Yet Another Value Podcast - Half Moon Capital's Eric DeLamarter and Brandon Carnovale thesis on Keurig Dr Pepper $KDP

Episode Date: August 7, 2023

The team from Half Moon Capital, Eric DeLamarter and Brandon Carnovale, come back on the pod to discuss their thesis on Keurig Dr Pepper Inc. (NASDAQ: KDP). For more on the KDP thesis, see: Half Moon Capital KDP Q2’23 Investment Thesis Update_8.1.23 Half Moon Capital KDP Investment Thesis_July 2023 For more information about Half Moon Capital, please visit: https://halfmooncapital.com/ Chapters: [0:00] Introduction + Episode sponsor: Stream by Alphasense [1:25] Half Moon Capital's Keurig Dr Pepper Inc. $KDP thesis [5:09] Fundamental growth drivers; what market is missing on the coffee side of the business [10:01] $KDP U.S. beverage business, brands, trends [17:08] $KDP valuation [24:27] Recent insider activity [27:43] International business [31:54] Bottling aspect of the $KDP thesis [36:38] Bud Light PR [38:37] $KDP inflection point; sale-leasebacks [42:08] $KDP earnings, expectations for the year [45:12] Update on Oxford thesis $OXM Today's episode is sponsored by: Stream by Alphasense Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are, and you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts, powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced buy-side analyst conduct the calls for you. But that's not all. Stream also provides the ability to engage with experts 1-on-1 and get your calls transcribed free-of-charge—all for 40% less than you would pay for 20 calls in a traditional expert network model. So, if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening, and we'll catch you next time. For more information: https://www.streamrg.com/

Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are, and you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced by-side analysts conduct the calls for you.

But that's not all. Stream also provides the ability to engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less than you would pay for 20 calls and a traditional expert network model. So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you.

Head over to their website at streamrg.com to learn more. Thanks for listening and we'll catch you next time. Hello and welcome to the yet another value podcast. I'm your host, Andrew Walker. If you like this podcast, it would mean a lot if you could rate, subscribe, review it wherever you're watching, you're listening to it. With me today, I'm happy to have on for the second time from the team at Half Moon, Brandon and Eric.

Guys, how's it going? Yeah, good morning. How you doing? Doing great. I'm laughing because for those on the video, you can see Brandon just opened up with Dr. Pepper. I'll join them. I've got my Diet Dr. Pepper cream soda. But before we started talking, Dr. Pepper, just quick disclaimer, nothing on this podcast has ever

financial advice. Please consult advisor. We're not providing financial advice, all of that type of stuff. Eric Brin, I was telling you guys before, I'm so excited to have you guys on because we're going to talk about cure Dr. Pepper, the ticker's KDP. You guys have a really interesting thesis. You've done really great work there, but I'm also personally excited because Dr. Pepper's been my favorite drink for 20 years. I was telling you guys, I used to have Dr. Pepper pajamas. I treat myself to a diet Dr. Pepper, strawberry and cream.

So I'm hitting the new stuff every night with dinner. And I'm really excited because we're taping at 1030 and I can treat myself to a diet Dr. Pepper at 1030. So what's better? But Eric, y'all have done great work. I think you want to start by for a minute. What's the thesis behind KDP right now? Yeah, yeah, quickly. Just kind of conceptualize what the business is.

So it's about 60% of businesses, the CSD, the beverage segment that's anchored by Dr. Pepper. They also have seven up, Schweppes and Canada Dry, which have a pretty dominant share in those subcategories. Cross that segment, CSD segment. It's about 25% U.S. share. they've been growing share up nationally and raising prices but are only really now starting to see an inflection in terms of catching up with those margin headwinds and the kind of overall growth trajectory has been low teams and that is those tailwinds I think are just beginning to manifest on that side of the business. The other side is the Carrick business. That's

the home brew kits and pods. That's about 30% of sales, about 34-ish percent. of earnings. You know, this has been in the real area of kind of focus for the market, maybe fixation by the sell side and to a certain degree buy side. And that's been a result of softer home kit, homebrew appliance sales in Q1 on what were really tough comps and also the bedbath stocking liquidation. That's kind of now behind them. Historically, I think people look at this as like, that's a big driver of business. Reality is the actual appliance is negligible, of any margin to them, the K-Cups themselves are where they make all the money. And their strategy there on the K-Cups has been getting market share of the homebrew segment

and don't raise prices. However, recently, they raised the price, the first we've seen in five years, other than one, maybe in 2022, which I don't think has been noticed by the market. Meanwhile, there's been an inflection across that the K-C-Cups and the homebrew appliances themselves in Q2, but also in the tracking day that we have so far in July, so heading towards a nice back-off. In addition, some of the cost inputs, the input costs have been moderating, which are a further tailwinds to that side of the business.

There's been a bit of a little bit of technical overhang, selling pressure from Mondalese legacy shareholder and as well, Jab. Mondaliz is now fully out as of July, early July. jab has sold down what they had said they desired to ending in June and have stated no intent to continue selling for the time being. Meanwhile, the stock trades it historically wide margin of Pepsi code. We believe for some of those factors we mentioned that the fixation on the coffee side and a lack of appreciation for the underlying drivers and business and the upside to it, which we think will manifest itself over the next several quarters. We think it's worth 50 bucks,

about 50% upside, given its trajectory, kind of the turn and sentiment is kind of beginning to take hold following a solid Q2 and what looks like a solid backoff. Brandon, did you want to add anything to? I think Eric did a nice job with the overview, but did you want to add anything to that? No, I think Eric touched on the overview, maybe like the setup there. I think they're at a really interesting inflection point here. So looking forward to diving into it. Cool. I guess let's just start with the fundamental driver. So I think y'all did a nice job, but you've got the Dr. Pepper, the U.S. beverage side, that's about 50. I think it's a little bit more than 50.

