All right. Well, good morning, everyone. I'm Dara Mohsenian, Morgan Stanley's beverage and household products analyst. Just before we begin, please see the Morgan Stanley Research website at www.morganstanley.com for our research disclosures. And with that, I'm very pleased to welcome Keurig Dr Pepper's management team here today, including Bob Gamgort, Chairman and CEO, CFO Sudhanshu, Sudhanshu, I don't think-
Priyadarshi
I got your last name right. There we go. And VP of Investor Relations and Strategic Initiatives, Jane Gelfand. Thanks, guys, for joining us. We really appreciate it.
Thank you.
Thank you. So, to start with Bob, obviously, Keurig's announced a number of leadership changes recently, including a CEO successor, as well as new leaders for all the individual segments. Can you just spend a moment on the rationale behind these changes and maybe tie that in with your go-forward strategy, how that might drive changes or sort of fits in with some of the strategy changes you already had in place?
Sure. It's a very exciting moment for KDP to have a management team now in place who can go on a nice long run for the next 5+ years. If you think about it, about 5.5 years ago, we formed the company by merging two. And when you're in that integration mode, you always have a management team, some of whom are legacy, who are thinking about how much longer they want to stay. And so you always know that it's going to be somewhat temporary. And so for us, to now have a COO announced, who's already started and is learning the business quickly, who will take over for me as CEO. We have a CFO who's been in place for one year, and we've had a chance to work together really well.
And then all of the other executive appointments that we talked about in the past couple of weeks came from within, which I think speaks volumes to the fact that we've been able to build an internal pipeline over the past 5+ years. I'll get a chance at the right time to move back to Executive Chairman. For me, what's most exciting about it is when you've got a team that's been around for a while, they spend a lot of time looking at their successes of the past. When you put a new team in place, they're just focused on the future. And Tim, as our leader, when he takes over as CEO, will be very much focused on the next five to 10 years. And the fundamentals. Beverage is a great category.
We're uniquely positioned within the beverage industry as a pure-play beverage company focused on North America, and we've got a set of strategies, to your question, a set of strategies and priorities, which I'm sure we'll talk about this morning, that have worked really well in the past five years, but I think have even more opportunity going forward. So having that team in place, ready to roll for the next five years, is very exciting for me as chairman.
Okay. Well, why don't we transition into your chairman role? What do you plan to focus on in the executive chairman role as you look out going forward? And maybe talk a little bit about timing, how long we should expect you to remain in that role, and how you sort of think about your presence in that role.
Yeah. I plan to stay connected with KDP for the very long haul. In addition to having been CEO since the beginning of the formation of the company and chairman, I'm also a substantial investor in the company, and I plan to stay in all of those roles, except for CEO, for the long term. The executive chair part of that there's no timeframe around that. That just means a bit more hands-on. My attention is going to be focused on the areas that are required to drive value creation, and that'll be a wide-ranging areas. But the biggest piece is really coaching Tim and the new team in place to make sure that they're up to speed and running effectively.
At some point in time, I'll transition over to non-executive chairman and stay affiliated with the company for the long haul after that. No specific time frame in mind, but whatever it takes to make sure that the transition is seamless and the company keeps humming along.
Great. In CPG, we're seeing a fairly volatile environment here, right? There are big swings in pricing and the volume reaction, et cetera. Maybe just give us a bit of update on consumer health here, and a bit of an update across your segments and cohorts. And maybe, Sudhanshu, as we look out to 2024, what are some of the things we should be focused on?
Yeah. If you think about what the environment is, you talk about volatility. Go back to the formation of this company in 2018 and what our outlook was and what actually materialized since then. Volatility has been the name of the game since we put the two companies together, yet we've delivered at or above all the expectations that we have and to put in place in 2018, which speaks to the flexibility and the resilience of this business. We're hearing a lot. You know, you pick up the news every day, there's talk of recession and consumer weakness. Quite honestly, we're not seeing much of that, if at all, in our business.
