Operator:

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Keurig Dr. Pepper’s Second Quarter 2024 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] This conference is being recorded and there will be a question and answer session at the end of the call. I would now like to introduce the Keurig Dr Pepper's Vice President of Investor Relations, Jane Gelfand. Ms. Gelfand, please go ahead.

Tim Cofer:

Thanks, Jane, and good morning, everyone. It's been eight months since I joined this great, young and dynamic company. I continue to be impressed with the caliber of the organization, the quality of our execution and the challenger mindset our people embody each and every day. Together, we delivered healthy second quarter performance while making important progress to advance our strategic agenda. With our first half now in the books, we're on track to deliver full year results consistent with our on algorithm outlook. The operating environment remains uneven with resilient demand from higher income consumers and value seeking behavior among low and middle income consumers. We are highly attuned to these dynamics and despite them, we still expect a top-line acceleration over the balance of the year. Thanks to several elements largely within our control including new partnership growth and traction from innovation. At the same time, our first half weighted EPS delivery outs taped the way for on planned performance as we also seed our multi-year growth agenda. In Q2, constant currency net sales growth sequentially improved to 3.4% and reflected a re-weighting of our top-line drivers with pricing moderating and volume mix accelerating to positive territory. We entered 2024 anticipating net price realization for KDP and the industry would normalize from the unusually high levels over the past few years and it has. It's encouraging to now see a more balanced top-line growth profile begin to emerge. At the same time, we remain focused on generating leverage throughout our P&L to fund reinvestments and drive earnings growth. In Q2, continuous productivity savings and cost discipline drove strong operating margin expansion helping to translate our top-line momentum to a solid bottom-line results with 7% EPS growth versus prior year. As we execute against evolved strategic framework, we registered a number of wins in Q2. Let me highlight a few that will continue to payoff throughout the year along with focus areas for the long-term. As you know, one of our key strategies is consumer obsessed brand building. Our innovation ramped significantly in the second quarter and as expected these new products are seeing good marketplace Traction. In U.S refreshment beverages, Dr Pepper Creamy Coconut is now our most successful limited time offering. Canada Dry Fruit Splash is also proving highly incremental to the brand. Together, these innovations are driving improved share trends across the CSD portfolio. Outside of CSDs, we're pleased with the initial response to our WonderWater restage, which is re-engaging consumers in its early days. In US Coffee, our new refreshers from The Original Donut Shop are on track to be the largest Keurig platform launch of the last several years. These coffee shop inspired cold beverages are bringing new occasions and younger consumers into the single-serve K-Cup category and are supporting market share gains for our owned and licensed portfolio. Outside the US, our Peñafiel Aced and Twist products are extending the powerful Peñafiel brand into new white space segments and contributing to market share gains for our Mexico portfolio. In total, these Innovations will continue to develop over the coming months with additional news and activation upcoming across the portfolio including in Powerhouse brands like Motts and Green Mountain. We also made progress with new partnerships as we focus on shaping our now and next beverage portfolio. With Electrolit and La Colombe now part of that portfolio, our excitement about each brand's future and the win-win collaboration models behind them continues to build. As anticipated, revenue contributions from these brands increased during the second quarter and should further scale over the balance of the year. The transition of Electrolit volume to our DSD network is ongoing with the handover expected to be complete in the back half. As we take on this distribution, we're beginning to unlock the brand’s untapped potential with outsized market share gains in KDP served regions and channels. This performance underscores our go to market capabilities and spotlights the growth opportunity for Electrolit within the Sports Hydration category. Similarly, we continue to cultivate our La Colombe partnership across both K-Cup pods and shelf-stable Ready-To-Drink coffee. Focusing on the latter, the La Colombe’s reformulated Draft Lattes are truly differentiated in this category and showed strong promise. As we speak, our DSD organization is focused on expanding this unique product’s availability and display to drive initial consumer trials contributing to strengthening marketplace trends. In May, we also announced a planned transaction with Kalil Bottling Company, another concrete step to amplify a route-to-market advantage, which is a key component of our strategic agenda. With one of only three nationwide direct store delivery systems for LRBs, we understand innately the competitive advantage of controlling last mile distribution in our industry. This particular transaction will grant us full control of our brands’ distribution in Arizona, a strategic and fast-growing state and with it the ability to optimize and extract even more leverage from our local DSD assets. We are moving quickly towards completing the acquisition of Kalil’s production, sales and distribution operations in Q3 and we are honored that the Kalil family has entrusted us to carry on the legacy of their multi-generational business. Perhaps less externally visible in any single quarter is the significant work we're doing to dial-up our productivity and fuel for growth engine. With consumer health mixed, pockets of inflation returning like in the case of green coffee and currency volatility increasing, we are reinforcing our attention on driving productivity, network optimization and structural cost discipline. These focus areas are essential to securing additional near-term flexibility and room for reinvestment and they are enablers of consistent delivery over the long term. We had an active agenda to support each element in 2024 and are laying the groundwork for meaningful further actions that will benefit us well beyond this year. Also woven throughout our strategic agenda is a commitment to corporate responsibility and being a force for positive change. I am proud of how our people corporate this focus into every day activities and decision-making, while also pursuing a set of ambitious multi-year targets. We highlighted this important work once again in our 2023 corporate responsibility report published just last month. I encourage you to give it a read to track our progress and to witness how we live up to our Drink Well, Do Good progress. Now, let's turn to our Q2 segment top-line performance. Sudhanshu will then discuss segment performance in more detail including the strong margin expansion we delivered across the board. Starting with US Refreshment Beverages, revenue grew at a low-single-digit rate in the quarter. Our performance was led by CSDs which remain an outperformer in the liquid refreshment beverage space by offering compelling everyday value and variety. Within the CSD category ,and as expected, our relative market share trend improved as Q2 progressed and as our 2024 innovations slate and brand activations layered into the market resonating with consumers. Brand Dr Pepper maintained its long-term track record of market share growth. On the back of this year's dirty soda inspired Creamy Coconut LTO and the marketing excellence behind our new “it's a Pepper thing” campaign. Our ability to steadily grow Dr Pepper by staying on top of trends and continually tapping into the cultural zeitgeist is a defining characteristic of the brand. It’s on track for its eighth consecutive year of market share outperformance and yet there is still substantial untapped opportunity to further expand its preferred status. Beyond CSDs, we also delivered another strong quarter of growth for C4 Energy. Despite the energy category’s recent moderation, it remains a highly attractive space with consistently faster volume growth in all major beverage categories including on a year-to-date basis. With C4, we also have a uniquely positioned brand that is gaining share with meaningful growth runway still available for us to realize. In some parts of these still beverages portfolio, we continue to see a more pronounced macro impact leading to softer category growth rates. As a result we're taking steps to ensure our brand’s value propositions are clearly resonating. This includes targeted channel-specific promotions, price pack work like smaller bottles and multi packs and a focus on value-oriented channels like Club and Dollar. Simultaneously, we are investing to drive demand through innovation and brand activations such as this year's rollout of reformulated Bai WonderWater and the Summer Olympics Gymnastics tie-in for core hydration Moving to US Coffee, we made further progress against key priorities during the quarter. While overall at-home coffee category trends remained subdued our relative performance is strengthening with pod shipments improving to flat year-over-year in Q2. This outcome reflected market share gains across our owned and licensed brands including initial traction across our three focus areas, affordability, premiumization, and cold coffee. Together, these initiatives reflects a barbell strategy intended to highlight value for those consumers who are feeling stretched and provide premium options for those with more spending power. When it comes to affordability, during Q2, we began rolling out smaller pack sizes intended to optimize the cost per package of K-Cup pods. Because of its multi-serve nature, coffee is one of the highest dollar ringed food and beverage categories and these price pack adjustments enable us to hit more attractive every day and promoted price points across grocery and club channels. At the same time, we launched digital campaign that emphasized the affordability of consuming coffee at home instead of at coffee shops which we see as particularly resonant messaging in the current environment. Our Q2 affordability strategy also extended to brewers where we drove sizable Keurig share gains led by entry price machines and supported by some targeted value investments. Shifting to premiumization, the combination of brewer innovation in an increasingly well-developed set of super premium pods is strengthening Keurig’s system credibility with coffee connoisseurs and tapping into more affluent consumers. This includes our work with Lavazza, now a licensed brand within our portfolio as of Q2. With greater commercial influence, we have already secured expanded distribution for the brand and are just getting started on the activation agenda. Moving to cold coffee, we are actively pursuing the significant number of ice occasions currently occurring away from home. Cold Coffee represents less than 20% of at-home occasions, while at certain coffee shops, cold beverages account for upwards of 70%. One way we are pursuing this white space is through K-Cup innovation with significant activity during Q2, including refreshers cold brewed pods. These items performed well in the quarter with wider distribution and support slated for the back half. We're excited to further address the cold opportunity through brewers including the upcoming launch of our new K- Brew + Chill brewer in Q3, as well as through the continued expansion of La Colombe Ready-To-Drink coffee. All in, we're encouraged by the progress we are seeing from our multiple coffee initiatives which is visible in improving market share for both K-Cup pods and brewers. Even so, and as with many food and beverage categories today, demand trends across the larger at-home coffee category are soft. In single-serve, a promotional environment that is at odds with significant green coffee inflation also persists. This softer demand backdrop supports why we constructed our 2024 outlook assuming a muted revenue growth contribution from U.S Coffee, which remains an appropriate planning stance. Turning now to International, impressive segment performance continued in the second quarter with double-digit constant currency growth on the top and bottom-lines and broad-based momentum across the portfolio. In cold beverages, strong in-market execution in both Mexico and Canada powered our results. Compelling Peñafiel the outline extensions momentum behind Clamato and Canada Dry and ITP share gains in the low and no alcohol category led the growth. Our Canadian Coffee results were also robust in the quarter driven by our owned and licensed brands and supported by nuanced portfolio management. With exceptional strength in the International business in Q2, we also seized the opportunity to reinvest in our brands and capabilities to see the future growth adding to our confidence in sustained segment momentum. In closing, we are pleased with our overall second quarter performance and remain on track to our full year outlook. At the same time, we are activating our strategic agenda. Our consumer-centric approach to brand building is resonating in markets. Successful portfolio expansion into higher growth categories like energy, sports hydration and ready-to-drink coffee continues. And multiple initiatives to strengthen and already potent route to market are underway including our pending transaction with Kalil Bottling. We also remain highly focused on furthering our enterprise-wide efficiency and cost agenda which will underpin our visibility for the balance of the year and our ability to invest in the future. And throughout our capital discipline is unwavering and with a strong balance sheet and improving free cash flow, our ability to strategically deploy our cash is robust. With that I’ll turn the call to Sudhanshu.

Tim Cofer:

Thanks, Sudhanshu. Now halfway through the year, 2024 is progressing well and according to plan. We knew that our top-line momentum would build quarter-over-quarter and it has improving market share trends and strengths of execution should support further net revenue acceleration in the back half. We also knew that margin and EPS gains would be tilted towards the first half and we delivered. With 9% EPS growth in the first six months of the year, we have good visibility to delivering on algorithm performance in 2024 while solidifying our focus on the strategic initiatives that will fuel consistent growth over multiple years. Before moving to Q&A, I'd like to take a moment to recognize our greatest source of competitive advantage, our talented people. I am thankful to our 28,000 colleagues for the hard work and dedication reflected in our Q2 results and in the strategic agenda we are simultaneously activating that will benefit us in the future. Thank you for your time and we're now happy to take your questions.

Bryan Spillane:

Hi, thanks operator. Good morning, everyone. Tim, I wanted to just pick up on maybe some of the comments you made about and some of the things that have changed like inflation the dollar strengthening a bit. Just can you give us a perspective on what the operating conditions or what the segment or category dynamics are today versus maybe where they were at the start of the year when you set your plan? The guidance isn't changing, but I guess it feels like the categories have a little bit and I know one major theme that we've seen across earnings season is just demand in the US across a lot of categories not as strong as expected and we've got some companies rolling back on price. So just want to kind of want to get your perspective of is it accurate that maybe the categories maybe not as strong as you all thought at the start? What have that patience you've made and maybe if I can slip into that in CSDs US in particular, if needed the - that the consumers’ ability to maybe absorb or take on more and more price increases. I know there's a lot there, but thanks.

Bryan Spillane:

Thanks, Tim. Appreciate it.

Peter Grom:

Thanks operator and good morning, everyone. Hope you're doing well. So, I was hoping to get some color on the organic sales guidance for the back half of the year which implies a pretty decent acceleration. You both touch on this acceleration being driven by areas where you have controls of partnered brands and innovation. So maybe can you just speak to how we should anticipate this contribution building and then just on the underlying business obviously a lot of moving pieces. Can you just touched on a lot of those as to Bryan's question, but you do you need any improvement in core trends and orders to hit this target or can this current environment hold and you would still see this acceleration?

Peter Grom:

Thanks and maybe just one quick follow-up. You mentioned green coffee prices starting to move higher. How should we think about this dynamic impacting your pricing strategy in coffee? And maybe what you'd expect from the category more broadly as we move forward here?

Operator:

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

Tim Cofer:

Yeah. Thanks, Lauren. As mentioned, when we think about driving our coffee business, we're really focused in three areas, affordability, premiumization, and cold coffee. And I think those first two do reflect this barbell strategy as we've called it and the bifurcation we're seeing in across the consumer landscape. Your question primarily was in that affordability area and indeed pricing and absolute price and price gap is one element of that. I would say specifically to your question and how we're feeling on price gaps, we feel good. We feel good. The move that was made late last year did put us more at historic price gap levels. I do think as Sudhanshu said and as we said in the prepared remarks, with green coffee going up right now, it is a little bit at odds with the current promotional dynamic that's going on. We're going to closely monitor that and obviously take a measured and nuanced approach. But our affordability strategy is much more than that. And one of them is the down counts so that was part of your question as well specifically on two of our key sizes 12 count at Food channel, we downsized to 10 counts. That is done in terms of from a production standpoint. So you'll continue to see a little bit of that 12 count still out in the marketplace. But it's rolling through as we speak, some retail some channels are already fully in 10 others are still working through 12. We've seen a good response from that Lauren, in terms of volume response as we would expect and obviously that allows us to hit an everyday price point and a promoted price point that is more in line with what consumers are looking for especially at that low and mid income level. I’ll remind you that as you look at total food and beverage, 40 is actually a top five dollar per unit outlay because of its multi-serve nature. And these down counts 12 to 10 and then I’ll reference the other big one in the club channel it was a 100 count and that's down to an 80 count and that also allows us to hit key price points. So you've got the pack down counts. You’ve got the value messaging, I think In the last quarter Lauren, I remember you asked me a question on that and indeed we went live with that feeling good about that. I think that is very resonant and compelling messaging positioning our coffee single-serve at-home, the quality, the variety in a broader frame of coffee shop and away from home. And the last thing I’d point to on affordability is entry price brewers. We're seeing that we're growing the Keurig system within the total coffee maker category and part of that is entry price brewers. So that's the affordability. I will stop there, but I remind you and others that there's also a great premium strategy as well, as well as a big push into cold coffee.

Dara Mohsenian :

Good morning. So, I just want to get a bit more granular on the take-home coffee category. Obviously, there’s been a slow down in the last year and a half, which seems to be improving. But more recently now we've seen a pronounced slowdown at the same time in their strength. So the broader energy, let's say caffeine complex seems to be a bit under pressure. So, A. would just love your perspective on that what's driving that? Is it more short-term macros? Is it the lot of middle-end consumer pressure you mentioned or other longer-term factors? And just B, is there opportunity in coffee to source greater share from energy here as you think about share of stomach. And then also maybe you can just touch on any shifts you're seeing in away-from-home coffee to at-home coffee and in brewing versus ground coffee and at-home just as you move through Q2 and here so far in Q3? Thanks.

Operator:

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

Tim Cofer :

Yes. Hi, Chris. So, let's start coffee back half and then we'll go to ref bev. As you said we're encouraged by the slow and steady progress we're seeing. in K-Cup volume trends and I will point out that we've now had four consecutive quarters of sequential improvement in K-Cup volume. And we were pleased to see our K-Cup shipments stabilized in the second quarter flat - I think up 20, 20 basis points. So this slow and steady improvement trend is clearly there. There's always going to be potential for quarter-to-quarter lumpiness, but I would expect that the H2 second half pod shipment trend will improve versus H1 in particularly in Q4. And indeed, that improvement has been underpinned by the progress we're making in our owned and licensed business, the market share progress we are seeing I referenced some successful innovation, the work we're doing again in the three areas around affordability, premiumization, cold coffee. And a big push into cold coffee the back half. That’s pods, that’s refreshers, that’s also our new Brew + Chill brewer and that'll be the first brewer that actually brews out a cold cup of coffee. So feeling good about the progress in coffee in the back half. As it relates to refreshment beverages, I'm pleased with both the base business and the new partners. And they will both play a meaningful role in the back half. The ramp, as I said earlier will be more around what we see from partner contribution, Electrolit, La Colombe, C4, et cetera. And I think we’ve said earlier then on a full year basis we expect those new partnerships to add about 200 basis points to total company net sales and I would tell you we continue to feel good about that number.