I guess it depends how corporate goes, but a little bit more than 50% of the earnings are there. You've got the international side, which is about 10% of the earnings. And then you've got the curing, the U.S. coffee side, which is, it's actually a little bit under 40%. But I think those roughly are right. So curing, you've got this great razor, razor blade model. And I think, as you said, they haven't taken pricing. But every time I flip through a sell side report or anything, I think there's a lot of debates over, hey, how much of Kurek has been, like, affected by work from home versus going to the office. There's all these debates on different cost security.

And so what do you think the market's kind of missing on the coffee side? Sure. I can hop in there if you want. You can follow up. But yeah, so it was really interesting. Into the print, you know, we like to track the K cup prices on a weekly basis. I mean, notice they had actually raised prices on cake cups. And that's really interesting in this scenario because historically they've been in the position only lower prices.

They want to get mass appeal. So it's kind of been just in the last couple weeks, a big shift in strategy where they're no longer prioritizing necessarily just volumes as much as they are in market share. So we think that's really starting to change the narrative. So just in the last, you want to look at like two years, the price, the commodity cost of coffee is doubled. They haven't really passed that on. Now we're starting to get easing input cost inflation and pricing going up. And as you mentioned, some of the mobility, people were working from home, drinking lots of coffee. Now they're going to the office.

They're going to Starbucks. They believe that headwind's going to be over by post-Labor Day. So Q3, that's going to be, we're going to be fully normalized, easier comparisons. And that's why we think this, like, 2H inflection point is really interesting just because the coffee business has kind of cycled up mid and it's cycled back down. And now we're starting to get more to a normalized run rate. But, you know, I think the way we like to frame it is, if you look at 2019 today, everything's growing up. brewers cakeups mid single digits. So I think people may be panic when they see one quarter of soft brewer's sales, but realistically it's on the right trajectory and taking market share, in fact.

I think on the Q2 call, the CEO said something along the line. He was like, look, we have 80% of the pod market. And if you believe that the trends are from people brewing whole pots of coffee to people brewing kind of by the cup, buy the pod, then we have 80% of that market. And ultimately, like, we are going to be a growth market. We're going to be a growth because we're going to benefit from that growth. Do you guys think that's the right? right way to look at it, or has that, are those trends kind of stopping or reversing? Yeah, from a value in proposition, the scraps of the coffee price have been increasing. So people have grew at home, a whole pot, a pot cup. You know, that's been, while kickups have been

kind of flat in pricing, those prices are going up. And then not to mention Starbucks prices have been increasing substantially. So, and also people are brewing and using cake. up's care platform in their office as well. So I think that is an offset. Maybe they have their first cup of coffee at home, but they kick up, maybe have another one on the way. That's, and it's something obviously people have every day. It's a ritual and have maybe multiple times a day. So I think that's adoption basis increasing and that is driving it. This on coffee, and this will come into play when we talk multiple stuff, but I think I've seen things that Gen Z tends to drink less coffee than millennials. And obviously that there's a little

bit of an age thing, and I think millennials might drink a little less coffee than the people for them. There is some age to it, right? You're more likely to drink coffee at 30 than 20 and 40 than 30, but is there trends like, look, we've got energy drinks now, tea, all sorts of other things. Are there, is coffee, not that it's a dead market, but you know, are there going to be maybe medium-term headwinds as this kind of demographics play out? Yeah, I think you know that. Yeah. Yeah. So, I mean, It's kind of interesting. You know, we looked at some of the industry data from the Coffee Association of the United States, which is really fun.

So they kind of view themselves as the original energy drink coffee. So that's kind of like their viewpoint. And I think, you know, they did some analysis. And I believe they found, I think it's 86% of U.S. adults drink coffee. And that actually, in their survey data, actually ranked higher than tap water. No way. It's, yeah. So it's 60% of Americans had a cup of coffee in the past day, more than any other beverage, more than soda.

tap water was 47%. Yeah. But does that- I think coffee's here to stay. But does that, that holds up over age, because you just said Americans, that holds up over like younger people. Okay. Okay. Cool. Yeah. And then just turning over and I just want to do it because like, look, these are great businesses. I want to just give some people some ideas of trends because they're good businesses, but especially on the U.S. beverage side, I do agree they're taking trends. This will come to valuation. But let's talk about U.S. beverage. They've released Dr. Pepper Zero. They've released some, you know, Dr. Pepper's, strawberry and cream, zero, which I'm holding up for people who are watching the YouTube. They've done a partnership with C4.

Basically, I guess what they're saying is the U.S. beverage business is doing really well. Do you guys want to talk about what's going, what's kind of driving some of the trends there? Yeah, sure. I can start Brandon Hump and I feel like, well, Dr. Pepper's kind of in some way. It's kind of a unique brand. It's not a cola, so it's not directly competing with Coke and Pepsi. It's actually alongside Coke in many instances. They have partnerships with them on the distribution side.

So that's their adoption, the road of Dr. Pepper, kind of its nascenty was coming out of Texas in the south region. It's only really now fully expanding some of the other regions, yes, broadly available. Consumption is only accelerating some of these other parts of the country. From a kind of overall beverage consumption standpoint, yeah, they have the diet offerings now, which they have in all the different flavors.

That's been tracking very well. and some of their ancillary brands that they expand into on the energy side as you referenced that's been going really well they've used JVs that they form to have a distribution agreement marketing agreements with these folks

that's been going really well and you know one other one is the fact that they've been raising prices and seeing its negligible decline in consumption you know demonstrating the elasticity of demand there people are continuing to be consumed

despite higher prices at the store Brandon, do you want to add anything there? Sure. Yeah. So I think, you know, Eric touched on it. It's really a regional soda that's starting to take and, you know, make its way across America. And I think the cool part from being the Dr. Pepper, as he mentioned, you know, it's a non-Cola. It's actually the flavor category. So 90% of their distribution is actually what they call it through the blue and red systems, which is Coca-Cola and Pepsi. Yep. So from their perspective, that, you know, that's great distribution. And both Pepsi and Coca-Cola, they really want to carry it because that gives them a market share edge. Dr. Pepper being the number three player.