On the edges, we're seeing some sensitivity to pricing and some trade-down behavior and some channel shifting, but it's more on the edges than it is at the center of what we do. We think that the categories in which we participate are incredibly resilient. We have a recession playbook that we could activate at any time, but back in the fall, we were asked about a recession, and my perspective then was: Everybody's predicting it, therefore, it's unlikely to happen. Most of the volatility comes from activities or events that are unpredicted, and I don't know how you have a recession when you have almost full employment and strong wage growth. We're certainly seeing the labor markets still tight. It's still an area of inflation for us.
I don't know how that translates into a recession, but I think the consumer feels a little bit of pressure based on all the pricing that they've seen over the past couple of years, and we're reacting, again, primarily on the edges rather than the center of the plate. You want to talk a little bit about 2024 and what our outlook is for-
Yeah, and from my perspective, I mean, you guys have laid out that you expect to get back to long-term algorithm for next year. So maybe talk a little bit about what that means from a top-line standpoint and bottom-line standpoint, but also the visibility. It would seem here that you've got productivity ramp-up, costs are moderating, so it feels like the visibility is probably pretty good on the bottom-line piece of it. But the top-line piece of it, there are some consumer dynamics here in broader CPG and for you guys, as we talked about. So just how do you think about 2024? What are some of the key puts and takes, and maybe the perspective of top line relative to bottom line would be helpful.
No, Dara. So we said during our Q3 call that our goal is to be on the algorithm for 2024. That is mid-single-digit net sales growth and high single-digit EPS growth. And while we'll give you all key details of this thing on our Q4 call, but the high-level puts and takes are, think about top line. The top line, the net sales, it will be more balanced between pricing and volume mix relative to 2023. But we also have in that algorithm, those partners, the strategic partnerships we signed, we talked about it. We still think that inflation will be there. It's moderated versus last couple of years, but we still expect to expand our gross margin because we have pricing, we have operating leverage, and we have productivity.
We expect to expand our gross margin, then we'll make decisions on investment. Those are the things we're doing, you know, where do we invest in marketing and capability building and just growing the category. We haven't seen those investments for the last two, three years as we were challenged with margins, so we will be doing a lot more of that. And then the last thing I would say is more interest cost. So below the line, we have some financing needs to get done, so there will be some higher interest costs. But net-net, we feel pretty good about delivering our algorithm for 2024. The other thing I would say is we have visibility. We are in December. You know, our plan starts on January 1.
But we have also seen in the last five years, no matter what the situation is, we find a way to deliver. Our, our job is to have a plan, scenario planning with different range of outcomes, and we remain agile, where things move, and we move things around that to deliver. So we feel very good about 2024. We have a very good visibility. Obviously, consumer, that's one thing people talk about, but we are in every channel, we are in every format. So there's ways to, to capture that growth if consumers shift the channel or they shift, the price pack. And with having DSD helps us because we get the real-time information that allows us to move things around and be agile and still deliver our goals.
Right. Okay, and Bob, maybe just before we leave the question, you mentioned a bit of trade down that you're seeing. Is that significant? And also in the coffee business, in theory, there could be a significant benefit from trade down if we're moving away from the, you know, $6 lattes or whatever it may be at Starbucks. But you also have a brewer piece of the business that requires a larger dollar outlay. So just every macro situation is sort of different when we see a slowdown, but how do you think through that on the coffee business? And just put trade down in perspective for us, and then maybe just a broader, longer-term question. It's been, right, top line's decelerated this year for your business. You know, put that in perspective.
You obviously have a great long-term track record over the last few years, but just how you think about sort of that recovery heading into next year, particularly versus some of the scanner data we see that doesn't appear as strong? I know there's limitations to it-
Yeah.
But the long-term perspective would be helpful.