Bonnie Herzog :

Alright. Thank you. Good morning everyone. I am I have a question on your International business. It's clear you've been making a significant push. So curious to hear what you believe, are the key drivers that are going to allow you to continue to win internationally? And second, how will you evaluate whether it's best to enter new markets or organically or possibly through acquisitions? And then finally what percentage of your sales, do you think your International business could ultimately represent? Thank you.

Operator:

Our last question today will come [Indiscernible] with Citi. Please go ahead.

Tim Cofer :

Thanks [Indiscernible] As the pioneer here in the single-serve and the category’s steward, we're most focused on high quality activity should drive sustainable single-serve category growth. And that’s of course for us, but for all our participants and all of our partners in the Keurig ecosystem. And that includes our work on innovation, in consumer marketing, value messaging, both on brewers and on pods. That said, right now there are some promotional dynamics at play in the category and in response to that, at the end of the year and early this year we did take some steps to appropriately position ourselves versus competition. I think inherent in your question is this tensions leave all that. The building backdrop around green coffee prices is a bit at odds with some of the promotional activity and I would say over long term it does not appear to be sustainable. So from our standpoint, of course we're doing the right thing around striking that balance around protecting our positions and making sure that we also have the margin structure we need to continue to drive the entire ecosystem. Obviously, part of that is the way that we manage commodities and our hedging position which I think we’ve shared in the past, that’s usually six to nine months out. And so that means the higher green coffee could begin to impact our P&L progressively over the course of H2, second half. So, we're going to continue to closely monitor that situation. Our intent here is to responsibly manage our price gaps while also protecting our ability to fund high quality reinvestment to drive the single-serve category.

Jane Gelfand :

Thank you, Drew and thank you, everyone for participating this morning. We appreciate your support. Investor Relations is available all day to answer any follow-up questions you may have. Appreciate it and have a great day.

Operator:

Good day, and welcome to the Keurig Dr Pepper First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to introduce the company's Vice President of Investor Relations and Strategic Initiatives, Jane Gelfand. Please go ahead.

Robert Gamgort:

Thanks, Jane, and good morning, everyone. It has been a busy and exciting start to the year at KDP. First quarter performance was strong, with solid consolidated sales growth and double-digit EPS growth. Momentum in our U.S. refreshment beverages and international segments remained healthy, and U.S. Coffee results showed meaningful sequential recovery. We invested in marketing and capabilities across the business while also delivering attractive broad -- the strong start to the year enhances our visibility to an unchanged on algorithm 2024 growth outlook.

Timothy Cofer:

Thanks, Bob. And good morning, everyone. Let me start by once again expressing my appreciation to Bob and our Board of Directors for the honor and privilege of leading this dynamic company into the future. I'm energized to partner with our 28,000 colleagues across the globe to build on KDP's strong track record and to guide our next chapter of growth and value creation. I see a tremendous amount of upside ahead. At our recent Investor Day, I shared the many elements behind my conviction and discussed how we intend to unlock this future opportunity. If you've not yet had the chance, I would encourage you to watch the replay of that event.

Sudhanshu Priyadarshi:

Thanks, Tim. And good morning, everyone. Our Q1 results were strong, demonstrating sequentially improving net sales growth, continued meaningful gross margin expansion and incremental investments in marketing and capabilities. With EPS ahead of our plan, we intend to use Q1 upside as additional pool for reinvestment to support revenue growth over the balance of year and as buffer against pockets of reemerging commodity inflation.

Timothy Cofer:

Thanks, Sudhanshu. Before we move to Q&A, I want to thank our KDP colleagues for embodying our company's challenger mindset every day. In Q1, we collectively put the business on an accelerating path in a dynamic macro environment. Strong execution was visible across our results and in every country end market in which we compete. We intend to keep building momentum as the year progresses. Bob, Sudhanshu, the broader executive team, and I, feel the team's energy and enthusiasm for KDP's Evolved strategy, which was particularly evident at this month's annual summit of the company's top leaders. Together, we're excited to activate this strategy to unlock considerable future value for our shareholders.

Operator:

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

Robert Gamgort:

I'm confident it will, Bryan.

Sudhanshu Priyadarshi:

Let me take the first inflation question, and then Tim will take over -- take the next question. So our inflation, we continue to expect some inflation in 2024 overall, but at a more moderate level than in recent year. We talked about green coffee. We're also seeing inflation in aluminum, but as you know, we manage it within our guidance, within our range of outcomes, and we have factored all of these inflation and commodity. We also had some stuff for 6 to 9 months in our guidance. So our overall guidance for the year, which is mid-single-digit top line and high single-digit EPS factors in all of these scenarios.

Lauren Lieberman:

I wanted to talk a little bit about marketing in coffee because one of the things that I've been thinking about recently is that the messaging that you've shared with The Street, the messaging on affordability, some of the advertising you've shared, all feels very spot on. And yet, perhaps over the last 12 months, you haven't had the reach to consumers or the impact to consumers that you might have hoped on some -- communication of some of messages. And so as we're thinking about affordability still being very much a concern and I would think a selling point of single-serve Keurig Coffee and also the launch of iced -- sorry, the chill machine.

Timothy Cofer:

Absolutely. So we are seeing and we saw it this quarter an increase in our total marketing investment on coffee. And I think as we've realigned back to the question that Brian asked making sure that from a price point standpoint, we feel good about our owned and licensed brand. It's an opportunity now for our marketing and innovation to work even harder. I think there's -- we're employing what we characterize as a bit of a barbell strategy, reflecting both the opportunity to reinforce value on our pod business as well as drive on the premium side.

Christopher Carey:

So 2 quick questions. First on the coffee business. So adding Black Rifle, very interesting development. Can you just talk about how that partnership came to be and whether this makes you more confident on your ability to continue to see sequential improvement in your coffee volumes into the back half of the year and perhaps into 2025, just given the momentum around that business? And then if I could, just on the cold side, Sudhanshu mentioned some of the innovation timing dynamics of the underlying cold business. Would you expect those to start looking better as innovation comes to market? And can you just remind us on timing of the innovation suite specifically with Creamy Coconut.

Peter Grom:

So maybe building on the partner brands, I was hoping to get some color on C4. Maybe first, I would just love to get your perspective on kind of what you're seeing from the category more broadly. Trends have moderated quite a bit across the board. So just any thoughts on what you think could be driving that. And then just on C4 specifically, continued strong growth, some share gains here. You have visibility on where you're sourcing these share gains from? Do you think it's coming from kind of the legacy brands like a Monster or Redbull? Or do you really think it's coming at the expense of maybe some of the other performance energy drink brands?

Stephen Robert Powers:

Congrats, Tim and Bob as well, from me. Tim, I wanted to play back what you said just a couple of minutes ago on the cadence of sequential improvement in underlying refreshment beverage performance. It sounds like with the innovation you're launching now in CSDs and then the Bai relaunch, et cetera, it sounds like we should see sequential improvement in market share this quarter as we're looking at consumption data, but the full financial impact is going to be more skewed to the second half. I just want to make sure I got that right.

Stephen Robert Powers:

Okay. Great. And then if I could take a longer-term perspective with respect to the Alta brewer system. As you pursue that, I was just curious as to the engagement you expect from some of your partners. And as you beta test and scale, do you expect to do that with a relatively full brand assortment? Or is that more of a longer-term endeavor?

Robert Ottenstein:

Two kind of follow-ups. First, on the pod business, could you remind us or maybe update us just in terms of what the business mix looks like between owned, licensed partner, private label, so we just kind of level set where we are on that. And related to that is there any change in strategy in terms of how you're looking at those categories and your emphasis? Or is it just pretty much as it has been?

Timothy Cofer:

Yes. I'll take that first question on pods, and then I'll defer it to Sudhanshu on the second part of your question. I mean broadly, and you see this in the syndicated data when you look at the full estate around pods, you're looking at roughly I'll do round numbers here, Rob. 50% is our partners, 25% owned and licensed, 25% -- well, 20% private label. So that's the broad makeup of the mix. And our strategy hasn't changed. As I said at the beginning, we are stewards of the entire category. Our responsibility is to grow the category and grow the entire ecosystem.

Sudhanshu Priyadarshi:

Yes. So regarding the share buyback, as you know, we had $4 billion worth of authorization, and it is opportunistic for us. Our #1 priority in capital allocation and investment in our own business, organic and inorganic growth. Number two is maintaining the strong balance sheet, our long-term leverage target of 2x to 2.5x. But we keep it very dynamic in terms of how we manage quarter after quarter, year after year. So you saw us, we saw opportunistic pricing with JAB secondary sales, and we purchased 38 million shares in 2024. 2023, we purchased close to 22 million shares. And 2022, we purchased 11 million shares. We still have $1.8 billion remaining on our share repurchase, but we will continue to be opportunistic when we see value in our stock price, we will go and buyback shares.

Andrea Teixeira:

So my question is on consumption. First on coffee, can you comment on the exit rate of pod consumption? And how should we think about the cadence of innovation, you had a lot of, in this call, in terms of that cadence in particular. And also Alta, I understand this is beta testing, but when we should expect that to conclude and to start commercializing. And for cold refreshments on the Creamy Coconut Dr Pepper, how can we pretty much eclipse with the Strawberry Cream lap and how we should be thinking about that? And if I can squeeze the marketing commentary that you had about the A&P investments, how we should be thinking in the cadence of the quarters.

Operator:

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

Operator:

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

Operator:

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Keurig Dr Pepper's Earnings Call for the Fourth Quarter of 2023. [Operator Instructions] This conference call is being recorded. [Operator Instructions] I would now like to introduce the company's Vice President of Investor Relations and Strategic Initiatives, Jane Gelfand. Ms. Gelfand, you may begin.

Robert Gamgort:

Thanks, Jane, and good morning, everyone. 2023 was a year of significant progress for KDP as we grew share across the majority of our business, entered multiple high-growth white spaces, such as ready-to-drink coffee and sport hydration through highly capital-efficient partnerships, began to rebuild margins while simultaneously driving high-quality reinvestment, returned more than $1.8 billion to shareholders, including a 7.5% dividend increase in the opportunistic repurchase of 22 million shares and delivered our financial outlook, while significantly improving the composition of our earnings and strengthening our balance sheet. . Full year constant currency net sales grew nearly 5% and EPS advanced 6%. On an underlying basis, our EPS growth was even stronger and in the double digits as we largely eliminated the contribution from nonoperational gains that benefited the prior year. Pricing actions and a near doubling of year-over-year productivity savings, more than offset continued inflationary pressure, supporting earnings growth even as we funded a double-digit increase in marketing. Our 2023 performance demonstrated the resilience inherent in our broad portfolio with continued momentum in U.S. refreshment beverages and international offsetting short-term pressures in U.S. coffee. We also initiated a thoughtful succession process that balances continuity and new perspectives across the company's most senior leaders. Tim and our refreshed executive team have merged seamlessly are building momentum and add to my confidence in KDP's future success. Our hard work in 2023 sharpened our strategic road map and bolstered our capabilities and financial profile providing a platform for growth and value creation in 2024 and over the long term. Moving now to our fourth quarter results. A primary focus for us last year have been rebuilding our margin structure. We made impressive gains in Q4, driving the strongest quarterly gross margin expansion in our history and the fastest rate of operating margin improvement in multiple years. This improvement was broad-based across each of our segments and enabled us to deliver EPS above the outlook we shared last quarter despite the impact of some transitory top line headwinds. Q4 constant currency net sales grew 1.1%, with net price realization more than offsetting a volume/mix decline. This result is not representative of our ongoing momentum and was, in part, weighed down by short-term factors in our U.S. coffee business that we do not expect to persist. We have good visibility to mid-single-digit consolidated net sales growth in 2024, which Sudhanshu will address in a few minutes. Q4 gross margin expanded 450 basis points, translating to gross profit dollar growth of 10% and helping to fund increased investments. Operating income increased at a high single-digit rate and EPS grew in the double digits. Notably, normalizing for nonoperational items in 2022, our Q4 underlying EPS growth rate was in the high teens. We continue to enjoy strong momentum in U.S. refreshment beverages. Net sales grew at a high single-digit rate in Q4, led by still very healthy net price realization and manageable elasticities with volume mix declining only modestly in the period, redouble focus on productivity and cost discipline along with strong C4 energy partnership execution, translated this topline to double-digit operating income growth. Q4 segment margins expanded meaningfully even as marketing continued to grow. As we observed back in October, though consumers remain largely resilient, value is a key shopping consideration. Many consumers are making trade-off decisions to manage stretch household budgets. As a result, value-oriented channels, such as club stores continue to outperform and consumers are inclined to shop more during deal periods such as holiday weeks. Our U.S. refreshment beverages business model is well suited to a dynamic macro environment. The breadth of the beverage occasions we serve and the depth of our distribution allow us to spot changing consumer trends with speed. We then flex our plans to deliver on the key tenets of our growth strategy, driving category growth, market share gains and white space expansion regardless of the operating environment. Fourth quarter was no exception with dollar sales growth and share gains across 85% of our U.S. refreshment beverages business. CSDs grew nicely, led by Dr. Pepper, which was the largest market share gainer among the top 10 category brands for both the quarter and the year. During Q4, we once again activated our Fansville marketing campaign, the fuel awareness and drive demand. And despite Dr Pepper's existing scale, we grew incremental display and ACV for key varieties and pack sizes. Dr. Pepper, strawberries and cream also remained highly resonant, finishing 2023 as the #1 innovation launch in the CSD category. In other parts of our portfolio, we leverage revenue growth management to ensure we are offering consumers continued compelling value across all channels and formats. For instance, in Q4, we deployed more multipacks and tailored promotional and merchandising strategies by channel for core hydration and Avion. As a result, our premium water portfolio grew retail dollars and notched market share gains, overcoming some consumer trade down to mainstream water. Our pursuit of white space opportunities continued in Q4, wrapping up a very active year. We exited the first year of our sales and distribution partnership for C4 Energy with momentum. C4 commands less than a 3% share in energy today with meaningful upside ahead, and we have strong commercial plans to add significant further scale in 2024. We also just started shipping electrically through the KDP system, which will build our exposure to the fast-growing sports hydration category and multicultural consumers. A full innovation slate adds to our 2024 excitement. These include the launch of Dr. Pepper Creamy Coconut, just in time for the summer season. Canada Dry Fruit/CSD, Apple Mini bottles, the restage of Buy Wonder Water, 4 hydration partnering with Teen USA Symnastics and the national U.S. rollout of Penafiel, our powerhouse mineral water brand from Mexico. We intend to leverage continued U.S. refreshment beverages top line growth to drive a balance of reinvestment and bottom line delivery in 2024. Over the past year, our commercial and supply chain teams have grown increasingly integrated, yielding significant efficiencies. As a result, our productivity savings run rate step changed in 2023, and we began 2024 with healthy carryover savings and a robust pipeline of additional projects to support P&L flow-through. In U.S. coffee, we continue to control the controllables in the context of a still sluggish at-home coffee category. Our Q4 pod shipment trends improved relative to Q3, and we delivered another quarter of strong segment margin recovery and underlying operating income growth. We also ended this year having added approximately 2 million new households to the Keurig ecosystem in line with our target. That said, net sales declined 10% year-over-year as some short-term dynamics weighed on Q4 segment performance. As Sudhanshu will describe in detail, a combination of transient factors accounted for roughly half of the top line decline, and we expect these to dissipate in 2024. Bigger picture, volume consumption in the at-home coffee category declined about 3% in 2023 in IRi tracked channels gradually recovering from a mid-single-digit decline in 2022. Q4 category trends were largely consistent with the full year. In both the quarter and the year, single-serve coffee continued to grow as a percent of total at-home coffee servings. And Keuring compatible brewers also gained meaningful share. 2023, 4 out of 10 brewers sold were Keuring compatible. And in Q4, that ratio approached 50%. These are clear indications of our ecosystem's ongoing appeal to coffee drinking households. While at-home coffee category consumption is taking longer than we anticipated to return to growth to the back half of '23 was clearly stronger than the first, and we expect the gradual recovery to continue. Our 2024 U.S. coffee strategy incorporates a balance between long-term growth initiatives and short-term actions that address current macro realities. We will continue with high-quality brand and ecosystem building activities to drive incremental household penetration, increased pod usage among existing and new households and accelerate growth in ready-to-drink coffee. At the same time, we will emphasize affordability through revenue growth management initiatives such as engineering brewers to hit important entry price points. and highlighting the relative value of consuming coffee-at-home versus in coffee shops. For higher income consumers, we continue to build out super premium solutions. These actions should support a broader at-home coffee recovery and ultimately help return the single-serve category to its long-term growth trend. Even so, we are building our 2024 financial plans around more prudent category growth assumptions. With more than 50 million coffee drinking households in the U.S. yet to convert to single-serve, there is significant runway to steadily grow penetration. We have an ambitious vision of Keuring future, some of which we will begin to share publicly starting this spring. At the annual Houseware Show in a few weeks, we will preview an exciting pipeline of disruptive innovation of Keuring brewers, and we will be making a public announcement about these innovation plans shortly before that event. Our 2024 pod program is equally robust. Innovation will span cold and hot occasions and a spectrum of brews and flavors. Along with incremental promotional and marketing support, these new products will directly bolster our owned and licensed brands. Products like refreshers will benefit our indulgent donut shop brand, while our high-profile collaboration with Kevin Costner will elevate Green Mountain. This is Costner's first brand campaign in 30 years and will feature the co-creation of a unique set of blends and integrated marketing events to highlight our shared passion for coffee quality and sustainability. We remain focused on building out the super premium tier of pods, which reinforces Keurig's reputation for quality and supports premiumization in the category. Our latest activities began in Q4 with the introduction of lock alone licensed pods and continue in early 2024 with the conversion of Lavazza to a licensed relationship, which will unlock more growth and efficiencies for the brand. Our ready-to-drink coffee efforts are also gaining momentum. In Q4, we commenced our sales and distribution partnership for lock-on ready-to-drink coffee now with renovated products and packaging. Wrapping up on U.S. coffee, while we are not satisfied with our 2023 performance, we are taking steps to support a stronger 2024. We are acting as a category leader to revive long-term category growth, thinking expansively and disruptively with the vision, capabilities and willingness to invest in the future growth opportunities for ourselves and on behalf of our partners. In other words, we are being open-minded and ambitious and positioning KDP to benefit from an at-home coffee category rebound, while also planning 2024 in a measured way. Moving now to our International segment. Revenue grew at a double-digit rate on a reported basis and high single-digit rate in constant currency with continued balance between pricing and volume mix. As with our other segments, operating income grew faster than net sales, resulting in significant margin expansion. Our performance reflected healthy growth across country markets. Our results were led by strong trends across our cold beverages portfolio, primarily driven by Penafiel and Clamato in Latin America, Canada Dry and Dr. Pepper CSDs in Canada, and our continued expansion of our ready-to-drink alcohol and alcohol alternatives products. In our international coffee business, we delivered strong household penetration growth in 2023 and this will remain a 2024 priority. For that aim, we recently inked an agreement to make sure the official coffee maker of the NFL in Canada, capitalizing on the sports growing popularity. Our international momentum is supported by broad-based capability investments, including in areas such as distribution and consumer insights. As in the U.S., our DSD system in Latin America represents a competitive advantage. During 2023, we bolstered our reach by expanding our routes and building out more dedicated coolers at retail and plan to do so again in 2024. Meanwhile, our innovation pipeline marries local expertise and enterprise-wide insights. For instance, the launch of Schweppes mocktails in LatAm will build on our experience in ready-to-drink low and no alcohol products in Canada. While the upcoming introductions of Dr. Pepper Dark Berry in Mexico, an expansion of 0 CSDs in Canada, leverage successful playbooks out of the U.S. Since merger, we have grown our international business at a strong double-digit CAGR from slightly over $1 billion in annual sales to almost $2 billion. We continue to see outsized growth potential in this segment, and it will remain a meaningful contributor to KDP's total results in 2024 and beyond. Wrapping up, 2023 represented another year of delivering on our commitments while also advancing key strategic priorities. The operating environment is as ever demanding but our all-weather business model and energized teams are up to the challenge. Our focus remains on sustainably and thoughtfully extending our leadership position in the beverage industry while consistently delivering strong and predictable financial outcomes, including a return to our long-term algorithm in 2024. On March 19, we will be hosting a webcasted investor event to dive deeper into our strategy and the multiple value creation opportunities we see across the business. We hope many of you will join or tune in. I will now turn the call briefly over to Tim, after which Sudhanshu will walk us through the detailed financial results and outlook.