So, you know, our big call on Dr. Pepper in the carbonate soft drink portfolios here is right now they have, I think, a little over 24, maybe getting closer at 25% market share. You know, we think Dr. Pepper's on the path to be the number two carbonated soft drink portfolio in the United States, essentially dethroning Pepsi. And we look at what's driving that, as he mentioned, their elasticity of demand have just been so phenomenal. since we look at it since 2019, so we kind of have that normalized base rate. Their volume growth is up 10% since 2019. Pepsi's is down 2.6%. So the trends actually for Pepsi in the last, we're going to call it like year to date, are actually worsening and Dr. Pepper's are, you know, holding up if not improving.

So there really been a big net market share gain. And actually the biggest net market share gain in the last two quarters is what they announced on their earnings call. So I think when people look at the Dr. Pepper portfolio, I mean, it's like ginger ale, they have 75% market share, orange soda, the number one with Crush and Sunkas. These are just higher growth categories that are taking share from colas. You know, Pepsi's kind of stumbled with being the number two player to Coca-Cola and the Mountain Dew actually has not been doing very well in track channels. It actually represents the majority of their market share losses, which historically has

been one of their stronger ones. That's because my friends aren't teenagers anymore. So, you know, the Mountain Dew trends have to subside. Brinan, I want to ask you a question on that. So I knew Coke and Pepsi like did did distribution for Dr. Pepper, but I didn't realize that they would look at it as a competitive advantage. Like I always kind of thought of it as a risk factor. And again, you guys have done way more work than me.

I've only followed it loosely. But I was thought of it kind of a risk factor where if they took, if Dr. Pepper grew too much, like, look, it has to get sold, right? Coke could look at it and say, hey, why are we even given the shelf space? Let's just take that shelf space. I understand what you're saying. But like a lot of the beverage game is just having the distribution, having those logistics. Why wouldn't Coke at some point look at it and say, hey, if we just took the cut the Dr. Pepper out or we're in 2020, I don't know if they could release their own Dr. Pepper style brand. They have done stuff like that in the past.

But why wouldn't they eventually just say, hey, let's just cut this out and try and take that for one of our other drinks or give up some lost sales and stop kind of funding a competitor. It's so funny because, you know, we recently read the book Fizz, which is the history of soda. So when we look back in the 80s, that's exactly what Coca-Cola did. They came out with Mr. Pibb. I remember Mr. Pibb. Not a big fan. They came out with Cherry Coca-Cola. That's like their competitor to Dr. Pepper.

And they just haven't really taken off and gained markets here. I mean, Dr. Pepper's still the number three soda right now in the United States, depending on how you kind of look at it. So in terms of shell space, so I guess we had the opportunity recently to speak with the manager for Dr. Pepper distribution at Pepsi's Buffalo Rock facility, which is like their largest independent bottle or distributor. And they do the Southeast, which is big soda drinkers. So, you know, when we're talking to him, he goes, yeah, he goes,

whoever can get Dr. Pepper essentially just, you know, they have the edge in that market. They have majority market share. It increases your scale, increases your, you know, SGNA leverage. You're doing more, you know, you can hit more stores with more volume. So it's just like a huge advantage to whoever has the Dr. Pepper in that territory. Because Pepsi and Coca-Cola, generally speaking, are like, they're pretty close. So that territory you talk to, they've got. got the Dr. Pepper distribution right now.

How often does the Dr. Pepper distribution regional agreements come up? Do you know? Every year and it's pricing. And then every year can they just kind of like flip it and be like Coke and Pepsi distributors, whoever wants us, whoever wants that extra market share, like come and get it. Whoever wants, what do you mean? Like so you're a Pepsi guy you talk to. December 31st, his agreement with Dr. Pepper comes up.

In October, can Dr. Pepper say, hey, we're bidding, we're doing a bakeoff. you versus the Coke distributor, whoever is giving us the best economic terms is going to win. Like, do they kind of, every year could they kind of look forward to balancing each other off? So they actually are, so I guess, Annette, okay, I understood the question. Yeah, so those are perpetual agreement. So when Dr. Pepper wants to, what they call is it, re-franchising, they actually have to buy out that distributor. And I believe they can buy someone out at any time. I'm familiar with the bottom line.

Okay. So they got their distribution locked in. Got it. Okay, that makes total sense. And now, a quick word from our sponsor. Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are, and you can access primary research easily and efficiently through their platform.

With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced by-side analysts conduct the calls for you. But that's not all. Stream also provides the ability to engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less than you would pay for 20 calls and a traditional

expert network model. So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening and we'll catch you next time. So at this point, like, and listeners probably came in thinking, okay, they're talking about Curig, you know, it's got a great brand, 80% of the pod shop. They're talking about Dr. Pepper. This is a, this is a branded drink. Like, they probably know it's a pretty good business, right? Like, historically, if you had bought Coke 100 years ago, you're listening to this podcast from the beach. So I guess my question here is, this is a 50 billion-ish company. It is widely covered. It's very

large. It trades at 20x plus next year's free cash flow. So my question the two of you is, I don't disagree. This is a really good business. But I know you guys, you guys are looking to generate Alpha. I think my listeners are probably listening not for investing advice, but thinking about generate Alpha. How can you generate alpha at like, you know, kind of 20 to 25 times on a good business, but ultimately a pretty low growth business, that type of stuff? Sure. So, yeah, so on valuation, we were looking kind of looking at it as like a little under, a little closer to maybe 16 times price to earnings. Yeah. And to your point, it's a widely followed company, the people who follow that just don't like it. You know, I think.

think they kind of get bearish and focus on all the wrong parts. So I think for us, we kind of viewed this as, you know, we're very opportunistic when we're kind of getting involved. It was everyone's pricing in the death of coffee. We're like, no coffee is actually a really growing net market share gaining business. And I think that was an extremely contrarian call, kind of like walked the plank on that one. So we kind of got, I want to say lucky, but we kind of, we're very fortunate that coffee kind of outlook held up there. So that's kind of like helped stock recently. And if you're a point about up pouring alpha, I mean, I think we could have to run the numbers on it, but I believe over the last few years it has, I think, generated Alpha versus

S&P 500, at least since they merged in 2018. Valuation. It was so interesting, you know, we did this sum of parts analysis to kind of understand how, because this was a merger in 2018, so we said, you know, what's coffee worth, what's use beverage worth? Everyone kind of loves beverage, doesn't like coffee, so let's do this back in this implied valuation. And we sent it to a couple self-side analysts. And I think within like a month, I think four of them had published this analysis. So it's just a way where I think we were kind of like, adding new information to the market, or at least getting people to look at things in a different way.