Yeah, let me start. I'll start with the last part, which is the long-term perspective. If you think about every single year we face since the merger of the company, with COVID, with inflation, if you think about the dynamics of the coffee business, it seems like every quarter we get into the details on our earnings calls of the coffee business, and then you step back, you say: How did we perform through all of that? 6% top line CAGR, 11% EPS CAGR over that time period, $11 billion in free cash flow, 50% of it was returned to investors. So I say this business model has the ability to withstand just about anything and deliver. So in any moment in time, in any quarter, it looks like there's a part of the business that is challenged.
There's another part of it's doing well, and that's what you pay us to do, is to be able to balance all of those different variables out and have different levers to pull. And our job is ultimately TSR. And so with that, we look at it over that time period, we've generated about an 80% TSR, and we still trade at a discount to our peers. So lots of upside in front of us. That's what the new management team is excited about. But the track record of this, this business model in delivering against a lot of situations, a lot of different situations, I think is pretty darn good. With regard to what you're talking about here, on the cold business, CSDs are very resilient. We've had price increases in the industry north of 30%, with virtually no impact on volumes.
That suggests to me that CSDs were too good of a value at the start of this, and that 30% was probably long overdue. So good for the industry that we were able to catch up to that. Some of the premium areas in the still part of the portfolio, you're seeing some trade down, like in premium water, to more, I'll call it commoditized water. That's somewhat expected, but it's really nothing that challenges our outlook. With regard to coffee, you've laid it out nicely. We have to make sure that we are continuing to drive premiumization in brewers, but at the same time, be really mindful of entry-level price points, and so we've got that balance right going forward. A lot of the price comparisons historically have been between pod coffee and roast and ground.
Those price gaps, which we intentionally narrowed, are the lowest they've ever been. So that's not really one that we're at all concerned about. There is a big opportunity, I think, from the out-of-home to in-home, because the price gap there is like a 5x-10x relationship if you take a look. We haven't seen that yet. As you mentioned, the biggest across this entire 5.5 years, probably the biggest challenge we faced, started in 2022, was the slowdown in the at-home coffee category globally. So it's all forms of coffee in all markets around the world slowed down. It's been gradually recovering, but slower than we expected. We don't expect that to last forever. We continue to pick up share of those coffee occasions, and we're improving our margins.
So we control the controllables and let that be, but outside of that, as you can tell, we're very confident in our approach to our business right now.
Okay.
The only thing I'd add is, you know, the way that you accelerate or just drive resilient, healthy top-line growth is the same way that we have over the last couple of years, but just by amplifying that strategy. In cold, that's, you know, driving core market share gains through innovation and renovation, that's filling in white space through acquisitions, partnerships, et cetera, continuing to invest in those DSD assets, which are very differentiated, and also driving premiumization that Bob talked about. And in coffee, there is a long runway of penetration upside that we continue to drive, as well as a total coffee approach. We've recently introduced, you know, more RTD presence than we have historically, and so you'll continue to see us focus on that. And I'd be remiss if I didn't mention international.
We've doubled the size of that business over the last five years. It has outsized growth potential, similar differentiated assets into which we'll continue to invest. That's what you do.
Okay, great. And you guys just gave us a ton of detail across the portfolio. But, you know, just as you look to returning to that top-line algorithm, are there certain things that need to get better, whether it's underlying growth on the pod side of the business from a category standpoint, or is it more a normalization of a bunch of these factors you talked about, and where you sort of land pricing versus volume, as you mentioned, Sudhanshu? How do you think about that?
Yeah. Well, the top line on our cold beverage business and our international business has been outstanding. The issue is really on the coffee side of the business.
Right.
That's driven by the at-home coffee category, which we influence, but we don't control. As I said before, we've been gaining share within there. So what do we think about that going forward? I think a lot of the cold beverage industry growth was driven by pricing. We don't expect that to be the driver in 2024, or the primary driver in 2024. We look at the playbook that Jane just described. We've been gaining a lot of share in our core business. We expect that to continue. We've been able to fill in white space in our portfolio, and we've had three transactions just in the past year with C4 Energy and La Colombe ready-to-drink coffee, and most recently, Electrolit in sports hydration. That gives us incremental growth beyond our core business.