Sudhanshu Priyadarshi:

Thanks, Tim, and good morning, everyone. I will focus my remarks this morning primarily on our quarter 4 results and the 2024 outlook. Our Q4 performance demonstrated strong execution in a dynamic operating environment. We further rebuilt our margin structure, invested to seed future growth opportunities and delivered a strong EPS growth that was slightly ahead of our outlook. . Fourth quarter net revenue advanced 1.7%, with 1.1% constant currency growth. Net price realization increased 4.8%, which was partially offset by a 3.7% decline in volume mix. We enjoyed strong momentum across approximately 70% of our business namely in U.S. refreshment beverages and international, but our top line growth was pressured by temporary headwinds in U.S. coffee. Gross margin expanded a record 450 basis points year-over-year, driven by a favorable net impact of pricing, productivity savings and moderating inflation. We also earned performance incentives relative to our strong commercial execution of the C4 partnership, which contributed approximately 100 basis points to gross margin. SG&A deleveraged 170 basis points, in part reflecting a double-digit increase in marketing. Total company operating income grew 6.5%, which, along with modest below-the-line leverage drove 10% EPS growth. Excluding the year-over-year reduction in nonoperational gains, EPS would have grown in the high teens. In 2023, we essentially eliminated nonoperational benefits. We now move into 2024, looking to build on this solid earnings base. Moving to the segments. U.S. Refreshment Beverages grew net sales 6.8%, led by 7.5 percentage points of pricing. Volume/mix declined a modest 0.7% with manageable elasticities, broad market share gains and a healthy growth contribution from C4 Energy. As Bob discussed, in 2024, we will build on our commercial momentum with a robust slate of innovation though our cadence of launches differ slightly from last year. For instance, our Dr Pepper Creamy coconut rollout will begin in quarter 2 and gain steam into the summer as opposed to the very successful launch of strawberries increased in quarter 1, 2023. While the calendar difference is made temporarily weigh on our market share comparison early in 2024, we remain confident in another great year for U.S. substation Beverages relative market performance. Segment operating income grew 20.2% in the quarter and margins expanded 360 basis points. This growth reflected the net sales momentum, a favorable impact of productivity net of inflation and the C4 performance incentives partially offset by higher marketing. In U.S. coffee, we made good progress across multiple dimensions. Share gains for the single subsegment, and for Keuring continued. We executed a successful holiday approval program to end the year with 40 million Keuring households and the segment margins came in at the highest level in 10 quarters. These markers survive, we do not view the headline 9.9% net-well decline in quarter 4 as overly indicative. With pricing, a positive contributor, just shy of 1%, segment sales were pulled down by a 10.7% decrease in volume mix. Let me deconstruct drivers to give you a sense of why we see roughly half of the decline as transient. Brewer revenue decreased 21%, primarily due to a 14% decline in brewer shipments and reflecting a return of normal seasonal shipment patterns against a steadier point of sales trends. Looking at the back half in total is more telling with brewer shipments in line with point-of-sale purchases. As context, full year approval shipments in 2023 were 13% higher than pre-pandemic shipments in 2019, representing a 3% CAGR. Pod revenue declined 7% in the period, even with the continued impact from previously discussed private label exits, pod shipment trends sequentially improved as expected, down 3% in quarter 4 versus 8% last quarter. Pod revenue in the period was also unfavorably impacted by mix, given a lower percentage of sales from on in-licensed brand relative to last year. The temporary headwinds in quarter 4 included the brewer decline, private label exits and a modest impact of lapping an extra week last year. Though quarter 1 will continue to reflect still sluggish category dynamics, we do expect these discrete factors to be less impactful beginning next quarter. Moving to segment operating profit and margins. Although quarter 4 operating income dollars declined 2.8% year-over-year, this was entirely due to the impact of lapping more than $50 million in nonoperational benefits. On an underlying basis, our operating income grew in the double digits. U.S. coffee operating margin expanded 260 basis points relative to the prior year. Drivers of this expansion included an improving relationship between pricing and inflation, continuous productivity benefits and overall cost discipline. In 2024, reinvestment will be an important priority in the segment and will source from these margin tailwinds. International segment net sales grew 11.5% in the fourth quarter. On a constant currency basis, sales increased 6.5%, with pricing up 3.6% and volume mix growing 2.9%. We continue to deliver strong results across markets, despite tough year-over-year comparisons in Mexico from lapping the World Cup last year. Segment operating income increased a very strong 25.6% on a reported basis and 19.8% in constant currency terms, thanks to pricing, operating leverage and productivity mating favorably against iteration. As President of our International segment, I see a tremendous multiyear top and bottom line growth opportunities across this business, including in 2024. Moving to balance sheet and cash flow. Our ongoing cash generation remains strong. However, we chose to deploy a significant component of our 2023 cash flow to strategically reduce our supplier financing program, a decision that optically weighed on our free cash flow even as it to strengthen our balance sheet. Put another way, our free cash flow for the year measured just north of $900 million, but included a $1.6 million use of cash from accounts payable, primarily due to our discretionary decision around the supplier financing program. Our business remains highly cash generative and on an ongoing basis, we continue to expect conversion commensurate with other leading beverage players. However, we will be below this long-term level in 2024 due to a continued a bit more modest impact from reducing supplier financing. How we intend to allocate our capital remains very much intact. Our priorities include making organic and inorganic investments to support our growth further strengthening our balance sheet, consistent with our long-term net leverage target of 2 to 2.5x and returning cash to shareholders through a steadily growing dividend and opportunistic share buybacks. In any given year, we may over-index to 1 or more of our priorities based on short-term opportunities, but over time, we will take a balanced approach. For example, direct shareholder returns were a focus area during 2023, representing a cash deployment of over $1.8 billion. We saw value in our stock and repurchased 22 million shares during the year, including more than 8 million shares in quarter 4, with over $2.9 billion remaining on our buyback authorization, we will continue to be opportunistic. We also raised our dividend 7.5% during 2023, marking our third consecutive annual increase. Moving now to our 2024 guidance. We expect to deliver mid-single-digit constant currency net sales growth and high single-digit EPS growth in 2024, consistent with our long-term algorithm. Based on our current FX outlook, we expect reported results to also incorporate roughly 50 basis points, top and bottom line currency headwind in 2024. Our plans reflect continued strong momentum in our U.S. Refreshment Beverages and international segments, while contemplating a relatively muted contribution from U.S. coffee. New strategic partnerships will contribute approximately 200 basis points to overall top line growth which will also benefit from the combination of carryover pricing and selected new price actions consistent with a more normalized inflationary environment. We are projecting another year of robust productivity savings to help offset this more normal level of inflation. Even with planned reinvestments in our brand and capabilities, we expect healthy operating profit growth, reflecting net sales growth and full year operating margin expansion. However, we also anticipate some below-the-line headwinds primarily in interest expense. This will constrain some of the operating profit flow through to EPS, though we retain good visibility to bottom line growth within our high single-digit target range in 2024. Our full year outlook includes the following below-the-line assumptions. Interest expense in a $560 million to $580 million range, an effective tax rate of approximately 22% and approximately $1.4 billion diluted weighted average shares outstanding. From a phasing perspective, we expect our top and bottom line momentum to build throughout the year. This quarterly EPS flow is typical for us and accounts for our innovation and investment calendar as well as building contributions from electrolyte and lacalome in the back half. Reflecting these dynamics and a slower start to the year in U.S. coffee, we forecast first quarter net sales and EPS growth in the low single digits. In closing, 2023 was a significant year for KDP. We grew share across most of our portfolio, increased gross margin through efficient pricing and record productivity, invested in key growth factors, improved the composition of our earnings profile and to strengthen our balance sheet. We expanded into attractive bite spaces through capital-efficient strategic partnerships and return a meaningful amount of cash to shareholders. Our 2023 performance was the product of hard work and strong execution across our whole organization, which enabled us to achieve a good set of operating and financial outcomes that were in line with our original projections. Our results also underscore our proven ability to deliver consistently and predictively in a dynamic operating environment. We have strong confidence that we will do so again in 2024. With that, I will now turn the call back to Bob to close.

Operator:

[Operator Instructions] The first question today comes from Peter Grom with UBS.

Robert Gamgort:

Sure. All 3 of us on the call today have been very involved in the development of the 2024 plan. I think as we said right upfront, there's no expectations in the plan of any significant change in the macro environment. And we talked about our expectations around coffee being quite muted as we think about 2024. We focused our energies really on what we have in our control which we've talked about a number of times. I think given that Tim will be taking over in Q2 and he's been very much involved with the team in developing AOP, it may be helpful for you guys to hear from Tim about why we have conviction on the outlook that we provided today.

Operator:

The next question is from Chris Carey with Wells Fargo.

Robert Gamgort:

Yes. Chris, let me just give you just a bigger picture context on the top line, and then I'll ask Sudhanshu to talk to you about the margins. and it's all under that umbrella of controlling the controllables. We have good visibility on the margins. If you look at the very long-term trends on at-home coffee and single-serve in particular, you talked about is volatility. It was a situation where the category went straight up during COVID due to time spent at home and then it moved down from that peak. So it's been slow moving. We talked about it quarter-to-quarter. It actually hasn't been that volatile. It's just been slower in recovery than any of us expected. Just to reiterate a couple of comments about the category. We're not happy with the the pace of the rebound, but it is sequentially getting better. It is interesting that we're seeing this trend globally in nearly every developed market, any other trend that seems to consistently hold up is that the single-serve segment outperforms all other forms of coffee. And so we're seeing this gradual improvement, the untracked channels perform better than the track channels. And given that the pace of that, while sequential has been gradual, that's why our planning expectations going forward, we think are quite reasonable and prudent. Now that's an area we don't fully control, we influence it through our innovation and marketing. We do have a lot of visibility and control of the margins. So Sudhanshu, you want to talk about that side of the equation? .

Operator:

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

Robert Gamgort:

Sure. So we've got good experience now. in onboarding a number of brands. And I'm not going to recite all of the ones that we've had over the past 4 or 5 years. But the most recent additions, which have happened or in process of being onboarded right now, of course, C4 La Colombe ready-to-drink coffee and Electrolit. As we've developed -- as we've brought brands on board, we've learned quite a bit about how to exit them out of their current distribution system quickly and efficiently, and then how to onboard them both into our national account planning process all the way down through our inventory planning and merchandising and delivery at a store-by-store level. So we've developed a playbook that we use. It's the same team who has onboarded all of these brands. And when we are in a position where we have an agreement with a partner, we bring all the commercial teams together. We spent a couple of days and we have this down to really a science. The tangible evidence of that, I would point to C4 where you could see there was not only 0 slippage in terms of its performance during an onboarding, which is a fear in most situations where you're transitioning from one distribution system to another, we picked up immediately and improved the performance as soon as it came into our system. And you can see that in terms of increased availability, both breadth and depth of availability. You can see it in the merchandising quality, and you can also see it in the display and promotional activity. And obviously, those are all the leading indicators, the lagging indicator that's critically important is the share gain. So we have the same bullishness as we're bringing La Colombe up to speed right now. And as I mentioned in my prepared remarks, Electrolit just started shipping through our system is going incredibly well right now. So I think we've got a great example -- many good examples of how we get better and better at that. In terms of what does the environment look like. The track record we have now of every brand partner brand that has come into our system that has seen a marked improvement in performance and growth and even brands that have been in our system for a very long period of time, our longest partner brand is Vita Coco and the fact that they continue to grow as well. has created a great sense of attraction for other brands who are outside of the system to try to get in. That puts us in a position to be very thoughtful and disciplined about where we want to do this. and also to be able to construct deals that are truly win-win over the long term. And we think the hallmark of this is that from an investment and growth perspective is that we're able to leverage the strength of the business improvement that we can offer partners to construct deals that are highly attractive to us, very capital efficient, give us exposure to higher growth segments and the proof in terms of the benefits to the partner or in the results that I just talked about.

Dara Mohsenian:

So Bob, I just wanted to return to top line in the at-home coffee category in the single-serve segment. You obviously covered 2024, but just can you take more of a look backwards at 2023 and some of the recovery being weaker than expected? Is it just the COVID drop-off you referenced earlier or are there other factors that drove some of that softness? And then just turning to the long term. So any perspective on if anything structurally changed here in the single-serve party segment? How you think about the growth opportunity post-2024?

Operator:

The next question comes from Andrea Teixeira with JPMorgan.

Robert Gamgort:

Yes, I'll answer the last part first, in terms of the cadence, you're seeing it happen, right? You see the sequential improvement on there. We don't have anything that would indicate that the continuation of that is anything but a good assumption. I think when you take a look at mix, mix, just remind you, mix gets very noisy when we analyze it quarter-by-quarter. There are a couple of factors in mix. On the brewer side, we had a mix scenario where we sold more of entry-level lower-priced brewers. We're indifferent from a household penetration perspective, but it does have an impact on the revenue side as you -- we say a 0 impact on the profit side of the business. . If you take a look at it within Pod, you do see that the owned and licensed pods were lower as a percent of total sales during the quarter and that the 1 licensed products have a higher revenue contribution. In our last earnings call, we talked about that the category had gotten a bit more promotional. It's not a surprise when the category consumption is soft. You can expect to see individual players promote more to try to gain a share advantage. Remember, we are really focused on category growth because we have about 80% of the category. So that's not a big of a focus for us. But when the price gaps become so far out of line, we have to address them on our owned and licensed portfolio. And we said that we were going to do that in the fourth quarter, which is what we've done, and it just takes time for that to catch up. But our expectation is that the promotional and marketing activity and the innovation activity that we put in place on owned at license will bear fruit for us in 2024.

Filippo Falorni:

Just wanted to go back to assumptions for category growth, but on the U.S. refreshment beverage side. Clearly, we've seen normalization in pricing and volumes have been a little bit weaker to start the year. Maybe can you give us a sense of what you're assuming for refreshment beverages for your core business, excluding the partnerships?

Operator:

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

Operator:

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

Operator:

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Keurig Dr Pepper's Earnings Call for the Third Quarter Of 2023. This conference call is being recorded. [Operator Instructions]. I would now like to introduce Keurig Dr Pepper's Vice President of Investor Relations and Strategic Initiatives, Jane Gelfand. Ms. Gelfand, please go ahead.