And we shared that with IR and they're like, oh, this is super interesting. And I think they maybe like even shared it with a couple of people. And I say, you know, where we also have kind of taken a maybe somewhat differentiated view is, you know, there's just post-merger. There's a lot of intangible assets. For whatever reason, people don't, they don't add back other amortization expense, which is about a 10 cents benefit. So if you want to look at maybe like cash earnings here, there's just like a big discrepancy

between KAPX and DNA. So you're going to like neutralize for that. They were getting very aggressive on their supply chain financing. So they're actually winding that down and that's going to be a big headwind to free cash flow over the next 12 months. But historically, their free cash flow conversion has been over 100% where their comparison. The comparables is actually like 80 to 90%. So it's a P.E. discount, but with higher free cash flow conversion.

And, you know, we like to focus on upside to earnings versus where we see ups and side evaluation multiples, presumably that will trace that. So, you know, when we look at what this business can do, gross margins. Can I just think into one thing? You said we sent around to a lot of sell side people some of the parts analysis. And within a month, you saw four of them published similar some of the parts analysis. What was what wasn't your some of the parts analysis that they were kind of republishing? Because to me, like a beverage, international coffee, corporate, slack and multiple on all those.

I think that's pretty basic. Was there anything else you guys were kind of looking at or thinking about that the sell side hadn't done? Yeah. So I would point to just the Wells Fargo, Morgan Stanley, J.P. Morgan. I'm forgetting any of them. Any other big banks you want to list there? Those are the guys who published it within a month.

And everyone had the same sentence, which is coffee is trading at a mid-single digit, like either P.E. or even multiple. And I think the only point that we made that we did differently was saying, hey, $32, everyone agrees with. the valuation on cold beverage, it's outperforming by such a large degree. There's no really discount required. Let's back into what the current market price is implying for the coffee

business. Yep. And I think people were, I think once we kind of framed it that way, and we said, let's look at Hamilton brands, which is a, they make Kyrig single serve coffee and small appliances. The valuations are actually somewhat similar. So we said, this is how the business is being valued and viewed. People are discounting estimates so much. And I think it kind of, resonated with some people. And, like, wow, it actually is an interesting way to look at things. And it would kind of, like, caught on fire pretty quick. Eric, Brandon just went through a ton.

Did you want to add anything to that? Yeah, you know, how do you get paid here? What generates your alpha? You know, I think the key catalysts are the inflection in the margins. If you look back to 2019, margins were 500 basis points higher. So as the coffee moderates, there's a six-month lags. They have contract coffee and various other input costs. That's just only starting to get absorbed.

And I think it's, you know, accelerating that's going to be a backout story here and then in that 2022 story. I think this kind of fixation on the decline of coffee that mentioned as relates to the brewer systems. You know, that trajectory has changed. The narrative just seems to be changing kind of the bias towards that and the marketplace seems to be changing. And I think that's kind of how you frame it. And then back to your question about like consumption trends, hot coffee being kind of the key. They recently announced or released a cold brew system, single serve basis. We have tested that, have one, looks to be quite good, you know, and that's adoption.

It's been strong. So I think that's one way they can attack that side of the market to help stem some of those younger folks that like cold room, we drink cold brew. So that's, I think, one thing they've done in addition to some of these kind of, I don't call them free options, but their recent JVs and other smaller brands that are partner with that are growing really nicely. I was reading the Q2 earnings and they partner with La Columbia. And when they said that, I was like, oh, between Dr. Pepper and La Columbia, they've got my drink and they've got my wife's drink. They've got this, they've got this household locked up

pretty good. And C4 is another one where they've done, I think they just have a distribution agreement with them. I don't think they own that brand. You guys can correct me if I'm wrong, but I see those every gym I go to. I feel like I see somebody drinking. They've got like a Sarburst branded C4 and then the legacy C4. I feel like I've seen those. It's where Celsius was two years ago is kind of how often I see those, if that makes sense. I mean, a great scenario, yeah. Yeah, they have 40% of right, C-4. So these J-B agreements whereby they get an attractive valuation, not taking over the company.

Yep. The company's able to retain their marketing brand in product development and can partner with a larger company to scale the system, you know, distribution and market penetration. And they've done that. That's kind of their blueprint that views it three or four times. and that's, yeah, exactly what they're doing in C4. It reminds me of what Coke did with Monster in 2003 or whatever, right?

Like, that's what they did, and that's the thing. You say an independent company, you focus on your brand, growing your business, and obviously distribution takes a huge fixed cost and a huge system. We can do that, and you kind of get the best of both worlds. Though eventually Monster grew so big that that did become kind of an issue. Let me ask a different question. So on the Q2 call, the company comes out and says, hey, we bought back seven, I think it's seven million shares in Q2. And they say kind of the same

thing you guys are saying. We see value in our stock. And when we see value, we're going to lean into the stock with repurchases to capture some of that value. But the counter to that is, you know, Mondalas and Jab are both sophisticated corporate slash strategic buyers in some way, shape, or form. And both of them have been reducing their exposure, have been selling over the past year. And I think the executive chairmen also sold a pretty substantial amount of stock over the past year. So, you know, it's kind of interesting when you hear the company saying, we see value, and then you see these key control strategic shareholders or high level executives who might be saying, actually, I kind of want to ring the register.