And then, this notion of premiumization is a really important one. People, when we say that, think list price increases. Mix is a big driver of premiumization. So when you sell energy, you're selling liquid that's 4x-5x the price per ounce. So sports hydration, ready-to-drink coffee, and energy are also mix drivers within there, and also pack sizes. We're still underdeveloped in mini cans, where we see a massive amount of growth. We trade down from 2-liter bottles into mini cans. You see a price increase through mix as a result of that. The biggest question mark really is the at-home coffee category. When is it going to recover?
As Jane said, a lot of activity to keep driving that category, but what we're focused on is making sure we have the right expectations combined with significant margin improvement, and that allows us to have confidence in our algorithm going forward.
Right. Okay. And on the U.S. refreshment side, to dial down into that a bit more, obviously, there's been a very strong pricing umbrella the last couple of years, in line with the broader CPG industry, and a period of excess pricing here. How do you think about that leveling off, in terms of sustained pricing as you look out? You mentioned mix opportunities. Is mix a bigger piece of it? Conceptually, as we get to more of a normalized period, help us understand what that normalized period might look like and what the drivers are.
Absolutely. N ot to take issue with the word, but I would say it's not excess pricing. And the reason it's not excess pricing is because margins were negative for every CPG company. And so every time we got pushback from a retailer, for example, saying, "You have excess pricing," I said, "Well, you can call it excess when you see our margins recover and go beyond that." And so we're still in a margin recovery period as an industry, and we as a company, which gives us, you know, positive outlook on the future. And I think what's actually happening is inflation, or pricing is now catching up to inflation. As inflation moderates and we have carryover pricing, we're seeing more normalized margins. And so therefore, we're not looking at price increases as the driver, primary driver of growth going forward.
It's going to be a balance between volume and pricing, and a lot of the pricing we talked about is, I would put more in the category of premiumization, which is really mix rather than straight-up pricing, and we have a significant opportunity in that space.
Okay, which is a great segue into my next question which is market share on the U.S. refreshment side. You guys obviously have a very strong track record since the merger. A, can you talk about what's driving that? B, as you look going forward, are you comfortable that's sustainable, particularly in this environment, where we may see some category top-line fluctuation?
So we've gained about 1 point of share in total liquid refreshment beverages, which is a massive category. Specifically, within carbonated soft drinks, we gained about 2 share points over the past five years. The drivers of CSD, where we haven't done any partnerships or acquisition, is really marketing, innovation, and outstanding distribution. And distribution I'll come back to because that's our DSD system, which we've invested heavily in and will continue to invest in, which really lifts all of the brands in our portfolio. LRB share growth is a combination of that growth in carbonated soft drinks, plus what we've been able to do to fill in white space in our portfolio. And so the sustainability of both, we think, is very strong.
The businesses that we added over the past year, C4, La Colombe, and Electrolit are good examples, put us in nice positions in segments where we really didn't have a market share position. But still, we have a lot of opportunity to fill white space within those segments, let alone expand into different territories, and none of those arrangements are exclusive, so we have the freedom to do so. So we see the formula we've got in place on the refreshment beverage side to be very scalable and repeatable.
Okay, and those partnerships, why don't we delve into that a bit more also? Just strategically, as you think about those partnerships, put in perspective your pursuit there versus full-blown M&A, maybe how these partnerships are a little different than just a distribution model. And then also, Sudhanshu, maybe we can talk about sort of contribution from these entities. It's a bit more nebulous for us as outsiders to understand the full impact to your financials, but how you think about them developing over time from here.