Robert Gamgort :

Thanks, Jane, and good morning, everyone. We are pleased with our Q3 results. KDP's diversified beverage portfolio and strong execution continue to support consistent delivery of our company goals and commitments, even as the operating environment around us remains dynamic. In Q3, healthy organic sales growth and significant gross margin progress fueled reinvestment and bottom-line growth, reinforcing the ability to our full year outlook, which remains unchanged. Third quarter constant currency net sales grew 4.1%. As expected, net price realization moderated from the first half but remain the primary top-line growth driver, while volume mix strengthened sequentially. Our performance reflected continued share gains in U.S. Refreshment Beverages, gradual recovery in U.S. coffee segment results, and strong momentum in our International business. Gross profit margin expanded significantly, up 100 basis points year-over-year and the largest improvement in four years, reflecting an improved balance between ongoing inflation, pricing and productivity. Gross profit growth enabled us to continue reinvesting in the business, including increased marketing for the third consecutive quarter, while simultaneously driving bottom line growth which was slightly above the expectations we shared with you back in July. As we move through Q4 and plan for next year, we expect our revenue growth drivers to continue to normalize as pricing moderates relative to recent history and volume mix continues to improve. To be clear, pricing is expected to remain a key part of the top-line equation, especially considering that inflation is likely to persist, albeit at more moderate levels than over the last couple of years. Simultaneously, our focus will be on supporting volume mix by balancing margin flexibility between reinvestment and future top-line growth and earnings flow-through. Let me take a step back and frame how we assess consumer health, our portfolio, and our strategy in the macro environment. The consumer remains healthy with demand resilient and category elasticity is manageable. Even so, consumers are closely calibrating where and how they shop? For instance, growth in club and other value-oriented channels has accelerated while the convenience of e-commerce and pickup and delivery services continues to resonate well after any pandemic-related uplift would have normalized. Consumers remain responsive to high-quality innovation and activation, but price and package architecture is another increasingly important dimension, including smaller pack sizes that hit key price points and multipacks that offer value and convenience. On the margin, we also see some migration of lower to middle-income households towards at-home meal and beverage occasions, which should benefit our more essential categories like CSDs and coffee. The business is well positioned against this backdrop, thanks to a compelling all-weather growth model. The ability to seamlessly meet the consumer across all beverage need states and to service those occasions across all channels is at the heart of why we formed this modern beverage company. Since then, we've made even more progress as we significantly grew the portfolio reach and strengthen our internal capabilities. Looking forward, our distribution prowess across retail is broad-based with very strong in-market execution yet we also enjoy a scaled online business, particularly on the coffee side. Our robust 2024 innovation pipeline has been well received by the trade and spans product, format, and packaging news. It captures a combination of value and premium price points as well as low and no calorie and indulgent beverages. We also continue to price nimbly across the entirety of our portfolio, including by leveraging our strong mix management capabilities. In short, the consumer is resilient but choiceful and KDP is positioned to drive attractive top-line growth through a combination of volume, mix, and price levers. Our successful growth model rests on our exclusive focus on North American beverages and a winning strategy. It begins with KDP's powerful twin distribution assets, our multichannel cold beverage distribution system, including DSD, and an installed base of nearly 40 million active households using the Keurig system. This is an unparalleled combination in the industry, which enhanced by strong R&D and commercial backbone, enables us to grow our categories, and gain share across our base business, and further build out our portfolio through high-value M&A and partnerships with counterparties who increasingly seek us out. When we fill in category white spaces, such as through our announcement today of the partnership with Electrolit, fuels a virtuous cycle of growth, investment, and growing returns on that investment. As the new brand scale and our portfolio expands, our capabilities get stronger. Drop sizes get bigger, our merchandising gets more impactful, we service each store and household more frequently and our commercial and consumer relationships tighten. This enables further investment in growth that begins to cycle anew. We have proven this model over multiple years. In U.S. Refreshment Beverages, we have consistently outperformed our categories, growing dollar share in at least 75% of our business in all but two quarters since the beginning of 2019. We also entered multiple strategic white spaces within the past 12 months such as ready-to-drink coffee, energy, and after today's announcement, sports hydration, all were achieved in a very capital-efficient manner. The growth path ahead is increasingly evident with both owned and partner brands. The latter, where our relationships are strategic and long-term, growth and mix are positive, and our economics are attractive. Coffee, the single-serve segment has continued to steadily gain share of at-home coffee, cementing Keurig's leadership position with this important category. At the same time, we are expanding our total coffee strategy to encompass iced, ready-to-drink, and other forms of coffee within and beyond the K-Cup format. And in Canada and Mexico, we have leveraged similar strategies across our Refreshment Beverages and coffee business as well as deeply experienced local teams to build a combined business approaching $2 billion in revenue, with a mid-20s operating margin. As a result, our International segment has become a scaled contributor to the overall portfolio with significant growth runway ahead. I'll now briefly discuss how this strategy played out in Q3, with Sudhanshu to follow with greater detail and guidance. In U.S. Refreshment Beverages, 82% of our business outpaced category growth in the quarter. CSD business is healthy. Dr Pepper building on the momentum of strawberries and cream earlier in the year, with a successful sixth season of the iconic Fansville marketing campaign. Other brands such as Canada Dry and Squirt also saw strong gains. And Polar's momentum continued in sparkling water, where it now commands the number two volume share position. CORE and Evian remains strong drivers in premium waters with CORE, in particular, seeing great traction from our partnership with U.S. gymnastics. That said, work to do elsewhere in the still portfolio including with buy, is undergoing a significant restage and reformulation next year. Importantly, our partnership with Nutrabolt on C4 is proceeding very well. In Q3, C4's market share and earned display accelerated while velocities remain strong across those regions where KDP has taken control of the brand throughout the market. Even as the C4 rollout continues in its first year, we have significant room for future growth in energy, where KDP's market share is only 3%, and C4 has tremendous potential. With the Electrolit announcement today, we are extending our portfolio into the large and important sport hydration category, another quickly growing mix accretive white space for KDP. Electrolit is a brand that has established a strong regional foothold, thanks to its unique product attributes, scientific heritage, and extremely loyal customer base. The brand is the market leader in sports hydration in Mexico, and that popularity extends to the U.S. where Electrolit enjoys broad multicultural appeal but over-indexes with Hispanic consumers. Though it has good scale today in the U.S. and already generates more than $400 million in retail sales, representing more than a tenfold increase over the past five years, Electrolit has significant upside potential. We are excited to partner with Grupo PiSA, Electrolit's parent company, to meaningfully expand the brand's distribution breadth and depth in the U.S. and across all channels while also leveraging KDP's commercial expertise to further enhance the brand's position at retail. With C4, Lock alone, and Electrolit having entered our portfolio over the last 12 months, we have meaningfully increased the growth potential for each of these brands while extending a positive halo on the rest of our business. For example, our total volume in chain convenience stores will increase by approximately 50% after incorporating these brands, providing scale and efficiency benefits across the entirety of our portfolio. This is the virtuous cycle that I described just a few minutes ago and which will continue to fuel KDP's success. Turning now to U.S. coffee, where our back half is focused on driving segment margin improvement in the context of gradually improving at-home coffee category volumes. With visible progress on both fronts, let's address each in turn. I'll start with the segment margin improvement. We have a greater ability to control in the short term than we do with category trends. Q3, we began to deliver against our objective with a strong inflection in segment margins and operating income, which meaningfully improved both sequentially and year-over-year. Importantly, we expect the margin improvements to continue. We previously said that delayed pricing would flow through our partner brands, and it has. We have now strengthened the pricing protocols across these long-term partnerships and do not expect any significant lag between inflation and pricing to recur in the future. Plus, commodity cost headwinds are now moderating and productivity is building across the segment, enhancing our visibility to continuing to grow the bottom line even with ongoing reinvestment. Moving to category performance. At-home coffee category volume growth accelerated relative to Q2 but the pace of recovery is admittedly gradual. From Q2 to Q3, volume trends across the broader category strengthened by about 100 basis points in measured channels though volumes are still modestly lower year-over-year. Single-serve continues to gain share of at-home coffee with our proprietary data, which is more comprehensive spanning both measured and untracked channels, indicating that Q3 Keurig's compatible pod consumption volume was approximately flat versus a year ago, proving from down approximately 3% in Q2. These green shoots are encouraging, and we will continue to nurture them as the single-serve market share leader. During the quarter, we saw our competitors begin to lean more aggressively into price promotions in the single-serve category, resulting in some share shifts across the various brands in the ecosystem. As a reminder, because we manufacture nearly 80% of all Keurig compatible pods in the U.S., we tend to participate even share changes occur between our branded and private label partner brands and our owned and licensed brands. Nevertheless, we must responsibly manage our owned and licensed brands price gaps within the category and intend to stay nimble to the changing operating conditions around us. Importantly, as we choose to surgically respond to the recent price activity, we expect segment margins to accelerate in Q4. We also do not expect the competitive pricing activity to meaningfully accelerate at-home coffee category buying, which we know are far more responsive to high-quality activities that influence consumer choice and lean into emerging trends. As the single-serve leader, KDP will continue to drive category growth as we always have through innovation, renovation, and white space expansion that build penetration with new households and increased usage among our existing consumers. With 90 million U.S. households drinking coffee at home, of which fewer than 40 million are actively using Keurig brewers, there is a significant multiyear opportunity ahead. In 2024, we will continue to pursue that growth through new consumables like cold brew, expanded ice varieties, and refreshers. New brands like La Colombe, which, by the way, begins to ship in ready-to-drink and K-Cup format starting in Q4, significantly new innovation in brewers, all supported by strong marketing and brand activation activity, including exciting new collaborations across our owned and licensed brands. Moving on to our International performance in Q3, which remained impressive with revenue growth once again, in double digits and continued segment margin expansion. Both our Coffee and Refreshment Beverages businesses performed well. Canada, the ready-to-drink alcohol and no alcohol segment is growing, and we are contributing to that growth. ATP gained significant share as velocity and distribution built and a blast from the past, vodka-based Tahiti Treat RTD generated exceptional consumer demand. In Mexico, our powerhouse Pena CL and Squirt brands, both grew at a double-digit rate, leveraging our strong go-to-market and DSD capabilities behind which we continue best. In Mexico, like in the U.S., we have significant growth potential ahead across both our core portfolio and through partnerships as we leverage these unique distribution assets. KDP's strong balance sheet and cash generation profile are powerful enablers of our broader growth strategy with today's Electrolit announcement yet another example of how we can grow our portfolio and market reach in a highly capital-efficient manner. As a result, our financial policy approach can be flexible and dynamic. This year, we are deploying some of our cash flow to strategically reduce our supplier financing program. Simultaneously, we announced a 7.5% increase in our annual dividend furthering our track record of regularly growing dividend income for our shareholders. With over $3 billion remaining on our share buyback authorization and having already repurchased 24 million shares of KDP stock over the last two years, we have substantial flexibility to opportunistically lean in when we see compelling value in the business we know best. Wrapping up, our third quarter results represented another period of consistent delivery against our commitments. Our top-line growth was strong and resilient and we reinvested in our brands and differentiated capabilities. We also achieved important proof points in our margin recovery journey this quarter as visible in our consolidated gross margin progress, and in U.S. Coffee segment results. Our Q3 results provide enhanced visibility to our unchanged 2023 outlook for constant currency net sales growth of 5% to 6% and adjusted EPS growth of 6% to 7%. We expect to close out 2023 having significantly improved our composition of earnings profile, lending further support to our aspiration to be on algorithm in 2024. I'll now turn it over to Sudhanshu.

Robert Gamgort :

Thanks, Sudhanshu. I'd like to close by saying how excited we all are that Tim Cofer has joined KDP as Chief Operating Officer on November 6. From there, we are looking forward to a smooth CEO transition between Tim and me in Q2 next year in continuity as I serve as KDP's Executive Chairman thereafter. Upon joining KDP, Tim's immediate focus will be immersing himself in the business. He will also partner with Sudhanshu, the full executive leadership team, and me to drive our annual operating planning process for 2024. A lot of robust work is underway, and we expect to provide you with a detailed outlook when we report our Q4 results. For now, let me just say that our entire organization is focused on delivering a strong finish to 2023. We expect that Tim will join Sudhanshu and me in this forum in February and I know you will enjoy meeting him after that. I'll now turn the call back to the operator for questions.

Drew Levine :

Hi, good morning. This is Drew Levine on for Andrea. Thank you for taking my question. So, I just wanted to ask on U.S. Coffee. If you could talk more specifically to the trends during the quarter, both in tracked and untracked channels, if the recovery is sort of playing out sequentially as you expected, and what we could think about the exit rate for September and October being? And then secondarily, I think the expectation was for pod volumes to perhaps see moderating declines in the quarter. They were pretty flat. So, anything changed incrementally during the quarter from a pod shipment perspective? Thank you.

Operator:

Our next question will come from Dara Mohsenian with Morgan Stanley. Your may now go ahead.

Robert Gamgort :

Sure. I think that when you take a look at the shipment -- or the trajectory of the coffee category, I think it speaks for itself. We talked a lot about mobility as a big driver, and we certainly weren't the only ones that were looking at that. So, mobility is no longer a factor. It's gone back to a more normalized environment. And so, I think that the trajectory that we're seeing right now on improved coffee consumption will continue. The drivers of that, I think it's -- there are multiple contributors to the slower but steady improvement in the category, including really a change in work routines, where you're looking at more hybrid work. The afternoon occasion, for example, changes on that. On the margins, we could see some impact from pricing and inflation and also some of the trends in cold coffee, which also indexes to out-of-home. But there's nothing structural going on right now. And you can imagine, we spent a lot of time digging into the fundamental consumer drivers of coffee. The tailwinds are incredibly strong. the movement towards improving growth looks to be right in front of us here. But we're being honest in saying that the total at-home coffee category has been more gradual than we originally expected, although we don't -- like I said, we don't see anything structural. With regard to the untracked channels, why is that stronger? It's really driven by club and e-commerce. E-commerce, which was growing prior to the pandemic, accelerated significantly during the pandemic, and it really has shown no signs of pulling back from that. And we talked before about the importance of e-commerce in our total business, but you can imagine when you look at individual segments, that single-serve coffee is really an ideal segment for e-commerce. It's lightweight, high value, long shelf life, not fragile to ship. So, you can really have a quite a good business on e-commerce. In addition to that, remember, we've been increasing our own subscription business and services to the consumer. And as we put more smart brewers out there, and allows for smart consumption-based reordering, I think that e-commerce will continue to grow. And I think club is an overall consumer shift towards that channel. It represents a good value. I also think that some of the changing away from home coffee trends, meaning office coffee trends have also benefit the club channel as well as people in small and midsized offices are picking up their supplies there as well as in e-commerce. And then with regard to 2024, I mean, we've given you our macro outlook. We're not going to break it down by individual segments. The one thing I would say that I believe is important is this gradual or more gradual rebound in coffee is something that we've been able to factor in our thought process as we think about our total company algorithm. And obviously, it's something that we've digested and built it into our expectations.

Bryan Spillane:

Maybe Bob, maybe to just pick up on that last point, and maybe a little bit higher level, just thinking about the consumer. As we've gone through this earnings season, it's -- there just seems like economizing behavior in a lot of different forms has kind of Bob more as we've moved through the back half of this year and Hershey talked a little bit about it this morning as well. And so, can you give perspective on two things. One, just how you're thinking or how KDP is thinking about the consumer next year, stronger, weaker, and how maybe you're adjusting your plans across all businesses for that? And then the second, just because it's been so topical, just kind of how you -- how KDP is digesting all of the sort of information about GLP-1? And is that something you're beginning to factor into your longer-term plans?

Operator:

Our next question will come from Robert Ottenstein with Evercore. Your may now go ahead.

Robert Gamgort :

Yes. So, Robert, I'm glad that you saw Electrolit at NAX and the excitement about. This is a business that we've been tracking for some time, and we've been really impressed with their strong growth. The fact that their consumer target is multicultural. And it's a perfect example as we've discussed with C4, with La Colombe, with Polar, where we can take a brand that is very strong and has a clear consumer base and opportunity and help them grow through expanded distribution, proof merchandising, and access to our RGM capabilities, category management capabilities, and more. And so, this one, I think, is another one of these win-win structures. When we think about Electrolit coming into our business and its implications on 2024, clearly, it's a contributor to revenue growth. Similar to what we talked about with C4, in its first year of incorporation, we don't think about it as much of a driver of profit growth. But when you get into its second year, it will be able to contribute profitability and we'll provide framing around that at that time. And that's because we make significant investments in the first year to get the brand on board. And also, as we discussed earlier, this gives us a wonderful opportunity to put more investment in our -- market system to be able to improve coverage with the fact that we now have larger job sizes and increased frequency. And as we said a number of times, that benefits all brands within our system. The fact that we put in the prepared remarks about the 50% growth in large outlet C-stores for us is a very significant consideration here in terms of our ability to cover our convenience stores for our entire portfolio. So, this is yet another great example of how we're able to build our capabilities. Your point about smaller pack sizes, yes, the other world has changed quite a bit. we have substantial distribution, and we have good manufacturing flexibility on small pack sizes. We see them as an incremental driver of growth. They happen to also be margin accretive. They're very much in line with consumer trends where if someone wants to treat themselves and a portion of our portfolio is in the treat need state that we give them an opportunity to do so in a smaller pack size. And that's been the case in other CP industries. And as we think about our manufacturing base going forward, flexibility in formats and pack sizes is a critical capability that we continue to invest in to give us the optionality of price pack architecture moving forward.