Yeah. So, I mean, that's really interesting point. That's been the, it's so funny, you know, since they went public, that's been a huge overhang on the stock. And every couple months we get these secondary press releases, people kind of hit the panic button and the stock kind of like sells off. So we're thankfully that that's now out of the way, no longer an issue. But Mondalese ended up selling their coffee business to Kuregg pre-Dr Pepper merger. So once these things merge, they're like, you know, we're not in the business of owning other publicly traded companies. We own 13% of the company. We're going to work it down to zero over the next few years. Yep. Um, so that's, that's all that's been going on there.

They had a member on the board of directors who stepped down earlier, earlier this year. so it was kind of just a not yeah it was a non-strategic holding for them they kind of worked it down on jab

they had distributed I mean they bought um cure egg you know I want to say like 12 years ago it was really early mid 20,000 2000 so

they had just distributed their final bit of stock to some of their LPs and in their press release they all in their 10th floor and in their form four they said you know that's our last distribution or long-term shareholders from here.

They still own 30% plus of the company and have a few board seats. I'm not the executive chairman. So he, Bob Gimgorton, we like him a lot. He did a great job as a CEO. They transitioned him to executive chairman and then the CEO replaced him. I had a very, very short tenure, I want to say a month or two,

tops, transitioned him back to CEO. And since then, he sold off some stock when he wasn't the CEO. He became CEO. and thankfully those insider sales have stopped. So it seems like he was kind of getting ready for retirement. And then he said, had the eye girl, ooh, who did I replace myself with? I might need to come back in and make sure the ship stays on course.

Eric, did you want to add anything there? No, I think kind of those are the key points. I would say, yeah, as it relates to Mondali's, yeah, their corporate needs, didn't want a little to public company stock. You didn't use that cash with their own business. And in Jap, it struck me as more of like a fun life decision to distribute the DLPs as opposed to a fundamental call on the business itself. And, you know, if you look at where they've been selling and where they sold,

they're pretty inopportune and disorganized. They weren't in communication with KDP. If they were trying to maximize the price, they would have struck out to KDP instead of, you know, if you do a share, you purchase buy our stock here, something like a tender. But yeah, that's how that's played out. Just one more question on multiple here.

So U.S. beverage, it is taking share. It's growing nicely. Again, I keep holding up the Dr. Pepper Zero, but the Dr. Pepper Zero Sugar has done really well. They've introduced interesting brands. Like they're taking sure they're just the international business for Dr. Pepper is very small. And this is a brand game, right? People drink Coke because their parents drink Coke and their grandparents drink Coke.

If you're international and you're going to launch Dr. Pepper, you might know it. I might know it. A lot of the listeners might know it. If international doesn't know it, you're just, you're launching a startup soft drink. Coke and Pepsi have a lot of their value comes from their international play, right? They've got the international brands. A lot of their value comes there. That's where a lot of the growth still comes from.

I guess can you give the beverage side of cure Dr. Pepper the same multiple that you kind of would give a Coke or a Pepsi when they don't have that huge international exposure? So I think how we look at it is we're saying, hey, you know, let's discount those two maybe by 10 to 15% for our implied valuation of beverage. And for the U.S., it's interesting that, you know, this really was a, and you know better being a Texas guy yourself. It really started where they had. Louisiana, but I'll take it. Okay.

Dr. Covers Texas. Close enough. Close enough. I was in the ballpark. So it really started as a regional business, and now they're expanding it. A great example is in the Northeast. They just signed a new distribution agreement in 2020 that doubled their amount of distribution in the Northeast, the Tri-State area.

We're like, that's 20 million people. right there. We're under penetrated distribution in the Northeast is still only represents, I believe it's a low double digits percentage of Dr. Pepper Drinkers. So it's like really under penetrated in the Northeast. But it is a U.S. focused business. They focus on where they can win and they think they can win in the United States market. It's outgrowing some of the other guys in the United States market like Coca-Cola and Pepsi. And it's really at this point too, an earnings growth story as much as a revenue growth story. So Dr. Pepper has, on the top line, exhibited better pricing, power, better elasticity.

Well, where we're kind of looking at it is 2019 margins are still three, 400 basis points above where they are today. And they just inflected positively Q2 of this year, I mean, by six basis points. So we're kind of saying, you know, hey, this and the work here we've done, we think carbonate softening prices are going to be flat to up going forward from here. volumes will be, you know, hopefully pretty close to flat, not declining slightly. They've been growing lately. But you kind of look at that, and now you have a low single-digit growth top line,

but we're going to keep scaling those input costs. And we think the earnings potential of this business is so drastic. I mean, sales are up over 30% since 2019. So we have a lot of SG&A leverage in there, over 100 basis points. We kind of put that all together to get to like maybe a 27% each. that margin consolidated business, which is a few hundred basis points higher than the consensus estimate over the next few years.

US beverage alone for Dr. Pepper. One profitability advantage they have is they over-indexed to these, which is the 20 fluid ounce. These are single-served. They're the highest margin product for them for the industry. And they over-index those. It's about a third of the business.

The majority of U.S. beverage revenue is actually their concentrate sales. This is just selling the bag of the syrup, that's a 65% EBIT margin business, which is highly attractive. That's why US beverage has 29% EBIT margins. The 20 ounce just on it, obviously, this is an inact data, not anything, but whenever I go to the Dr. Pepper down the, the, Jain Reed down the street and get a Diet Dr. Pepper, you know, the Diet Dr. Pepper, no, it's in the fridge, but so they're providing

you a service, and I think a lot of the margins going to join Reed because they're charging that service, but I'm pretty sure it's higher margin for Dr. Pepper as well. Dr. Pepper in the fridge is always like $2.99, and then the 20 ounce, the two-liter bottle that's on the shelf is $2.99 as well, and I always pay for the cold one, because I just want a cold one, and I want that hit right then, but I do think about that they probably over because of that. Do you guys want to talk about, you had a really interesting bottling thesis, piece of the thesis. Did you want to talk about that? Because I don't think anyone, I think on your recommendation, maybe one side, cell side person has kind of mentioned it, but

pause there. So here's a bottle cap for the Dr. Pepper bottling cap right here. I don't know if the viewers can see it, but it says, bottled by affiliate of American bottling company under the authority of Dr. Pepper Snapple. So this is their bottling subsidiary, and it began in 1999 as a roll-up with the Coral Group. So private equity guys got in the business, so a big growth market and soda combined it with Dr. Pepper. And since the early night, well, I'm sorry, since the early,

2000s, they've been rolling up all their other independent distributors and you're really creating a in-house bottling group. And when they originally IPOed in 2008, they had a bottling group and it was these guys right here. It's not what they do, though. They're marketing and more of like a marketing business and a formula business than they are a manufacturer of sodas. So, you know, our whole thesis was these guys right now actually are trading more like a bottler than a high margin, you know, syrup and marketing business. Evaluations have somewhat converged. Let's get rid of the, at least spin it out.