So the key is to get new brands into our system, and I say to our total system, including our DSD system. Being flexible in how we do that allows us to be capital efficient. It prevents us from overpaying in the industry, and it also gives us the ability to bring brands into the system that you couldn't acquire. So let me start with the last piece, which is the flexibility. Polar, family-owned Electrolit, family-owned pharma company. Evian is owned by Danone. You can't own that. So those are three really important brands that have entered our system, where if you were forced to say, "I need to do an acquisition," you couldn't have them in the system, and we all benefit by those partnerships, so that makes sense.
Secondly, on areas where we can have an equity investment, we've just elected to have a minority investment. Why? Because it allows us to be much more efficient with our capital. We get the majority of the economics by having them being a long-term partner in the system. We just don't want to be in a position where we build these brands, and they leave the system. That's learning from the past. We have those mechanisms built in.
Of course, as we raise the value of the company that we have an investment in, we profit from that, but the founder profits more because they own the majority of the business, and we don't care about that, 'cause we love the fact that these founders and entrepreneurs stay engaged and motivated to continue to drive the value of the business while we work with them to improve their distribution base. And so we think that the model that we've got adds a ton of value to the company, as evidenced by, you know, the track record that we've had of value creation over the time period that I discussed earlier.
This is one of many of the drivers of that, and the alternative of going out and paying a massive amount of money at a high multiple to buy the entire brand, as we've talked about many times publicly, we could not find an example, including the Bai acquisition, which was part of, you know, part of our, our business today, that has ever generated positive value creation. So going out, paying a huge multiple for 100% of a large brand is not a path to prosperity. That has been repeated over and over again. Sitting on the sidelines and not participating at all and being a distributor is not the path to prosperity.
Finding the sweet spot in between, where you take an equity position, where you can, you have agreements where the distribution is very, very sticky, and you get the majority of the financial gain out of that, I think is a win-win for us and for the entrepreneur. I don't know if we want to add anything in terms of how that benefits our system from, by bringing these partner brands in.
Look, as Bob mentioned, you know, you saw our performance in U.S. refreshment beverages in the last five years. We're gaining share, we're expanding margin. It's close to a $9 billion business. It's high 20s margin. So what happens is all these white spaces we fill in a very capital efficient manner. If you saw Electrolit, La Colombe, and C4, Nutrabolt, three white spaces we entered in, and we paid roughly $1.2-$1.3 billion. So it's more capital efficient manner. We are not paying premium, but buying 100%, then the founders will leave. Here, founders are incentivized, and it helps create the scale in the channel and also scale in the category we want it to be. So these are the three categories we were in white spaces.
It created scale for our C-store channel that allows us to have bigger drop sizes. We go more often. It helps our base business, too. So our C-store business will be 50% more if you add these, these three things. So it's very hard to parse out by brand, how much they're contributing. So I want all you, all of you to think about overall U.S. refreshment beverages. Are we getting market share? Are we expanding margin, and are we filling these white spaces? And that's what I would say, is breaking down individually, it's very hard to do it because y ou share the warehouse, you share the truck, you go to the channels, you do more frequency, you increase your frequency there because now you have the scale to go often there.
It's very hard to break it down, but I would ask you all to look at share gain, revenue growth, and also the margin expansion.
Yeah, I would say, you know, five years ago, when we talked about what's the investment opportunity over the next five years, and that's where we are today. We said, if you look at our current portfolio, you'd say we have a lot of white space. Great. So that's an opportunity for the future. We've been moving down that path. So we had really good core brand growth. That has continued. We've expanded our share across our core brands. We also said our distribution system is under-scaled, and that would be on a snapshot of the moment. You'd say that's a disadvantage, but for the next five years, it's a huge advantage because we can improve it, and we've improved it significantly. The partner brands coming into our system help improve that. We've also made close to 30 acquisitions of independent distributors to strengthen our system.