Bonnie Herzog :

Bob, I was hoping you could give us some more color on the exiting of certain private label contracts in terms of maybe how big these customers are and if there's an expectation for more to come. And then you called out a tough comparison on your pod volumes in the quarter, given the trade inventory builds in the year-ago period. So just trying to understand how big of an impact do you think that was? And could you just confirm, I thought you said that you're already starting to see pod volumes improve in Q4? Thanks.

Operator:

Our final question will come from Chris Carey with Wells Fargo Securities. You may now go ahead.

Robert Gamgort :

Yes. Let me talk about the margin inflection that we've seen in the quarter, and we talked about prior to that. And then I'll ask Sudhanshu to take a look at where we are on -- from a segment OI perspective and a forward outlook on that. We had a number of conversations in the past, as you'll recall, about the gap between pricing to partners and private label versus the inflation that was -- that we were experiencing that had never been contemplated in the years in which we had the prior years in which we had signed those agreements. And remember, that's very different than pricing that you see at retail, just to be clear because I know when I say pricing, people immediately go to retail pricing. What I'm talking about is the contractual pricing that we have with partners and private label, who then in turn set their own retail pricing as a result of that. And so, we said that there was a lag, but it would flow through. It's flowing through. We have great visibility to it going forward, to answer your question, because it's contractual. And I think the other point to make, and it's an emphasis of the prepared remarks, is that we've now adjusted all of those agreements going forward, and we don't expect a substantial lag to -- between pricing and inflation to occur in the future. So, lessons learned from the past, a bit of pain that we had to incur over the past couple of years, but that's all catching up right now, and you're seeing that flowing through. In addition to that partner and private label pricing flowing through, we're also seeing some moderation in inflation, and we're experiencing an increase in productivity. As we said a couple of times, when we were in a supply chain disruption mode, and we were trying to get every case out the door, productivity takes a backseat. We're in really good shape on our supply chain from a capacity standpoint. And we have the ability now to focus on productivity and dial that up. So, it's a combination of partner private label pricing, productivity, and moderating inflation that is contributing to the margin inflection you're seeing now and also our confidence and visibility into the future. But Sudhanshu, why don't to take up a minute and talk more about that last piece?

Operator:

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

Operator:

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

Operator:

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Keurig Dr Pepper's Earnings Call for the Second Quarter of 2023. This conference call is being recorded, and there will be a question-and-answer session at the end of the call. I would now like to introduce Keurig Dr Pepper's Vice President of Investor Relations and Strategic Initiatives, Jane Gelfand. Ms. Gelfand, please go ahead.

Robert Gamgort:

Thanks, Jane, and good morning, everyone. KDP’s second quarter once again demonstrated our portfolio’s resilience and ability to consistently deliver on our total company commitments. Our solid performance was driven by strength in U.S. refreshment beverages, encouraging developments in U.S. coffee and continued momentum in international. Consolidated Q2 results were healthy with strong revenue momentum and sequentially accelerating operating income and EPS growth. Net sales advanced more than 6% supported by net price realization, modest category elasticities and good share performance across much of our portfolio. For the first time since Q3 2021, reported gross margins expanded as an improving balance between pricing, inflation and productivity began to emerge. Gross profit dollar growth funded marketing increases across all segments, and help to offset continued cost pressures in transportation, warehousing, and labor. As we forecasted, we're in the early stages of a margin recovery that we expect become more visible in the back half. Looking ahead to the balance of the year, we are raising our 2023 net sales growth outlook to 5% to 6%, while our full year EPS Outlook is optically unchanged, it in fact represents greater than originally anticipated underlying rule with an enhanced composition to our earnings profile. As Sudhanshu will discuss in more detail, we now expect minimal non-operational items in 2023 setting KDP up for strong and sustainable earnings base from which to grow in 2024 and beyond. U.S. refreshment beverage’s performance in Q2 was outstanding double-digit revenue growth and strong operating margin expansion. Similar to last quarter, category growth and our own momentum remained pricing-le. Limited volume elasticities across the portfolio. Though demand is resilient, we are mindful of the various pressures facing our consumers, and are proactively meeting our needs to product, and package innovation along with strong in-market execution. These elements come together, we see market share gains. Q2 these were most notable across our CSDs sparkling water, coconut water and juice portfolios. Even as price realization begins to moderate in the back half, we remain confident in our ability to drive attractive organic growth by creating value among three key dimensions. First, by driving growth in core brands through marketing and brand renovation. Second by filling portfolio white spaces via innovation and external partnerships; and third, by enhancing the effectiveness of our omni-channel selling and distribution system. We delivered on each of these dimensions in Q2. Focusing first on our core brands. For the second consecutive quarter, Dr. Pepper was the largest share gainer in the CSD category, bolstered by the success of Strawberries & Cream, and the continued strong momentum of Dr. Pepper Zero Sugar, which was once again maybe top two food and beverage product in IRI Circana’s New Product Pacesetter Innovation Ranking. Keurig also continue to outperform driven by its multicultural appeal and unsweetened sparkling waters, our partnership with Polar have now boosted the brand to the #2 volume share position nationally. We also brought significant excitement or choose categories were mocked in a wine puncher driving innovation and gaining share. When it comes to the partnerships our C4 distribution transition is proceeding well. 2023 is a year of transition and investment and though it is still early days in our distribution rollout we are driving gains across multiple metrics and remain confident in the growth potential of C4. KDP distributed geographies, total points of distribution increased nearly 60% versus prior year and waited weeks on display across large format food outlets are up nearly 50% relative to the beginning of 2023. These gains translated into continued velocity and share momentum for C4, and accelerated the brand's already strong revenue growth even further. Clearly, our partnership approach continues to create win-win outcomes, making this model increasingly attractive to other high potential companies including La Colombe, which I'll speak more about shortly. The effectiveness of our selling and distribution engine underpins our success across all the examples I cited. One would acknowledge the hard work our teams have done to drive improvement across the system where it shows signs of strain during the pandemic. Customer service levels have now significantly improved relative to where we were during the COVID period, and in some cases exceed pre-pandemic comparisons. But our work here is never complete. These strides are leading to even tighter in-store and on-shelf execution as our market share momentum demonstrates. Turning now to US Coffee, we're exiting Q2, we saw several encouraging developments that are expected to benefit segment performance over the coming quarters. On our last earnings call I identified three key tenets underpinning our expectations in this segment. First, an at-home coffee category momentum would begin to recover in the back half, as mobility comparison ease. Second that we would add approximately two million new households to Keurig’s ecosystem in 2023, aided by BrewID & Pod innovation and the addition of new brands. And third, that segment operating margins would improve meaningfully in the back half supported by a better balance between pricing, inflation and productivity. We had even more visibility to these elements playing out today with Q2 marking an expected trough in both top-line growth and margins. Let's address each point in turn. First, as anticipated, at home coffee category momentum began to improve toward the end of the second quarter. This continue to do so in July. Lot of time our consumers are spending at home this year versus last is continuing to normalize. Since we believe time spent at home is the single largest variable driving at home coffee consumption, it follows that volume trends are recovering too. We are observing this across broader at-home coffee within which single-serve continues to gain share. Category recovery is very clear when looking at publicly syndicated data. In Q1, Keurig compatible Pod volumes good proxy for the total single-serve category declined nearly 4% across measured channels. Q2 these declines moderated to less than 2% with improvement particularly notable towards the end of the quarter. For the last four weeks, category volumes are flat to up slightly. Notably, category and KDP volume performance has been even stronger in non-track channels such as e-commerce and Unmeasured Club. Category trend is a positive leading indicator for our business and we would expect sequential improvement in net sales growth in the back half. That said, we are prepared for our volume growth to lag the single-serve category in the shorter term, as we focus on optimizing profitability. Pricing across all sub- segments of our K-Cup K- portfolio Is now more fully flowing through our financials including from our partner breadth consistent with our previous expectation that pricing would catch up to inflation, but a delay We also exited some of our lowest margin private-label contracts. Both of these elements are now filtering through our results and the syndicated data. Longer-term, our growth in U.S. coffee will remain underpinned by driving incremental household penetration for the Keurig system and increasing revenues from our existing 38 million active households, which brings me to the second tenet of our coffee outlook, driving incremental household penetration. In Q2, we furthered this growth strategy by elevating our presence in cold coffee, which is an important trend among younger consumers. This spring, we nationally expanded the K-Iced Brewer platform, especially formulated Ice K-Cup pods. Strong marketing and activation activities across all media and digital channels, including a special limited edition Rolling Stone’s K-Iced brewer that sold out in less than 24 hours. These Innovations are off to a very strong start with the K-Iced Brewer family performing extremely well and our ice pods proving highly incremental to our base business. Just last week, we announced a strategic partnership with La Colombe, super premium and award-winning coffee brand with wide appeal and untapped potential. Partnership which includes an equity investment, a sales and distribution agreement for RTD Coffee and a K-Cup pod licensing agreement is a compelling example of our ability to add value to a single partner across both hot and cold beverages, which KDP is uniquely positioned to deliver. Our collaboration with La Colombe will encompass several exciting strategic avenues. We will leverage our sales and distribution capabilities to scale La Colombe across major retail classes of trade. Along with the Pete's brand, we're creating a ready to drink coffee platform, which will enable us to better serve the needs of our consumers and retail customers in this important category. We will also work closely with La Colombe to formulate and introduce the brand into the Keurig ecosystem in a K-Cup format. Here too, we are building a super premium platform as La Colombe joined several recently added brands like Intelligentsia, BLK & Bold, and Philz. Additionally, La Colombe is a vertically integrated model and specialized manufacturing knowledge are other differentiated elements that could enhance our collaboration over time. In short, this partnership has strong value creation potential that when unlocked will benefit both KDP and LA Colombe to our joint ownership model. Now moving to the third element, driving our coffee outlook. We continue to expect segment margins for the U.S. coffee segment to meaningfully improve both sequentially and year-over-year in Q3 and Q4. Multiple factors led the segment margin contraction over the last few years and several elements including sequential favorability in pricing, commodity costs and productivity are now starting to come together to facilitate a margin rebuild. Pricing to offset cumulative inflation across our K-Cup portfolio including for partner and private-label brands will now more fully flow through starting in Q3. Commodity cost pressures including in green coffee and packaging are also projected to ease. Efficiency benefits should ramp up throughout the year as we have redoubled our productivity efforts following a period focus on mitigating supply chain disruptions. We will work to further enhance these elements going forward with the expected back half margin inflection and important marker for future profit growth. Our International segment continues to perform well, even as it begins to lapse double-digit growth in the year ago period. In Q2, Canadian volume momentum was fueled by non-alcoholic and low alcohol beverages where we have multiple brands like Atypique and Labatt's is gaining share. This is an exciting set of emerging categories where we plan to leverage our learnings across markets. Execution also remains strong in our Canadian coffee business where KDP manufactured Pod’s grew consumption dollars in gained market share during the period. In Mexico, our DSD network continues to strengthen, which is supporting broad based share momentum across our LRB portfolio and the ongoing rollout of our partnership with Red Bull. Across the portfolio, Pen UCL and its aide extensions into flavored sparkling waters, as well as our CSD brands continue to perform very well. Wrapping up, our consolidated Q2 results are yet another illustration of our modern beverage company working to deliver strong, consistent and predictable company performance. We continue to develop our business for the long term to investments in innovation, partnerships and capabilities, while demonstrating our ability to work through shorter-term normalization in coffee. We also continue to deploy our cash to create value for shareholders. It’s all this via the equity investment in La Colombe and through the opportunistic repurchase of KDP’s shares, which continued through Q2 as our share price remain dislocated. We are raising our 2023 outlook for constant currency net sales growth, do 5% to 6% and reaffirming our guidance for adjusted EPS growth of 6% to 7% with an improving composition of our earnings profile. We now expect only minimal non-operational benefits within the frameworks of this guidance implying double-digit adjusted EPS growth on an underlying basis. I'll now turn it over to Sudhanshu to discuss Q2 results and our balance of year outlook in greater detail.

Operator:

[Operator Instructions] Our first question will come from Chris Carey with Wells Fargo Securities. You may now go ahead.

Robert Gamgort:

Hi, Chris.

Robert Gamgort :

Okay, Chris. Let me start it at a very high level with the total category, because I think that is most important. We've clearly weathered a storm over the past year or so that's impacted our category and our profitability within the negative impacts were on at home coffee. We saw this category decline in all forms globally. And to answer your question, we have seen that as primarily driven by mobility changes. This is the post-COVID recovery mobility impact. That's largely played out. I think, by the end of the third quarter for sure that will be played out. We also had some issues in terms of supply chain recovery coming out of COVID where it was a service at all cost mindset and we were also not focused on productivity and of course inflation. And that was combined with the lag in our pricing realization. And that's when you add that all up, that's quite a list of challenges in our coffee business over the past year. If you look at what the setup is right now, it’s much more constructive. We're seeing a rebound in category and that's largely driven by normalized mobility. To your specific question about away-from-home versus at home, wait from that hasn’t change that much, right. If you look at office occupancy, it's pretty stable. It's improving very, very gradually. Over time, if that improves, then we'll get the benefit of from that on our way from home coffee business. But that's not something that we're banking on. It's really been an at-home coffee consumption story driven by changes in mobility. So we're seeing is rebound in category. As we talked about in our prepared remarks, we're seeing that pricing that we talked about that was lagged now flowing through the P&L and of course we're seeing a moderation in inflation and the combination of that is very constructive going forward. And one thing I would point out is that single-serve coffee has had and continues to gain share of all forms of coffee over this time period In terms of our shipments below consumption, the best way to look at us over the long term, I am not going to talk about 2024 specifically, but our shipments share approximate category consumption over time. Our focus is on category growth. We have about an 80% share of all Pods that go through the system. Mix can change over time, but again we're focused on category. And I think you ought to just think about category rebound as being consistent with how we think about our long-term shift and trends. But in the short term, we're looking at against a period a year ago, we were still rebuilding shipments from supply chain disruptions, so that's part of it. We've also talked about exiting some of the lowest margin private-label contracts and then we’ve taken some additional pricing on our owned and licensed. We think these are really the right decisions to prioritize margin recovery in a recovering category, and that's what causes a little bit of a separation between consumption and shipments in the short-term. But there's no reason to think that's the case over the long term and really I would point you to category consumption as the long-term indicator.

Bryan Spillane :

Thank you. Thanks operator. Good morning, everyone one. So, just two quick ones for me. Sudhanshu, just the flip of non-operational gains now not contributing as much, that's obviously good news. Is that a change in just the way you're going to treat them, one, backing them out versus including have things changed. So, some of these financial moves like, sale-leaseback just not as attractive anymore? And then the second one for you Bob is, just 2 million household penetration or new households - is 2 million new households in coffee brewers still a possibility this year? Or might that be little bit below that just given the current environment?

Robert Gamgort :

Brian, on the two million households yes, still our target for 2023 as we talked about a number of times, brewer sales are really a great predictor of household penetration. So, the two million is still where we're trending. The one thing I would point out is, as you know, we are heavily fourth quarter loaded. Holiday season, gifting we've done well in difficult environments that – in a difficult economic environments around that gifting because people go for more functional gifts during that time period. Our innovation pipeline, the promotions, the retailer support that we're getting for the fourth quarter, all was terrific, but got a lot of game left to be played in the fourth quarter. But as we sit here today, we are targeting two million.

Dara Mohsenian:

Hey, good morning.

Dara Mohsenian:

So, on the coffee side, you were very clear and comprehensive in your remarks on the second half improvement and what drives the improvement versus the first half. But in theory, it's a pretty big dichotomy. So, I guess it just be helpful to hear how much visibility you think you have at this point in coffee, particularly relative to some of the first half disappointment, maybe rank order some of the factors you mentioned in terms of driving that sequential improvement? But also just longer-term, broader context for the volatility we're seeing this year and what you think it sort of means for future growth prospects, as we look out longer term? And then be, I'm sure coffee will get a lot of the air time as usual. But we probably be remised if we didn't touch on the US refreshment and international strength in the first half of the year. How sustainable do you think are the factors there that have driven the strength as you think about go forward trends from here? Thanks.

Operator:

Our next question is from Andrea Teixeira with JPMorgan. You may now go ahead.

Sudhanshu Priyadarshi :

So, let me take the first one. First, I would urge you to think about back half in total with the cadence between Q3 and Q4 EPS, just the matter of phasing. Our second half growth is expected to be largely Q4 loaded reflecting the expected flow of investment spend and the cadence of pricing and productivity relative to inflation. In forecasting quarter three EPS, last year, we have no non-operating items in Q3. We had in Q4, which we expect that to be minimal. But the reason we is modestly higher year-over-year. There are three key components. One is U.S. refreshment beverages. We are lapping the year ago pricing and we are forecasting heavier investments. U.S. coffee positive OI growth as margin begin to inflect in quarter three and then more to come in quarter four. So those are the two main reasons mostly driven by our decision to invest more importantly. But I said, let's look at the second half and you will see that we have a strong EPS growth.