Coca-Cola has a few publicly separated entities that have also done this. Let's get rid of that and just show the very best part of the business, which is what we do best to get management and focus on that. So I think that's just how we're looking at it. And it doesn't, they used to say in the 10K, you know, we are more vertically integrated than our peers. They got rid of that language. And they used to break up the bottling revenue, which is in the billions.

they don't want to do that either. So we think there's essentially like a $5 billion hidden asset value in this business that just no one's really paying attention to. Manager has not signaled any intention of spaying it out. So we don't expect people to start paying for it yet. But, you know, if an activist ever emerged, I think that would be one of the angles that they would pursue. As we're talking, I think Coke, not Coca-Cola, Coke, C-O-K-E, which I believe a lot of Robin Hooders confused with Coke a few years ago.

But they're a Coke distributor and bottler, and they're up like 15%. I'm guessing on an earnings beat or something, but they trade for a very healthy multiple for a bottling system. I guess my pushback there, it's really interesting because, again, I've never even heard of anyone talking about the hidden bottomling value in Dr. Pepper. And you are right, like Coke has, they've spun out the, especially their international side, they spun out their bottling assets. Then sometimes they bring them back in.

They go back and forth. But it's really interesting as a hidden value. My question would be, is it really, like, you tend to get hidden value where a company is just at the wrong multiple. I think of a restaurant company, right? A restaurant company that owns all their land and the restaurant company trades for five times earnings. And then one day they say, hey, we did a sale lease back.

And look, our earnings are going to go down because now we're going to have to charge ourselves run expense, but we do the sale lease back at a 5% cap rate, which implies a 20x earnings multiple. So your earnings go down, but you get like way more. If they, like, we're saying the U.S. beverage business should be worth like 18x. And I think a bottling business should probably be worth a little bit less than that. So if you spin that out, like you're going to have to start paying out to the bottling business. Is there really hidden value there?

Or would that just kind of be a financial engineering spin? And maybe a little value because it's a big business and people can like put the proper multiple on each of them. But is there really a lot of hidden value there? Yeah. I mean, I think they could sell it for $5 billion. You know, maybe Coke consolidated is up big today. Maybe they're trading action higher premium. Now you have to dig it on that one.

But they actually are a Dr. Pepper distributor, a Dr. Pepper bottler. So seeing them go up 15% with a $6 billion market cap maybe makes us think that they hit an asset value on Dr. Pepper has maybe just increased a little bit, at least maybe 14%, like he mentioned. But yeah, I think they could sell it and then just what they would do would be selling the concentrate to that new entity. And it actually is its own corporate entity. Subsidiar called American Bottling Corporation on this bottle cap. So I think it's very doable. Yeah, I mean, it's not like a financial alchemy situation. Depending on the value, but they realize for the sale,

it's a much higher margin business selling of syrups as opposed to the capital intensive nature of bottling and that and the like. So margin will certainly be, it would be accretive to on a margin basis, unlike, say, a sale lease back where you're still having to pay someone to use that property in that situation of a restaurant image. And I guess, yeah, I'm just, not convinced because then you have to pay the bottling fees, but $5 billion would be a lot. And as you said, it would really clarify the margins and show people just how much cash for this

core business is generating. Is there anything else when obviously you guys talk to a lot of people on the thesis? Your thesis is are widely red. As you said, I love that you sent the sell side, the sum of the parts, and within a month, four of them are doing it. Are there any other pieces of the thesis that you think either people are missing or that you guys have kind of engaged the most back and forth with people when you're discussing it? I mean, there was the Bud Light issue. Yeah, I thought y'all did fantastic work here. I didn't know if y'all wanted to talk about or not, but go ahead.

Why don't you say it? Yeah, there are a few days. There were, you know, following the Bud Light PR debacle where we're like, are we missing something, or are they somehow affiliated associated with that? We found that it is like Lomato, essentially, it's like a mixed drink that they partnered with Bud Light, which was getting hit as a result of that. kind of brand version, and then dug into the numbers, and it only equated to like 0.02% of revenue.

So, you know, de minimis, you know, inconsequential. And, you know, I think that was one potential thing that everyone was looking to see what were the, you know, what was the blueback across the industries related to that, those dynamics of, you know, bud. This year has just been the year where it shows just how thick the left tails are in the market. Like, you know, who thought a bank could blow up because they own too many U.S. long-term U.S. treasuries? Who thought investing in AT&T, it might turn out that they were killing all of their customers and communities with lead. And who would have thought like Bud Light could do,

you know, send, send an influencer, what, $50, $100 worth of gifts and basically destroy or maybe not destroy, but put at risk a lot of their brand value. Like it's just shown how thick the left tails are. But yeah, I just said you guys did such great work on it. because, again, I hadn't seen anybody even mentioned it. Obviously, you guys said, oh, this could be a risk. Went uncovered it, saw it wasn't a big deal. But I hadn't even seen anybody mention or think about that. Right.

Brandon, anything else that you guys, when you kind of talk to bulls, bears, or anything, engage with, think it gets people really up about this, kind of the different pieces of the stock? Yeah, I'd say one big inflection point that happened this year is kind of evolved, too, which is earnings quality. I mean, that's usually where you can get these debates with some of the bulls or spares as they say, you know, they're driving EPS by doing these sale leasebacks. And the sale of these backs have one-time gains, and they actually include those above the line. So it's included in an adjusted EBIT, and people always kind of frown on that kind of discount the earnings. This year, they're expected to be what they call above their long-term growth-algo year.