That all three of those working together is how we took the refreshment beverage business from $6 billion-$9 billion over the past five years and also increased the margin. So that's a tremendous success story there. How do I feel, we are in terms of the next leg? We're still in the very early innings of each, so we... Great, we made a good move in energy. We're like a 3% share of energy. We have so much more to go. I'm using that as a proxy. That's the opportunity we have to improve our portfolio, to continue to grow our core brands, to expand our distribution system.
In some respects, we're just getting started, five years later, and that's why I started off by saying it's an exciting time to have a new team in place that sees that potential, not the past, and is totally focused on making sure that happens.
Great. And then on the coffee side of the business, you talked about how the industry recovery hasn't been quite as strong as you expected recently. What can you do to sort of drive improved performance going forward? What part do you have as a system to sort of play in that going forward? And also some of the pricing adjustments you've made on your own brands in the portfolio, how significant is that in context? And third, an area that's always more nebulous for us, is understanding the pricing in your partner contracts, you know, how should we sort of think about that going forward versus recent contributions?
I'll cover the other ones, and then why don't you, at the end, pick up the partner contracts. If I work backwards on this thing, as I think about it, is what level of control do we have? A lot of control over our margins. We've talked about margin recovery. It started in the last quarter, and we talked about our confidence in that continuing to improve. And then one of the questions that we've gotten along the way is: Is there any reason why you couldn't get back to your peak margin that you saw previously? And our answer is no, there's nothing in the way of getting there. It will just take time to get there. So we control that, and so we're very focused on that.
In terms of our ability to gain single-serve share of total at-home coffee, we feel very focused on that one, and that's largely in our control, and that's driven by marketing and innovation, both on the brewer side as well as on the pod side, and that continues to be a robust part of our activity. That's why single serve continues to gain share of total coffee. Our ability to influence at-home coffee gets lower and lower in terms of the pecking order here. So all the marketing that we're doing has some effect on that, but that's driven by more macro dynamics. The fact that at-home coffee slowed down in 2022 across all forms globally suggests that a lot of this is the post-COVID COVID hangover that still continues.
We can't control that, but we just have to make sure that we're planned for that recovery to be more gradually than we originally thought, and focus on the areas that we control, which gives us the, the confidence in our outlook. With regard to pricing in the category, we are responsible for about 80% of the dollars that go through the Keurig system, come through us. That's a very unique situation where our primary focus is not brand share gain, but total category growth. That's what we focus most of our energy against.
When we have a situation like 2023, where everybody in the coffee industry expected the at-home coffee category to be stronger than it actually was, and it's not, it forces brands to start to compete on price, because if they're missing their objectives because the category is softer, then the next best thing for them is to gain market share. And so, as the steward of the category, we're watching this movement back and forth, and all you're seeing is brand shares change, and the category doesn't move. We don't love to participate in that with our own brands, but there gets to be a point where the price gap gets to be too wide, and so we've invested tactically in our owned and licensed brands. But none of that do we think is out of the ordinary.
As we move into 2024 and the expectations of this gradual coffee recovery, I think, are more embedded across the industry, I think you'll see more normalized behavior. So with the partner contracts, was a big part of our margin.
So the margin, you know, you saw that last two to three years of margin degraded, and we hit the trough, so 30% in quarter two. Our peak margin used to be high 30s. Partner is just one factor of those overall margin rates. The reason we declined in the margin was, one, inflation. The second was lag in partner pricing. We kept talking about that we will see the benefit. It just takes lag, but you have to negotiate. Inflation wasn't built in the contract. And third was we were not focused on productivity because our goal was to service at any cost during pandemic. So the partner pricing, we said we have renegotiated contract with all our partners, structurally changed it for the future, so that now the inflation adjustment will be there, both sides.