Operator:

Our next question will come from the Lauren Lieberman with Barclays. You may now go ahead.

Robert Gamgort :

Sure. Yes. Thanks for the opportunity for me to talk about the way - the way the system works. So, again, I go back to the very beginning and say that what we manage as an ecosystem that involves our brands, our partner brands and private-label brands, our retailer brands. And it's really important that retailers are considered to be a partner in this whole ecosystem, as well because, conversion of brewing by the cup are popped by the cup benefits all of the interested stakeholders in this. Our objective is really focused and hasn’t changed, which is we want to have a growing system. We want to category to continue to expand. We want the dynamics of that category to be constructive for everybody. Part of that is managing our own brands which we manage very separately from our partners. So there is no conflict of ventures. We manage those as a separate group within our organization that has no visibility into what our partners or private-label are doing and it allows us just to maintain focus on the category. For us, we see the opportunity for more pricing within our brands, within the category. If you take a look at our price gaps versus other forms of coffee, even though there's been pricing in the single-serve segment, the price gaps versus all forms of at-home coffee right now are the narrowest they have ever been. And in fact, we do believe they are at a point where it's actually not doing anything to drive category growth. Partners and that includes some of our retail partners and their private-label brands. Look, sometimes they have short-term objectives that are more share-driven. So, we see some of that promotional competition and that shift share between one brand to another, but it really does nothing for the category which is our focus. And so that's why when I take a look at our pricing, it comes back from being more restrained in the promotional environment, which allows us to protect margin. And again, if you go back to the highest level, the rational decision for us to make is to improve our margins in a growing category. And then, you did point out something about if owned in license brands are losing some share it might have some negative in mix impact. Fair enough that mix is as great as some people think it is as we said before. But I would then also point out that we're looking at pricing inflation and productivity. And the reason that people should believe that we're not concerned about that that difference of share is the visibility that we're giving you two improve in margin going forward. If it were a heavy negative impact on our business, we wouldn't be able to do that. So we understand all these weavers of pricing inflation part to be mix. And sometimes you have to trade out one for the other. We can do that for the long-term health of the system and the growth of the category, which is what we are focused on. And then your last point is about destocking of pods. It’s not something that we've seen at retail and nor do we expect to see anything of that nature.

Steve Powers:

Yes. Hey, good morning. Thank you.

Steve Powers:

I wanted to ask on the free cash flow conversion. Sudhanshu, you talked about the improvements to come which is great. I guess there a way to frame where you think you'll land on convergence for the year? And as we think ahead, is there any reason that a return to 100% free cash flow conversion or thereabouts is too ambitious for ‘24 and beyond? And I guess, within that, if there's any – is there any changes that you're thinking about or that you’ve implemented more structurally with regards to supply chain financing that’d be useful to know. Thank you.

Steve Powers:

And last point, are you through those changes? Or do you anticipate there may be still changes to come given where rates are and where they may go?

Operator:

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

Operator:

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

Operator:

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Keurig Dr Pepper's Earnings Call for the First Quarter of 2023. This conference call is being recorded, and there will be a question-and-answer session at the end of the call. I would now like to introduce the company's Vice President of Investor Relations and Strategic Initiatives, Jane Gelfand. Ms. Gelfand, please go ahead.

Robert Gamgort:

Thanks, Jane, and good morning, everyone. We started 2023 with good momentum. Our overall Q1 performance came in largely as expected and demonstrated the resilience of the modern beverage company we have built. We continue to manage well against a dynamic macro environment with the diversification benefits of KDP's model evident in our results. This morning, we reaffirmed our 2023 outlook, and we are confident in our ability to continue to deliver on our commitments as a company. For the quarter, consolidated net sales advanced a strong 9% versus the prior year, and adjusted EPS grew 3%. Consumer demand remained healthy driven by successful renovation and innovation, increased investment in marketing and modest elasticities across much of our portfolio. A narrowing gap between inflation and pricing coupled with increased productivity and favorable mix contributed to good flow-through to gross profit, though we continue to work through significant ongoing inflation in transportation, warehousing and labor costs. We expect the balance between these operating income drivers to turn more favorable in the back half of the year. In U.S. refreshment beverages, which represents nearly 60% of KDP consolidated revenue, our strong performance in Q1 demonstrated the depth of our capabilities across multiple dimensions including brand renovation, marketing, distribution and in-market execution as well as our partnership philosophy and successful track record. As discussed previously, we create value in U.S. refreshment beverages in 3 ways

Robert Gamgort:

Thanks, Sudhanshu. Before moving to Q&A, I want to take a moment to thank Maria who is retiring in July after a distinguished 40-plus-year career. She will remain with KDP as an adviser through year-end. I know that most of you hold Maria in the highest regard, just as we do at KDP where she has been a valued member of the executive leadership team for the last 5 years. Maria and I have worked together for over a decade, spanning 2 companies and countless deals, including an IPO. She has built a very strong corporate affairs team for KDP, and we are pleased that she will stay on as an adviser to support the transition to her successor upon hire. We will all miss working with Maria, and wish her the very best in this next and well-earned chapter. I'll now turn the call over to the operator for questions.

Andrea Teixeira:

So I wanted to go back. Bob, you spoke about like the brewer shipments. And then I understand the volatility that allowed you to change the reporting ways and merging the 2. I was just wondering, embedded in your commentary as well, you spoke about second quarter still being challenging and all the mobility aspects of the category. So if you can talk about a little bit of what are you seeing as we exit the quarter and as you lap the Omicron or [indiscernible] pandemic benefits for the in-house or at-home consumption? And then at the same time, I understand you don't disclose what is out-of-home, but there is some out-of-home component of the pod, so how should we be thinking about that as well as pantry destocking or retail destocking?

Operator:

The next question comes from Bryan Spillane from Bank of America.

Maria Sceppaguercio:

That's so nice, Bryan. Look forward to seeing you soon.

Robert Gamgort:

We'll wait for that.

Sudhanshu Priyadarshi:

Bryan, it's a great question. So you see Q1 operating cash flow is down versus a year ago, but last year, we had a lot of one-off items. So it's lower, mainly driven by those things, but also there is some timing of supply chain financing, we call it factoring. And this program was great in the beginning when interest rate was low, but we have a lot of options of our cash. You saw our leverage target is 2x to 2.5x. So we make the right optimal financial decision, whether it's interest rate, factoring also takes care of some interest rate is impact our P&L. So we're making a lot of those decisions. Those are dynamic. But when I sit today, I still expect that we should be pretty close to our long-term target of cash conversion. I don't see an issue here right now, but we will be making these like dynamic trade-off decisions every month, every quarter, and we will update you more if we see something different.

Lauren Lieberman:

Very much appreciate the conversation I'm trying to effectively almost smooth out the conversation on brewer sales in particular and also on pods across multiple quarters. But I was wondering why the comparison is being made to trailing 12 months ending the March quarter of '19 because that's basically comparing to 2018?. I wouldn't think that with the pandemic starting as it did that there was any big real acceleration in shipments. There may have been takeaway at retail, but shipments wouldn't have changed very much in those last weeks of March 2020. So why compare it to effectively 2018 rather than to 2019?

Robert Gamgort:

Yes. And just to build on that one, but one of the points is if you take a look at how we're expecting sales for brewers to play out in 2023, it's going to be up nicely versus 2019 or you could pick a date prior to 2019, all of which were years in which we added 2 million or more households. So one of the points we're trying to make on this is there were a number of upgrades and replacements that were accelerated during the pandemic cycle. You'd people spending more time at home, people were spending money on their home and also there was government subsidies as well. But if you're -- if in the end, we sell brewers as part of household penetration -- actually, the household penetration is what drives brewer sales primarily. And if you go back and you check '19, '18, '17, the 2023 numbers no matter how you look at it, are going to be up nicely versus that. And we added 2 million households in all of those years. And that's the point we're trying to make.

Christopher Carey:

Can you just comment on the coffee margin in the quarter, just given the volume decline I actually think it came in a little bit better? What are some of the drivers? What are you seeing from commodity inflation? What are you seeing from transportation? What are you seeing from volume deleverage in the quarter? And then also, what are you seeing from a productivity standpoint? This is a key kind of debate for investors. And again, I just want to understand some of the components that came in, in Q1 and maybe helping build confidence on what you expect for the full year, including the back half recovery?

Operator:

The next question comes from Steve Powers from Deutsche Bank.

Sudhanshu Priyadarshi:

So Steve, this is Sudhanshu. The reason we did this resegmentation, we didn't do it since we merged. When we merged, we were running the business the same way. But internally, this is our second chapter of KDP growth and we run the business, U.S. refreshment beverages, U.S. Coffee and International, so that's the region we're required to report results to you the way we run the business. We also feel that U.S. Coffee will give -- people will get a lot more visibility because we talk about 2 million households, people look at IRI and channel data. So it will help more clarification and people can relate to what internal numbers and external numbers are. Regarding refreshment beverages, you have the 3-year -- the 3-year margin and sales. So you can see from there that we will continue to disclose the key drivers of that performance. But that's the way we run the business. It's U.S.-focused. We're also taking noise from ForEx, we're taking noise from -- before it was Canada and U.S. combined. So a lot of those things will help you simplify it, and we will aid you if you have any questions on building your model. Nutrabolt this quarter was minimum is help us. But for the year, as we say, depending on the interest rate we pay, interest cost and also the equity pickup we will take, it's marginal. It will see more improvement or accretion to our EPS in 2024.

Brett Cooper:

Congrats to Maria as well. A question for you on distribution system. There's been a lot of change in the marketplace. And I think you're in a unique position given that your nondistributed volume goes through Coke, close to Pepsi route to market. And given that perspective, I was hoping you could offer your thoughts on the potential for distribution relationships and partnerships as a means to enhance scale capabilities and economics and then obviously, ultimately, brand performance in the years to come?

Operator:

Our next question comes from Kevin Grundy from Jefferies.

Robert Gamgort:

Early days on C4. We're in the mode of transitioning from their current distribution system into ours. I can tell you that that's gone very smoothly so far. And if you look at the syndicated data, you can see that the points of distribution are on the rise, which is really what our initial objective is. And it's more than just the quantitative increase in distribution. It's also the qualitative increase in terms of quality of placements, distribution -- I mean, on merchandising and placements. So all of that is very much going on track. And the good news is you'll be able to track our progress on both the distribution gain and you'll be able to monitor velocities through syndicated data. So you'll be able to track our progress. You want to talk about the growth contribution?

Operator:

Our next question comes from Bonnie Herzog from Goldman Sachs.

Robert Gamgort:

Sure. Sure. On our last call, we set the expectation for 2023 that brewers would be down modestly. When you take a look at it on a trailing 12-month basis, you see those kind of trends that we described here, down 9.8%. This quarter, as we said in the prepared remarks, was softer than expected. And I don't take a look at any one of these quarters and project it as a long-term trend. And there's a lot of volatility in this quarter compared to a normal quarter, which is -- which has volatility. And part of that, as we talked about is retail disruption with regard to some of the specialty retailers being really challenging and one of them going bankrupt. Having said that, other retailers will pick up the consumer slack and the consumer demand. And we will certainly be there in all those retailers. We have distribution everywhere. And a lot of this is moving online where we are very, very strong. And so as I said before, just like in quarters, we're plus 60%. We said don't project this quarter out anywhere that's the inherent volatility. I'm saying the same thing about this quarter. With regard to brewers, I mean inventory, it's not an issue from our standpoint. We managed that very, very well. So it's not a negative. And with regard to second half margins, expected reduction of brewers is not a driver of our margin assumption in the back half of the year, that's not built into any of our assumptions.

Peter Grom:

Maria, congrats as well. Maybe just two questions on coffee, maybe 1 just housekeeping. Bob, you mentioned Bed Bath & Beyond, how impactful is that to the business? I'm assuming it's embedded in the outlook, but just wanted to understand if there's something we need to think through as we model the growth from here? And then I guess I just wanted to follow up on Chris' earlier question around operating margin in coffee, but more from a long-term recovery perspective. I understand you expect improvement in the back half of the year. But how would you frame the long-term opportunity? And maybe more specifically, how quickly can you get back to operating margin in kind of the mid- to high 30% range?

Operator:

Our last question comes from Rob Ottenstein from Evercore.

Robert Gamgort:

Sure. Just to clarify on the pod conversation. The primary driver of pod volume is the mobility. And it's -- as I said before, time spent at home is the biggest driver of coffee consumed that no big surprise there, but it's a very direct relationship there. The run rate that we're seeing on mobility is relatively stable over the past couple of months, and we continue to expect that going forward. It's the lap versus year ago that becomes more neutral/favorable as you get to the second half of the year. And that's why we're saying in the second half of the year for all forms of adult coffee would look better on a volume perspective. The unique element in your comparison to Q2, in addition to the mobility comparison, is we were rebuilding inventory after the late -- it was Q4, Q1 supply chain issue. And so we outshipped ourselves in the second quarter of last year. And we were really clear when that happened and that was the rebuild of inventory. So that's why when we talk about Q2 being more challenged on a comparison basis, it's the combination of still the rebound in the mobility versus a year ago with this unique situation in Q2, which is the inventory build. With regard to digital, we don't have a lot of time to talk about that right now. I mean I think it's a conversation for another day. We have initiatives across the board in terms of the way that we plan and run the business as well as the way that we identify and optimize our consumer marketing. With regard to direct-to-consumer, we are -- we've talked before that we believe we are one of, if not the leader, in -- certainly in the food and beverage world in terms of direct consumer sales. And the technology that we continue to build on the Keurig side of the business, which is the connected brewers with the ability to understand consumption on a real-time basis, translating that into a smart auto reorder program is very exciting as we continue to move forward and build the number of households that have a smart brewer. So a lot more conversation on that point to come. I can't really do it justice in this period of time, but appreciate the question.

Jane Gelfand:

Thank you, Jason, and thank you, everyone, for joining us on a busy morning. The IR team is available to answer any questions you may have. So please do reach out. Thank you again.

Operator:

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Keurig Dr Pepper’s Earnings Call for the Fourth Quarter and Full-Year of 2022. This conference call is being recorded and there will be a question-and-answer session at the end of the call. I would now like to introduce Keurig Dr Pepper’s Chief Corporate Affairs Officer, Maria Sceppaguercio. Ms. Sceppaguercio, please go ahead.

Robert Gamgort:

Thanks, Maria, and good morning, everyone. In 2022, we continue to advance our vision of a modern beverage company by expanding our portfolio to reach more beverage consumers, needs and occasions and by enhancing our unique selling and after-market capabilities to make our brands available at every point of sale. Our full-year financial results were in line with or above our guidance with revenue growing by 11% and adjusted diluted EPS expanding by 5%. Since our Q3 earnings call, we had the opportunity to engage with many of you twice. First, at our early December in- person event, where you met the KDP Management Team and Board of Directors, and again, on our mid -December fireside chat, during which we discussed our investment in Nutrabolt, including the distribution agreement for C4 and answer questions regarding recent trends in the categories in which we compete. Those conversations provided us with a good sense of what's top of mind with our investors, which we will build upon during today's call. I'll start by providing perspective on the macro and category environments we faced in 2022, discuss how we created shareholder value over the past year and offer thoughts on how we see 2023 shaping up both in terms of the macro environment and our strategy to continue winning. Sudhanshu will follow me with specifics on our Q4 and full-year 2022 results, provide more detailed guidance on key metrics for 2023, and discuss the evolution of our capital allocation policy. While it seems like a long time ago, we started 2022 with the lingering effects of supply chain disruption, primarily driven by a final COVID wave that reduced labor availability in late 2021 and early 2022. We felt that impact most acutely in our coffee business where strong 2021 consumer demand had depleted our inventories and in our still beverage portfolio where we faced a range of supply shortages. We implemented supply recovery programs that yielded strong customer service improvements with replenished inventory levels. By Q2, our concerns around COVID and supply chain disruptions were quickly supplanted by industry inflation in ingredients and materials, labor, and transportation. That was outpacing significant pricing. Velocity held up well in the categories in which we compete, which enabled strong revenue growth, driven by both the higher pricing and increased volume, but came at lower margins. Store perspective, we faced total cost inflation in 2022 of 16% far above our expectations going into the year. And we implemented pricing actions across our portfolio that averaged in the low double-digits. Pricing realization was strong and accelerated throughout the year. Yet it consistently lagged the timing of the escalating inflationary impact on our P&L. As we approach the end of the year and enter 2023, we became more focused on the potential impact a recession on our consumers, despite seeing minimal evidence of changing behavior to-date. We are monitoring consumer behavior closely and are taking proactive steps to ensure our brand strength continues into 2023 and beyond. Of course, the wide range of challenges of 2022 is a continuation of the rolling set of obstacles we have navigated since the onset of COVID in 2020. In this context, we have discussed the benefits of our all-weather business model. This is more than a punchy sound bite; it reflects our ability to manage our broad portfolio in unique routes to market to deliver strong and consistent shareholder returns in an unpredictable and changing environment as we did in 2022 and every year since forming KDP in 2018. In addition to delivering our ambitious financial commitments over the past five years, we've also been immersed in an integration and transformation process that created a modern beverage company that today can consistently deliver attractive, high quality, dependable returns with a well-capitalized balance sheet. Toward that end, we have evolved our capital allocation policy to reflect that of a more mature KDP and to be contemporary with a changing macro environment marked by rising interest rates. During the integration and transformation stage, we had a strong focus on rapid deleveraging. Using all available levers available to us, while still investing in building our capabilities and brands. We took advantage of compelling opportunities to monetize non-strategic assets through sale leaseback transactions, which enabled us to simultaneously invest, delever and drive strong returns for our shareholders. As we shift from integration and transformation to activation, we are planning for a step change reduction in the use of non-operational benefits starting this year. That means our underlying operational growth will exceed our adjusted growth in 2023. Of course, our guidance will continue to be for adjusted metrics and we will report results on the same basis we've always done. But we will also highlight operational performance from time-to-time to provide you with a better sense of the underlying strength of our business. Strong cash flow remains a hallmark of KDP. As we discussed in December, we plan to deploy our cash to improve our long-term targeted leverage ratio to 2.5 times or below. While still funding strategic growth projects, and attractive return of cash to shareholders. With the learnings from 2022 in mind, I'll shift to a discussion of our 2023 outlook. Starting with the most pressing industry topic from last year, inflation. Our plan assumes the rate of inflation will moderate to the mid-single-digit range, that translates to a cumulative inflation rate of approximately 30% over the past three years clearly unprecedented in our lifetime. Regarding the inflation outlook for 2023, recent spot price declines of key inputs might lead some to believe this could be industry deflation. The reality is we don't buy on a spot basis and the underlying commodity cost doesn't reflect the total delivered cost to us. Such is certainly the case in coffee where seed prices dropped in late 2022. However, the differential, which includes everything in our fully landed coffee costs, such as broker fees, sea freight and premium coffee up charges was up meaningfully. Labor is another area in which we're continuing to see persistent inflation. To offset the continued impact of inflation, we have upped our game in productivity, reduced our discretionary costs and increased pricing. The realization of 2022 pricing actions will continue to flow into our P&L during 2023. And in some areas, where continued inflation impacts are not yet fully covered by pricing. We've implemented additional revenue growth management actions to address key margin gaps. The combination of moderating inflation and continued pricing realization means that we expect year-over-year improvement in gross margin in 2023, but not yet returning to 2019 levels. With higher gross margins in view for 2023, the conversation shift the demand. A key focus point for us in 2023 is the financial health of American consumers and its impact on price elasticity for the categories in which we compete. Therefore, we believe it's prudent to expect that lower, but still positive of year-over-year pricing realization combined with modest elasticities will yield KDP net revenue growth of approximately 5% in 2023. It's also important to be proactive in ensuring the continued strength of our brands by increasing our investment in growth in 2023. As we are all aware, industry marketing budgets were reduced during COVID and many haven’t yet been fully restored. While we have learned to be significantly more efficient with our brand spending, 2023 is the right time to increase our absolute investment behind key segments and brands, as well as the support a strong lineup of innovation. The improvement in our gross margin combined with 5% revenue growth will enable us to deliver year-over-year improvement in operating income growth. Even with our increased brand investments and the headwind of comping significant non-operational benefits in 2022. Taking all of the macro and company specific factors discussed this morning into account, we expect adjusted EPS for 2023 to grow by 6% to 7%. Removing the impact of previously disclosed non-operational items from 2022 implies adjusted EPS growth that is toward the high end of our long-term algorithm. Our expectation for continued strong value creation in 2023 is rooted in the success of our unique and flexible business strategy over the past five years. In cold beverage, our focus is on driving growth. First in core brands through marketing, brand renovation and continued strong end market execution. In 2022, we continue to build upon or hold the significant share gains we achieved over the past few years in total liquid refreshment beverages and key segments such as CSDs and premium water. Second, by filling white space in our portfolio through innovation and partnerships such as our strategic relationship with Nutrabolt for C4 Energy and our Red Bull agreement in Mexico, as well as our expansion into new platforms such as non0alcohol beer with our investment in athletic brewing and better for you drinks in foodservice through our partnership with Tractor Beverage. Third, by enhancing the effectiveness of our omnichannel selling and distribution system, including e-commerce, where we are one of the food and beverage leaders, and our company owned direct store distribution system. Over the past several years, we have built a stronger direct to market -- direct route to market capability through investment in capabilities and tools and acquiring key DSD distributor territories, all of which have driven consistently strong market share performance across our brands and segments. In coffee systems, we are focused on growth. First, by driving household penetration growth for the Keurig system every year. Given the large number of remaining addressable households, we have line of sight to continued household growth well into the future. As we enter 2023, we have built the U.S. installed base of 38 million households, which along with our installed base in Canada consumed more than 13 billion cups of coffee manufactured by KDP annually. Second, by expanding the roster of coffee partners in the Keurig system. 2022, we welcomed back community coffee and added new brands such as BLK & Bold, the first black-owned nationally distributed coffee brand and Intelligentsia, one of specialty coffee's most pioneering and innovative brands. Third, by creating new platforms to drive incremental revenue and profit growth from existing Keurig households such as connected brewers and new beverage formats and occasions. In 2022, we expanded our lineup of connected brewers with the introduction of K -Café Smart, which has received outstanding consumer and professional reviews, expanded the Keurig app, which works with both connected and non-connected brewers to help consumers make barista quality specialty coffee beverages at home and expanded availability of our Keurig’s Slim + ICED brewer and expanded our brew over iced pods. In 2023, iced will be a significant focus area procuring with expanded K-Ice machines and pods supported by dedicated marketing and focused retailer support. And finally, KDP's extraordinary free cash flow enables the potential for incremental shareholder returns through strategic capital allocation including M&A and partnerships, opportunistic share repurchases and growing our dividend within our stated payout ratio of 45% of free cash flow. With that as important context, I'll hand it over to Sudhanshu to discuss 2022 results and our 2023 outlook in more depth.

Robert Gamgort:

We formed KDP in 2018 as a pure-play beverage company focused on the North American market. In the U.S. alone, there are 1.2 trillion beverage consumption occasions in play every year. Beyond population growth, that number doesn't change much, nor do the fundamental consumer needs for beverages. What has and will continue to change is which beverage formats consumers choose to satisfy their needs and where consumers purchase their beverages. Compared to 2017, we served an additional 6 billion beverage occasions in 2022 through portfolio innovation, renovation and new partnerships. By executing our concept of a modern beverage company, which reflects our holistic view of all beverage opportunities, we've been able to better satisfy consumer needs, leading to our accelerated growth rate. We remain excited about the significant growth opportunities ahead. In 2023 and beyond, we'll continue to leverage our business model to capture even more of the trillion-plus beverage occasions each year in North America. I'll now turn the call over to the operator for questions.

Chris Carey:

Hi, good morning.

Chris Carey:

So I just want to clarify one thing than a fundamental question. So clearly, the non-operating adjustments have been a sticking point with investors. I gather from your comments on this earnings call that you're well aware of these dynamics and are making some changes going forward with specifically the guidance range, reflecting potentially the clean base. And so I just -- I kind of wanted to be crystal clear about this. The use of these non-operating contributor. And I appreciate there's an investment offset, but these will be kind of a thing of the past. And we can look at somewhat clean results going forward. Obviously, it was going to be dynamics every quarter, but these sorts of programs will be sort of sunsetted. Is that what I'm hearing? Then I have a fundamental question.

Chris Carey:

Okay. Very clear. Just on the expectation for gross margin expansion. I guess, I'm trying to frame that in the context of -- you gave an outlook for inflation and also, you're saying that you're going to be investing into marketing. So something like a mid-single-digit inflation. Is that sort of a COGS and SG&A is the right way to think about that inflation overall and then there'll be marketing on top of that? So that's quite a bit of increase. So I'm just trying to frame the gross margin expansion to need to offset that. So any context there would be helpful. Thanks.

Operator:

Thank you. And our next question today comes from Bryan Spillane with BoA. Please go ahead.

Robert Gamgort:

Good morning, Bryan.

Robert Gamgort:

Yes. Good question. Let me start with something I said a number of times in the past, especially when we've had quarters where the brewer sales were up significantly, and that is -- we're not in the business of selling brewers. We're in the business of driving household penetration. And while there is a correlation between brewer sales and household penetration, there's not this direct causation that we've talked about a number of times in the past. And what I mean by that is there are three reasons consumers buy brewers. It's a new household. It's a replacement of an existing brewer or it's an upgrade. And so there's a number of factors that you can see brewers sales down, and it has no impact on household penetration, because it means that somebody has delayed an upgrade, for example. So two things to point out in 2022 versus 2021, obviously, in Q4 is we were delivering 3 million new households in 2020 and 2021. So obviously, in 2022 with 2 million households, you would expect to sell fewer brewers. The other part is we have seen a challenged retail environment, and we referred to that in our script, particularly in specialty channels in some mass customers as well. And while we're working with them to continue to drive growth of the whole category and our brewers specifically. We also think it's smart to continue to look for other opportunities to pick up that consumer demand elsewhere, where the consumer demand is moving. A lot of that, as you know, is moving towards e-commerce. Having said all of that, I think your question on consumers making other choices. The reality of it is KDP brewers or cured brewers picked up share of all coffee makers and of small appliances. So it's not a decision to buy something in place as it, but there's clearly been some pressure on small appliances in general. And some of that is the rebound effect post COVID, but some of it is also due to some retail pressure that we described in the prepared remarks.

Kevin Grundy:

Great. Thanks, good morning, everyone. Bob, just to follow-up on Bryan's question, but very succinctly, as you kind of pull this together, look at household penetration, your confidence in the business, is this -- your Coffee Systems business is the expectation that this grows mid-single-digits longer term. I think that's really important, because it's a key debate for the stock. And then just my follow-up unrelatedly, just on the advertising and marketing increase. Bob, maybe just a little bit more color there on the magnitude of the increased key areas of spend, I think that would be helpful for folks as well. Thank you very much.

Sudhanshu Priyadarshi:

Bob, I can take the -- I can take the marketing question. So as we've said, our marketing spending will increase in 2023, but our learnings and marketing returns will decide which brand and how much we spend. So we don't have a top term marketing target, we will watch our brand formal and elasticity during the year, and then we'll make the decision of which brands we invest in.

Lauren Lieberman:

Great, thanks and good morning. So we want to -- I know we want to look forward and you've talked about plans on non-operating items for next year. But I did want to talk about the gross margin performance in the fourth quarter. Because my understanding had been that the expectation was for gross margin expansion and that kind of went the other way and then we had another sale leaseback gain. So I think it's important for people just to understand what went on with gross margins this quarter when that kind of changed versus an expectation for the things to be improving already. Thanks.

Lauren Lieberman:

Okay. And is that going to be a beginning in Q1 do you think? Or is it later in the year that, that starts to kick in?

Robert Gamgort:

Yes. And look, we have good visibility, obviously, for the early part of the year and what commodity pricing is in the first quarter for -- from a coffee perspective, is where we see the highest inflation and then it improves from there.

Brett Cooper:

Thanks. Good morning. You've talked about the underutilization of your bottling system. I was hoping to get a sense of how much of a step adding in brands like NutraBolt is to raising that utilization to your desired levels? Or is there more that needs to be done to get to where you want to be? Thanks.

Operator:

Thank you. And our next question today comes from Bonnie Herzog with Goldman Sachs. Please go ahead.

Robert Gamgort:

Yes. Bonnie, what I think is most interesting is if we just take a step back and say, let's look at at-home coffee in total. So we're a leader within at-home coffee, but we participate in this bigger category. I think what's most noteworthy in 2022, is there was a volume decline in all forms of at-home coffee globally, and single-serve actually grew its share of coffee consumption in the U.S. So from our perspective, on a relative basis, single-serve continues to outperform within at-home coffee. But at-home coffee volume decline was about 6% for the year. That's pretty notable. Our biggest -- our belief is that the biggest driver of that is consumer mobility. If you look at the first part of COVID, as we talked about in December, you would see acceleration in attach rates. If you looked at it in the recovery period from COVID, you see a deceleration in attach rates. And what happened, especially in the second half of 2022 is that there was this global slowdown in volume of coffee that's driven, we believe, primarily by mobility, but on a secondary basis, it'd be driven by some elasticity, because there was significant pricing in there. Why do we have confidence in this is because the Keurig System continues to outperform year in and year out within at-home coffee. None of us believe that at-home coffee is a long-term problem. In fact, it has significant tailwinds. This is just an adjustment as people are spending less time at home, more time out of home. We know that the number one driver of at-home coffee consumption is time spent at home. And it's as straightforward as that, and we expect to see the recovery in the category of at-home coffee to occur as mobility improves throughout the year.

Operator:

Thank you. And ladies and gentlemen, our final question today comes from Filippo Falorni from Citi. Please go ahead.

Robert Gamgort:

Yes. The great majority of the pricing that shows up in our 2023 P&L is carryover from 2022, and I'll remind you that we took extensive price actions in 2022, and they did not flow through to the P&L all the way through in ‘22. So that's happening. We did take some additional pricing actions in the early part of ‘23 on our packaged beverage business to close some of the remaining margin gaps. So that will flow through as we move into the remainder of 2023, but that's all that we have planned right now.

Maria Sceppaguercio:

Hi, everyone. This is Maria. We are around today to take your questions. We'd love to connect with you afterwards if you have any. Feel free to call as usual. Have a good day.

Operator:

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Keurig Dr Pepper’s Earnings Call for the Third Quarter of 2022. This conference call is being recorded and there will be a question-and-answer session at the end of the call. I would now like to introduce Keurig Dr Pepper’s Vice President of Investor Relations, Mr. Steve Alexander. Mr. Alexander, please go ahead.

Ozan Dokmecioglu:

Thanks, Steve, and good morning, everyone. Giving that this is my first earnings call as CEO, I would like to start today’s discussion with my thoughts on the KDP operating model, and a strategic approach that makes us unique in the CPG space. Our focus continues to be on managing our business for a range of potential macro outcomes, and leveraging the all weather business model we have created to drive success. Regardless of the environment, we may face. Our results this quarter, and the consistency of our performance since merger are a testament to the strength of this model, which has continued to perform well in the highly volatile macro environment our industry has faced since the onset of COVID. And, most recently, our portfolio has performed well with significant levels of inflation, and pricing, along with a challenge consumer landscape, demonstrating its recession resistance. With elasticity impacts remaining modest, and our market share positions remaining strong. Our business model starts with an attractive and competitive organic total shareholder return algorithm, which is driven by a flexible and scalable strategy. In cold beverages our strategy is focused on driving growth. In core brands, through marketing, brand renovation and in market execution by filling whitespace in our portfolio through innovation, and partnerships, such as our Polar Seltzer partnership, and the recently announced Red Bull selling and distribution agreement in Mexico, which we will touch on a bit later. And by enhancing the breadth, depth and effectiveness of our omni-channel selling and distribution system, including our company owned direct store distribution system. The investments we have made in selling and distribution over the past several years have built a stronger go to market capability that has driven consistently strong market share performance across all the brands and beverage segments. In coffee systems, we are focused on driving household penetration growth for the Keurig system at the rate of approximately 2 million new households every year. Given the number of remaining addressable new households for the Keurig system, which we estimate at more than 50 million. We have line of sight to household growth well beyond the next 10 years and consumer mobility continued to increase. KDPs, LRB dollar consumption increased more than 11% in the quarter. Growing LRB share in both the quarter and year-to-date periods, reflecting the benefit of pricing that was only modestly offset by volume, which remained quite resilient, with elasticities below the category in both periods. We continue to benefit from healthy categories as strong portfolio of leading brands, and very effective in market execution. The strong performance in the quarter was broad based and led by share gains in premium waters and seltzers, teas, apple juice and fruit drinks. In carbonated soft drinks our performance also continued to be strong, with dollar consumption up 12% in both the quarter and year-to-date periods with our share up year-to-date. We are pleased that we continue to expand on the impressive share gains we generated over the past couple of years. Within carbonated soft drinks our zero sugar innovation continues to perform well. With modulus elasticity impacts, and stronger velocities, then the overall zero sugar and diet category. In premium water, core hydration group dollar consumption 35% in the corner, driving almost two full points of share growth. Snapple led by the success of our Snapple brand refresh, and Snapple elements drove dollar consumption growth of 15% and share growth of almost one full point in the quarter. And in seltzers our partnership with Polar that continues to drive growth for the brand with ACV increasing six points and share gains of two points. Moving to coffee. Before discussing category dynamics, let me quickly share some context on our business and the performance improvements that are now beginning to materialize. You will recall that the combination of consistently strong consumer demand and supply constraints led to a port shortage starting in late 2021. Consequently, we fall back on our demand investment, as did most of our partners and lounge, the coffee supply chain recovery program to increase port output and rebuild finished goods inventories for all parties in the Keurig ecosystem. We completed the program last quarter and have now restored inventories across the ecosystem which enables us along with our partners and customers to resume investments in demand generating programs to drive category growth. As a result, the single server port category continues to recover from supply constraints. We store our consumption up 6% in the quarter, advancing to 7% in September, and off to a good start in quarter 4. There has been considerable noise in the broader at home coffee category numbers well beyond single serve coffee that is worth discussing further. A combination of increased consumer mobility, retail price actions, and the reduction in advertising and promotion spent the latter related to the single service supply challenges negatively impacted at home coffee category demand over the summer. Our analysis suggests that consumer mobility had the outsized impact with mobility returning to more normal patterns once the school year started, we are seeing sequential improvement in at home coffee demand. Importantly, single serve coffee outperformed all other forms of at home coffee during quarter 3. Further away from home coffee category while still down significantly versus pre-COVID levels continues to improve with further runway as returned to office behavior builds. Looking specifically to KDP coffee performance, KDP manufacture port consumption was up 4% on dollar basis in the third quarter, with owned and licensed brand consumption growing by 5%. As the McCafé donut shop and Green Mountain brands posted the strong growth. Performance is ranked during the quarter with year-over-year dollar and volume share advancing sequentially in September versus July and August and continuing to improve into the fourth quarter. KDP continues to maintain its strong leadership position in the category with market share for KDP manufacture ports at approximately 82%. Moving forward, we expect mix to shift for KDP manufactured ports from private label to branded as community coffee comes on board beginning late this year. Turning to brewers. Today, we are confirming that we are on track to add 2 million new households into the Keurig system in 2022, which is consistent with our long term algorithm. As discussed many times, we expect the elevated rate of 3 million new households that we attracted in 2020 and 2021 to normalize post-COVID and that’s exactly what’s happening in 2022. Of course, we don’t need to sell as many brewers to support 2 million new households as we did to support 3 million, which explains the 15% decline in brewer shipments in the third quarter. Remember, we are in the household penetration business, not to brewer sales business as the last the break even on brewer sales and generate nearly all of our profits from attracting new consumers into the Keurig ecosystem. Taking a longer term perspective further brewer sales were a healthy 16% above 2019 and on a year-to-date basis brewer shipments are up more than 30% versus the first three quarters of 2019. In addition, single serve brewers continue to hold the number one position in the at home brewers segment and KDP continues to grow share driven by strong innovation across all consumer price points. Finally, our Latin America beverages segment continued to pass exceptionally strong results in the third quarter. Net sales advancing 29% and operating income was up 14%. The latter on top of all the 8% growth in the fourth quarter of last year. Leading this strong performance in the quarter were Peñafiel, Clamato, Mott’s and Squirt. Earlier this month, we announced a strategic partnership to sell and distribute Red Bull in Mexico starting in quarter four. The majority of the revenue we generate in our Latin America beverage segment is from Mexico. And we are excited to enter into this win-win partnership with Red Bull which will strengthen our position in the energy category, improve our go-to market scale and drive efficiencies over time. And now, I will hand it over to George to cover our third quarter performance in a bit more detail.