So they've got it for 9% growth. This year, it has to be like 14% growth. So people are saying, ah, they're not going to be able to do that without like some material one-time gains. So on the Q1 call we got 5 million And then on the Q2 call we got zero And they said, you know, originally we were expected to have 50 million one-time gains now we're going to have close to zero So I think it really can approve the model

And supported some of the bulls who thought that their earnings power is actually better Than they had been fearing So now we think people will be more comfortable Kind of placing a full multiple like a full P.E. multiple on these earnings And hopefully close that discount with some of their bigger peers If I can just add one more, and it relates to that, you mentioned the factoring earlier, but, you know, Jab, who I think they've been unbelievable, like, if you look at their consumer holdings, I think we all probably just wish we had had the Jab, like, buy Krispy Cream when

no one thinks Krispy Kreme's good, Brianra, whenever, like, they've been unbelievable, but, you know, I do think there's something to people see Jab, this big consumer-oriented thing that takes these brands and really spruce them up, and people might have like a little bit of echoes of 3G in their mind. And when you've got KDP, both with a lot of adjusted eBed ad, adjusted ad backs in their earnings and that big factoring thing. And you're just looking, you're like, hey, guys, you're a tens of billion dollar company. Do you really need to be factoring your receivables from your bottlers? Do you really need all these adjusted? Like, I think the fact that those are going to be in the rearview mirror, again, it really cleans up the quality of the earnings. But I also think it just

moves a little bit of that ick factor away from it if that makes sense. Yeah, I mean, we would email you in our and be like, why are you guys so aggressive on your supply chain financing? I mean, the real answer is it's a performance metric for the management team. Yeah. So, like in the proxy, they would say, you know, we're going to push out our days payable to increase, to decrease our networking capital. And that is 30% of our bonus this year. We're like, that's not really aligned with the shareholders, but, you know, management's getting aligned to essentially work that. So we're glad that this year they actually, and then this quarter they announced, hey, we're no longer going to do that.

$600 million head wouldn't be cash flow. It's going to be maybe brutal on the way down, but next year we'll have a clean base and that would all be normalized. We think for the long-term health of the business, that was great. Yeah, 100% agree. Yeah. And they're not the only ones you do it. It's like AT&T is doing it. And AT&T deals with a lot of smaller suppliers and stuff. So I get maybe you're solving some credit things. It's like, AT&T, your investment grade. So you really need to go back to your receivables rise and your investment grade. Like I understand you guys have a dividend you want to pay and you're worried about headline leverage and stuff, but making it by factoring, it's just, it's very strange. It's very strange. Yeah, I mean,

we told, we told the company, like, you guys aren't bedbath and beyond. You're not having a cash crunch. Like, the guys are doing just fine. Let's, let's keep things, you know, on track here. But if I could maybe just quick on earnings, expectations for this year. So, you know, I think the big, the big I say you know why people are continuing discount is the coffee inflection you know we think that'll be good the Q3 versus Q4

build I think is what people are really focusing in on they somewhat lowered Q3 EPS expectations and mid single digits maybe even a little bit lower than that so there's kind of like just like Q4 build when we look at what they did guide for Q2 and delivered on Q2 it was so far above

so we're kind of looking at Q3 being similar we think they're actually going to actually have a it'll be more evenly split between Q3 and Q4 as people are fearing And then what's interesting is when we kind of look at the exit rates in the 2024, that would imply somewhat material step up to earnings and run rates and everything like that. But I think it's going to have a really good blow through.

So when we see that, you know, since December 1st, which was before they did this fireside chat and talked about expectations, the stock's down 15%. Earnings estimates are down not even 2%. The driving force behind that is cold beverage off sending some coffee weakness. so we think that now the earnings revisions are actually starting to become positive that'll start to close that gap between what the stocks been doing what the fundamentals have been doing and consensus at the low end of guidance we're at the high end so that's kind of where we're differentiated on expectations for earnings Eric did you want to add anything to that

no I think that hit it I mean one other quick point about maybe points of pushback or retention in stock probably the categories a whole is the fact people in probably our markets are saying while I go, I don't drink soda at a time, you know, I don't see sodas serve the kid. And yeah, that's fine. That's good. Well, the reality is the majority of the country still does. I mean, and there's a low sugar option or non-sugar option in the case of diet. And people that think about it, that they drink these, you know, multiple times a day.

They think it was like a treat, so to speak, you know, like instead of any donut, like Dr. Pepper, that's their afternoon snack. And that has innovated despite, you know, health pressures, the woman, you know, vilification of sugar and stuff we agree but yeah they have the diet off diets growing really nicely and that's probably a good thing to Eric i'm laughing because i felt so seen when you're like people drink them as their afternoon treat and as i said it it is my afternoon treat you know there was right right for a while there was the scary like as part of mean it might cause cancer from the who or whatever and i think if you looked at the research is like yeah if you drink 18 cups a day for a grown man you you might have

like 18 cups a day every day for your entire life you might have some issues which you know if i could I would, but I try to stay underneath that limit. Yeah, that comes and goes, right? Yes, pertain concerns and such. And as you said, like, I understand there are healthy trends, but there's a zero-sugar option. They've been doing these for decades. It's a lifelong, I don't want to say habit. They can be addictive if you, like, really are drinking tons of them every day.

But it's a lifelong treat. I don't think, like, the demographics on changing that are just so long. I think in the long run, there's the heat death of the universe, and that's probably what we're talking about coming out of that. Hey, if you guys don't mind just really quickly, the last time you came on, I thought you did a great pick for Oxford. They, you know, the business is doing well, maybe not quite as well as people thought at the beginning of the year because I think they did a little bit of a pulldown in their Q1 earnings. Just wanted to, if we, if you guys have two, three minutes, just see how you guys are thinking about Oxford because I think that's a super

interesting one as well. Yeah, quick kind of high level brand and feel free to happen. But so the last quarter, they, you know, again, beat numbers, but the guidance was softer. The cadence that they articulated was that March was a little bit softer than they expected. And then they even noted that April and May were subsequently stronger, but they gave a kind of soft Q2 guide tracking data we have and indications are, you know, going to exceed those expectations. I think it was more conservative messaging and being low on their guidance forecast relative to what, you know, is probably the reality. Yeah, poor business is still doing really well, being Tommy and Lilly is also.