So that, that is done, and you're seeing that is flowing through. In our quarter three, our operating income margin was 33%. That's 300 basis point improvement versus our first half and also versus last year in quarter three. And we've also said in quarter four, we expect that margin to expand further. And as you think about 2024, for the full 2024, we expect our full year margin to be better than 2023. And our path, goal is to get to the peak margin. It will take two to three years to get there, because it didn't take us a year to get back, and we want to use this margin to invest in marketing, to grow, grow the category, because that's what partners are looking for.
We are the steward of overall category growth, and as I said, partner pricing is just one portion of it, and that is all done now.
And to get back to that peak, high 30s margin level in coffee, what are the key building blocks if you had to sort of rank order them? And secondly, maybe specifically just for 2024, how should we think about productivity relative to 2023? You know, it's certainly a tale of sort of ramp up throughout 2023, so I'm just curious for some specific perspective on productivity in 2024 itself.
It's basic. It's the coffee, the CPG business in U.S. coffee, $4 billion revenue and 30%+ margin. This is a great business to have in CPG. It starts from the category growth. That's where when you get the top-line growth, that's the first thing. Then you get operating leverage, and you also we said we're getting gross margin expansion for the three factors I talked about, commodity inflation, partner pricing, and the productivity. Productivity wasn't a focus area for the last two, three years. We started looking at in late 2022, early 2023, so a lot of ramp-up will happen next year in that, and we'll also see further in 2025, more productivity happening for the coffee. But this all starts from the category growth. We are controlling the things we can control.
If you think about 2024, if I have to give you, it's like, think about one-third productivity, one-third pricing, and one-third just volume mix growth.
Yeah, and those components to build it back up. If I were to say: How do we go from peak down to the trough? It'd be the exact same components in reverse. So there's no magic in getting back there, other than the fact that we've renegotiated the contracts, which allows the pricing. Inflation is moderated, which allows the pricing to catch up to inflation, and the focus on productivity and the automation we put in place over the past number of years, we start to get the benefit of that.
And now we have the growth capacity so that when we grow faster, we already have the capacity in place to be able to satisfy that growth. And that's the leverage that you get off of that. So it's pretty clear to us how you get back to that. It's not much different than what we've done in the past, that actually was successful just a couple of years ago.
We'll balance that against reinvestment, making sure the category continues to recover. Our brands are vibrant within that.
Okay. And Jane, you mentioned earlier international, as part of your growth drivers. You've really had some outsized growth in the last couple of years here that's made it more of a needle mover for the overall company. Maybe first, given it's not as, I don't think, well understood in the investment community, maybe a little bit of state of the union on what the business is today, what the key growth drivers are, and then going forward, how you think about the growth potential in that business and, how it fits into the broader corporate strategy would be helpful.
How about if I give the status, kind of where we are today, and then you'll pick up on where we go from here, 'cause the international business now reports into Sudhanshu. So I think shame on us for not talking more about the international business. We've now carved it out into a separate segment, so you can track it. We have doubled the business to $2 billion in the past five years. The growth trajectory has been, I mean, to get to that level is high, and it continues. It's not as if it was up front, and it's slowed down.
It continues to be very, very strong. Our line of sight to where we're gonna go, as you can talk about it, is very positive. And the profitability behind that segment is also very, very strong. Mexico is currently a cold beverage business, where we have our own distribution system, and we have incredibly strong brands there. Peñafiel is the strongest brand in our system there.
It's the number one water player in Mexico, premium water player in Mexico. We've been now able to add partners into that system. The most recent we added was Red Bull Mexico, now comes through our system, and so we're bullish on that for the future. Canada is a model where we have both coffee and cold beverage. The cold beverage business up there is more warehouse delivered than it is DSD. But the coffee side of the business is strong, and in fact, household penetration for single-serve in Canada is higher than it is in the U.S. We've talked a lot about how European household penetration is north of 50%. U.S. is around 30% today. Canada is in between those numbers, and so it shows a leading indicator of where the U.S. market could go. That's where we are today. You want to talk about what's next for both of those markets?
