deep bench of talent and have a very skilled and experience executive. In fact George is sitting next to me today on this call, and George Lagoudakis as we have announced publicly stepping in on as Interim CFO. So that’s very important to note. So there in no any gap and we carry the experience, as well as the necessary knowledge to perform the duties without creating any gap. With regards to the other positions that we may be looking for, as well as the internal promotions that took place, at this point in time lets be clear on one thing; we do not have any open position. We have people on the jobs that we will be either looking for external or the promotions that took place on an internal basis, and there will be a healthy handle where when we have the external candidates in place. So it's not a situation that someone left the positions open and we are looking to recruit externally. So that's important to make sure that the continuity is 100% there.

And then just in terms of the CFO, I mean there’s CFO's who are more financially oriented and other ones that are more operationally oriented. Any thoughts along those lines?

I mean it is – absolutely, I agree with you. It is important to focus on the CFO and the necessary credentials and the knowledge and the experience, but there's also another factor that we should not forget, which would be the overall financing team that supports the CFO. When we step back and look at it to the several, the several finance leadership team executives that we have KDP today, all those roles being occupied and serviced by the really world class expertise. Therefore we do have a very strong finance team below the CFO, which definitely helpful to perform the CFO activities, and we are not necessarily looking for to grab or find one specific expertise. What matters for us is to be able to operate on a cross functional basis across our company, and most importantly contribute to the growth agenda of our company that we are very excited given all the opportunities that lie ahead of us.

Terrific! Thank you very much.

You’re welcome.

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

Thank you, operator, and thank you everyone for joining this morning. If you do have any questions or follow ups, Chethan and I are around all day. Please reach out; we’ll be happy to talk to you and answer any questions. Thank you very much.

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