And, you know, that has largely remained unchanged. There's some of the capital allocation questions going back and forth with them on. But, you know, margins start to reflect, paying down debt. This isn't, you know, necessarily promoting. So maintain those nice to track margins. Yet still trades like, you know, eight to nine times earnings. In the market where others are being forced to discount or,

aren't able to price, pass a long price, you know, they're demonstrating the strength of their brand and lifestyle, they call it, within their customer set. I got my father-in-law, Tommy Bahama shirt for Christmas. I don't know if you all factor that into your, this was last Christmas, but I just wanted to let you all know. And now, a quick word from our sponsor. Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are. And you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts powered by AI search

technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced by-side analysts conduct the calls for you. But that's not all. Stream also provides the ability to engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less than you would pay for 20 calls and a traditional expert network model. So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening and we'll catch you next time. I think last time we recorded, it was like they announced that Johnny was acquisition either a day or two before or a day

or two after. I can't remember exactly. I was kind of, this is me personally. I was kind of like, hey, it seems fine, but you've got this great time. I'm a growth business. I don't know. know if you really need to, like, go buy another thing and have three brands in your it. I always get a little concern when you have these companies trying to run like three different lifestyle growth brands under the same thing. I'd rather just see a focus on one, let investors really focus on one. How are you guys feeling about the Johnny Watts acquisition? Is it Johnny was? Johnny was. Johnny was feeling about that acquisition. Yeah, yeah. So, yeah, we agree. You know, we prefer that resources and focus beyond the core brands. We're still pretty early on

and Johnny Wads acquisition cycle. You know, they acquired them late November. There's just starting financials, you know, we'll give them some time to deploy their playbook, kind of the marketing schemes and direct consumer kind of channels that they've shown that they can be utilized really well within their forebrands and help accelerate growth. There's a nice store opening trajectory, of course, within Johnny was,

but, you know, it's the quality of that brand is attractive as, you know, Tommy, no, but it's also about 10% of revenue. So, you know, it doesn't derail the story, but, you know, I think time will tell, but so far it's been okay, we'd say. Yeah, it's more than just the distraction. Like, I was almost hoping you got to the point where, hey, they were at the point where their balance sheet was, hey, we can just start buying back shares and you can get this like financial engineer levered playback story on Tommy Bahama growth, right?

It spits off the ton of cash. We grow up, but we also buy back shares. Brandon, did you want to add anything to that? Sure. Yeah. I mean, I think you guys nailed it. I think, you know, a big thing for us was coming into the 20-23 guidance was everyone was playing for this big negative. They've been over-earning, over-growing. 20-23 is going to be a down year. In fact, they guided for high single-digit direct-to-consumer growth, which is 80% of the business. They said wholesale is going to grow maybe 0%, which is like 500 basis points of net market share gains. So Tommy Bahama is just crushing it right now. Big beat on Q.

one, and they're going to grow mid-single digits this year. So when we look at some other players in the space, we're trading at like mid-teens, PE multiples, and we look at Tommy Bahamas growth in margins, return investment capital. They're rolling out Marlin bars. We haven't had a new unit grilled story for Tommy Bahama

in like 10 years. What if I said to like ballpark it? They've been a net closer. So for this year of Tommy Bahama, the outlook has just been so fanatic. I mean, so fantastic. And we kind of look at that business as being worth more than the current market cap, more current enterprise value. So we kind of look at some of the other brands.

It's like sure, maybe those have maybe slowed from mid single digit to low single digit growth this year. I think where people really got tripped up was even margins are coming down this year. We were kind of hoping for a flat that may be slightly down. In fact, they're going to take it down maybe like 70 basis points

and that's just SG&A catching up. They skilled SG&A just so nicely over the last few years. They felt like they had maybe underinvested in the business. So he said, you know, SG&A, expect even margins down slightly this year, but then to inflect positively next year. Consensus is still not modeling that. They're still discounting it. So we think in terms of like what this business can do, it's going to be hopefully over $12 of earnings per share in 2024. We think they're on that

trajectory. They've kind of proved that not just a one time COVID winner. So let's just really beat up and say it's worth 10 times earnings. I mean, I think Decker's and some other like gap are worth double digit multiples. But rocks. If you talk about the multiple crocs paid for hey dude, if you guys slap that on a I mean I know apples to oranges but you're like starting at like maybe $120 per share like your starting point for like a fair value for this business and we think it's obviously worth much more than that so it's just time with we prove the story at this point no look I didn't I didn't tell you guys I was going to ask but I knew y'all be ready so that's why I did because I just think it's a super interesting story I think you know

Tom Bahama it has a chance to be a real brand it already is a real brand but have real legs behind it. And, you know, if I remember correctly, there were some sharp guys quoted in Barron's about a month ago about how Oxford Industries was undervalued. So I had to ask them while the sharp guys were on the podcast because it's a really interesting one. Eric and Brandon, we're quoted in Barron's on Oxford. So just for people who don't know. Anyway, guys, this has been great. I think we're close to the end of the hour. So I just want to say thanks again for coming on. Brandon, thanks for joining me in the Dr. Pepper Party while we were here. Eric, I don't know what sort of shareholder you are, not, not. I got a Carrick in there. I have a carrig. I'll

I'll have to make up for this afternoon my snacks. I'll have a coffee this afternoon as well. But guys, I really appreciate you coming on and looking forward to the third one. Excellent. Andrew, always a pleasure. Thanks for your time. A quick disclaimer. Nothing on this podcast should be considered an investment advice.

Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.