Thanks, Bob. No, international is a growth engine. It will always, it will drive outside growth for the future. You know, we saw from $1 billion-$2 billion. I'm super excited to take this role. And the way both Mexico and LAB market and Canada is growing, it's the same play you play from the U.S. You know, Canada is coffee and beverages, and Mexico. They're the same play you do, but you lift and shift ideas between U.S. and there. You use the same RGM model or price spec architecture, and we have a lot of room to grow.
Our focus, so much, was in coffee for the last couple of years in U.S. market, but you know, with the pricing, U.S. will have a slower growth than international, but we have a lot of room to grow in international business.
Okay, great. Maybe we can turn to cash flow. This year, obviously, the supply chain financing with the moderation in that program, you haven't had a strong free cash flow conversion as you've had in the past. Can you just talk a little bit about expectations going forward? Obviously, that supply chain financing isn't something we, you know, can sort of model out, in a higher rate environment. How much of a drag might that be? And just in general, how you think about free cash flow conversion over the next couple of years beyond this year.
So first, I would let me start from last five years, we had more or less 100% cash conversion every year. And the reason was, that was our priority area because we wanted to delever the company. Once our balance sheet came to a right place, when we laid out the new financial policy with that 2x-2.5x leverage, we started looking at, you know, best-in-class CPG financial performance. So that's where we started looking at this non-operating thing. We said, "We don't need to do it." We started looking at supply chain financing because it has impact on our balance sheet. It's, it has high interest rate. It doesn't make sense. So we started looking at case-by-case basis, and bulk of the paid is done with supply chain financing. So we're still generating the, the similar cash profile.
We're just using that cash to reducing supply chain financing this year. But the second half, you saw the cash conversion went up, because when you take the one vendor out of those, those 360-day term, the pain is there. The first half was lower, but the second half, the Q3, our cash conversion was in 60s. So next year, if you ask me, we will continue to look at case by case, and our goal is to generate industry-leading cash flow conversion, but it cannot be like by year, 100%. We will look at every year, what are those levers we need to do to basically return cash to shareholders?
And during the same time, we also did M&A, and that's $1.2 billion we spent. We also did opportunistic share buyback. We increased our dividend. So we look at more as h olistic financial policy, and look at dynamically every year, every quarter. But for next couple of years, you will see us slowly removing basically more case-by-case supply chain financing. It will have some impact on the capital conversion.
Okay, great. Maybe that's a good place to focus on capital allocation here. Obviously, the balance sheet's been strengthened over the last few years. You've also had some partnerships.
Yeah.
There's been M&A. So just as we sit here today, leaving this year, update us on capital allocation going forward, and maybe how the mindset has shifted, if it has, on areas of focus, from a capital allocation standpoint versus a couple of years back.
No, so we laid out last year, I think that was my first fireside chat, the new financial policy. The key tenets are: number one, is continue to reinvest in the business because that's where you get the best payback. Number two priority is the inorganic, this partnership, because it helps, allows us to fill the white spaces and keep the flywheel going. Number three, there is maintain the strong balance sheet to 2x to 2.5x leverage. We are currently at 3x, so the goal is to keep it to 2x to 2.5x. And fourth is returning money to the shareholders. So we increased dividend. We have—When we saw the dislocation in pricing, you know, we purchased till Q3, in last 18 months, more than 24 million shares. So we feel.
We still have more than $3 billion of authorization left. So we look at it, this more dynamic way, but those are the key parameters of one, two, three, four, the way I laid out. And we feel very good about where we are in terms of the progress we made. Bob talked about, you know, $11 billion of cash flow generation in last five years. We also delevered, when we joined. We delevered from, I think, 6x to now around 3x, and our goal is to be, in the long run, 2x-2.5x .
Okay, great. Well, with that, we're gonna wrap things up here. Really appreciate you guys being here. It's an interesting time for you guys, and it's been very informative. Thanks to all three of you.
Thank you.
Thank you.