Ozan Dokmecioglu:

Thanks, George. Before moving to question and answer, let me spend a moment on recent organizational announcements. On Monday, we announced the appointment of our new CFO, Sudhanshu Priyadarshi who will be joining us on November 14. Sudhanshu is a seasoned global finance, strategy and operations executive with significant goal about experience including in the beverage and retail industries. He will be a strategic partner to our team as we deliver against our commitments, scale our business for growth, and continue to successfully navigate the complex macro environment. We look forward to introducing him to you soon. Earlier this month, we announced a strategic realignment of our supply chain organization to accelerate enterprise wide productivity and speed of decision making. In doing so, we leveraged our strong supply chain bench promoting three experienced supply chain Leaders. With Roger Johnson becoming our new Chief Supply Chain Officer. It all builds on our strong supply chain foundation, and we believe positions as well as we head into 2023. In closing, we believe that our attractive organic growth coupled with our significant inorganic value creation opportunity will enable us to continue to drive strong total shareholder return results over time. We are excited about the talent and structure we are building to continue to execute against our opportunities with excellence. I will now hand it back to the operator for your questions.

Bryan Spillane:

So Ozan we got a lot of questions this morning about brewer shipments being down in the quarter, as much as they were. I know, you talked a little bit about this dynamic even earlier at the Barclays conference back in September. But I guess can you help put this into a little bit more context? How this tracked relative to what your expectations were? Maybe about your also just how you’ve planned for holiday this year against this backdrop where there’s certainly going to be less discretionary spending. And maybe within that, just how you’re addressing maybe the value equation of the Keurig system against the backdrop of consumers tightening their belts.

Operator:

Our next question will come from Lauren Lieberman with Barclays. Please go ahead.

Ozan Dokmecioglu:

Thank you, Lauren. And so I will break your question, I believe into four parts. And the first part, the answer for your first part of the question. Yes, absolutely. And our guidance, not only on our planning stance basis, but in reality as well, that includes to deliver 2 million incremental households for 2022. And we are quite certain on our numbers. As you know, we have the tracking mechanism. And that’s where we are at this point in time. When we step back and look at it with regards to the slowing down the consumption. Obviously, there are quite a bit of noise that we need to do a double click and provide the context. A combination of the increase in mobility especially in the summer months, following the post-COVID environment, along with retail pricing actions, combined with the less investment into advertisement and promotion as well as consumer activities, which the latter one complete the lead due to supply chain port supply issues that we have encountered. And then we got out of it fully at the end of quarter two. So all these combinations, and our analysis also suggests that the mobility increase was the outpaced one, an outsize one that impacted negatively the consumption in terms of the port consumption. However, with the investments coming back, and this life going back to more normal, like the school season kicking in, and also people are starting to go back to more to the offices, we started to see improvement in the consumption. For example, when you look to the market data, in September versus July and August, you will see an improvement. And we are also off to a good start into quarter four, which is October. Therefore, we have reflected all these into our plans for the remainder of the year. And we are quite certain that our growth in the single serve, we’ll continue both from a top line and the bottom line perspective. And as we said in our prepared remarks as well, quarter three had the highest absorption rate in terms of the green coffee beans, which created quite a bit of pressure in our P&L in Q3. The good news is that is behind us. Therefore the inflation rate that we are going to see in quarter four is going to be significantly less versus the first three quarters that we have seen due to the spike of our base last year. Therefore, several factors that will enable us to deliver a very good corner in coffee in quarter four. So that’s the important part. And the last part of your question with regards to the private label. When we actually look to the entirety of our portfolio, we will see that our private label exposure is limited. Especially when you look to the carbonated soft drinks, we have very limited competition coming from the private label. When you look to the fruit juices that is through there’s a healthy amount of competition in the private label yet, as the data, I’m sure that you have looked at it, we continue to increase market share in that category, which we have been really doing well on the basis of our innovation and market execution in the strong brands of portfolio that we have. And on the coffee private label, please remember that we are still the largest producer, and the manufacturers of the single serve K-cup pods for the private label sector as well. So if the private label increases share or there’s a trade down going on, we will still contribute and participate to the economics of that, given that we are still producing a vast majority of the private label K-cup pods. That’s why we believe that our ecosystem is really intact, again, goes back to our old weather business model between the cold beverage and the coffee. And we expect to have a very strong Q4 across the enterprise. Bob would you like to add anything?

Operator:

Our next question will come from Nik Modi with RBC Capital Markets. Please go ahead.

Bob Gamgort:

I’ll start with the M&A environment. Ozan you can pick the second part of that question up. As we monitor the M&A environment. And we continue to see what we described previously, as the relatively easy funding situation for high growth companies starting to change and that continues to do so new investment for them is becoming more challenge. If you look at the public valuations as a marker for the few companies in this space that match that high growth criteria, you can see the change in investor sentiment reflected there pretty aggressively. So we continue to see an opportunity for us to be a catalyst. Our goal is always create win-win partnerships, we’re not out there trying to buy something at a low price, we’re really trying to step in, and be able to solve a number of challenges for these high growth businesses, by creating a partnership that works for everybody and take a look at what’s happened just in the recent past with Polar, and beverage AT peak. And now in this call, we’re talking about Red Bull in Mexico. If you think about it every call, we talked about a new piece of news where we’re layering in more strategic businesses or segments into our business. And as that continues to build, it makes us a stronger company going forward. I would also add to that list all of the independent distributor acquisitions that we’ve made over the past couple of years that significantly strengthens our distribution system. So we’re going to continue to do so. I would say that as we continue to engage in these discussions, and we have numerous discussions right now, we’re very clear in our strategic priorities. We’re really confident in our ability to assess the value to KDP and KDP shareholders. And we’re incredibly flexible in our approach to have on how to make these partnerships work. If you look at the track record of our success in creating value and growth for the partners I just described, as well as the continued growth that we have on our long term partners like Evian and Vita Coco and McCafe that is very attractive to emerging beverage companies. And so it allows us to have a seat at the table in a number of these conversations. And we’re very optimistic and we will continue to play out in the way that I described. We’re talking about the interaction, medium coffee.

Operator:

Our next question will come from Chris Carey with Wells Fargo Securities. Please go ahead.

Ozan Dokmecioglu:

No problem. Thank you very much. So I will break up your question into three components. So first of all the major drivers and how are we looking to the profitability of coffee in quarter three. The major determinant and the driver of coffee P&L in Q3 was the absorption rate of the coffee beans, green beans which is obviously our raw material that we use in terms of the negativity that it calls in our P&L. Why? Because when you looked over base last year, you will see, and we alluded to this during our quarter two call as well. Last year, we had several hedges that came off in Q3 which means that our inflationary step up was significantly higher in Q3 with regards to the coffee beans versus the other quarters. The good news that’s behind us. That’s one of the reasons why we have solid plans and we expect to see significant profit improvements in quarter four as well. At the same time, our pricing continues to build up and we believe that in quarter four, we will be in a position that our pricing will fully catching up to the inflationary factors. As you said, the inflation was broad based. It’s not only coffee beans, but across the other materials and the ingredients that we have been using. But our algorithm clearly suggests that Q4 will be a very good inflection point not only for coffee, but for the cold beverage business that we also have and is basically mirrored in coffee P&L we expect to mirror more or less what has happened in the cold beverages as we have been expecting and communicating which was the pricing quarter in quarter out was getting closer to the inflation and at one point that pricing would be fully sufficient to overcome not only the absolutely the impact of the inflation but the margin percent wise as well. And that’s what has happened in our for example when you look to beverage concentrates and the packaged beverages segments that we have announced and we expect that positive trend to continue into quarter four. So coffee is a little behind like a quarter but that’s what’s going to happen exactly. And we should not also forget that obviously we are continuing to build the productivity programs and Q4 as has always been the case would be the highest delivery quarter for us at the same time. Therefore, we see Q3 coffee inflationary trends in relation to the pricing in the negative operating income delivery at transitory quarter for us and we expect a very strong quarter for the reasons that I have just articulated. Absolutely, we do not expect any structural issue or reset with regards to the coffee margins going forward. And as I say, we will we see a very strong actual the improvement in quarter four. There is no any reason and, and as we discussed before, obviously, coffee margins is one of the highest in our overall CPG industry as well at the same time. Therefore, we were very pleased, and we are very pleased, and there is no instructional change that we are forecasting for any reason. The last part of your question with regards to the 54th week, extra week in coffee, as we said before, it is true that we have few days, not even a week because of the holiday season and most of the retailers being shut. And the consumption in that, sorry, the sell out in that week, which is the last, very last week of December is the slowest. And it’s almost minimal, not is almost but it is very, very small number that wouldn’t change our profile with regards to the quarter four. It will have a little impact to the growth rates as well. That’s why we have not quantified that number that we spoke before and communicated giving the very minimal impact on our numbers.

Bonnie Herzog:

I wanted to circle back to brewers with a question, hoping you could touch on your inventories, which are quite high up 60% this year. So wondering how much of this might have to do with retailer inventory levels of brewers being elevated and then therefore retailers aren’t ordering or buying as many brewers? Is that is something that’s going on? How big of a risk do you believe this is in the next quarter or two for you? And then a quick clarification of your mid single digit EPS guidance for this year. Last quarter you mentioned you expected your second half EPS to be up high single digits driven largely by Q4. So just wanted to verify that high single digits in 2H is still expected or is maybe mid single digit growth more realistic. And that would I guess, result in your full year EPS growth possibly coming in at the low end of mid single digits? So just clarification on that two please. Thanks.

Bob Gamgort:

Let me add, I think, Bonnie your question. And Bryan also hinting at potential concerns about the environment in Q4. Let me make a couple of points on the holiday season this year. One of things that we’ve seen is that whenever there’s a challenging economic time, gifting tends to shift from the indulgent or frivolous to functional. And there’s no better functional gift than a Keurig Brewer. We have a wide range of price points from entry level all the way up the premium, we have an incredibly wide range of retail distribution, from e-commerce to all channels of brick and mortar distribution. And we’re already seeing a number of retailers very early, are already pushing Keurig as one of their premium or prime promotions going into the holiday season. And we continue to expect to see more of that. So I know there’s some concerns, as you guys have articulated about inventory levels and purchase power and small appliances. But as Ozan pointed out, if you double click on this, you see that single serve brewers and Keurig, in particular are doing incredibly well. And we expect them to have a strong holiday season. But again, all consistent with driving 2 million households, a penetration, which is what all of this is about.

Operator:

Our next question will come from Brett Cooper with Consumer Edge Research. Please go ahead.

Ozan Dokmecioglu:

Absolutely. I mean, we always look for opportunities across our business, either how we operate, the ways of working, that we also align our organization accordingly. As you know, approximately two years ago, we moved a little bit from the functional to more business unit lead organization structure, and these data moves are in support of that move, taking it to the next level, nothing new is around the edges. And now that we have any issues or we have encountered in our supply chain or any unresolved issues that we are trying to tackle. To the contrary, as we have been talking at many different platforms that our supply chain organization as well as its supply chain fundamentals improved drastically across two businesses that we have in the cold beverages, especially in coffee. Therefore, this organizational change is making our supply chain to get even closer to the businesses that we do expect to see faster decision making with at the right time with the right players around, which will eventually impact our productivity programs as well. And a little bit more info on how this change may impact our productivity programs a bit, the first six to nine months because of the supply chain issues that we have faced, especially in coffee but not limited to coffee. In some brands, important brands like Snapple, as we communicated publicly before and by and a little bit in the CSS that we ran into some supply chain issues. In fact, the focus whether we liked it or not that went towards getting collecting all those issues that we have faced, because that’s what we should have been doing. And this, putting those problems behind us. And with the new organization that we made, the small changes now will enable us to focus on much more productivity delivery, either in quarter four or next year as well. So this is the sum up of the impacts that we expect from the latest supply chain changes. Thank you very much.

Andrea Teixeira:

Thank you. Good morning. So I also want to have a clarification on the coffee side. I’m sorry for going back to that and then Bob on M&A. First, can you comment a little bit on the sell out for the brewers from a replacement standpoint, which I understand is still bigger than the new households, of course, the razor blade model, we would like more households, but I don’t want to underestimate what’s happening on the future to single serve. And then Bob on the Red Bull distribution agreement in Mexico first, congratulations on that. And should we see more of these in isolation, but or perhaps testing the waters for potentially expanded agreement including the U.S. and if not, given your firepower M&A how we should be thinking about opportunities in energy. Thank you.

Bob Gamgort:

Yes , I’ll refer back to our investor day a little over a year ago where we talked about the role of M&A and partnerships. And we said that we had a number of criteria. One is we want to add on to our existing portfolio and leverage the infrastructure we have in place, particularly our DSD system. We were really interested in new platforms, particularly in energy and alcohol, where we saw good whitespace opportunities. And we also talked about we’ve got these incredibly strong businesses in Canada and Mexico that we really don’t talk much about. And we saw opportunities there. So quick, simply, when I look at the new arrangement with Red Bull and Mexico we think about that hits on energy. And it hits on continued expansion in Mexico, [indiscernible] was expansion within Canada. So we’re beginning to add into these opportunity areas that we identified about a year ago in a more aggressive way. And all I will say on the Red Bull Mexico piece is our goal is to do what we do with all of our partnership, which is demonstrate incredibly strong value added for our partners, drive growth for them. And that always leads to more opportunities in the future. And I would expect that that would be the same in the case of this one. Before I think I’m turning it back over to Ozan before I do that I have to in my new role here, I have to say we didn’t get a single question on our cold beverage business today. And I want to give a shout out to our cold beverage team who delivered another incredible quarter of revenue growth, market share performance, record profitability, and they continue to hit it out of the park and they kind of feel left out on some of these calls. So I will acknowledge their strong performance as it shows up in our EPS in our overall financial delivery to KDP. So Ozan back over to you.

Steve Alexander:

Yes, this is Steve with our team around all day if you have any questions and we thank you all for your time participating on the call today. Thanks and have a great day.

Company Representatives:

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

Steve Alexander:

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

Ozan Dokmecioglu:

Good morning everyone! Bob provided an overview of our successful growth strategy, and I want to spend a moment to highlight our quarter two results in the context of our overall strategy. On a total company basis, net sales advanced 13.5%. With net sales up more than 10% and volume mix up more than 3%, with all four segments posting strong growth. KDP adjusted gross profit increased 10%, while adjusted gross margin declined 180 basis points, reflecting the timing gap that remains between pricing and inflation. During the quarter we experienced cost of goods sold inflation across all inputs, including ingredient, packaging and manufacturing labor. In addition, we also experienced a much higher rate of inflation in transportation and warehousing. At the time of robust consumer demand and SG&A inflation was also significantly higher. Taken together, our total inflation for the quarter exceeded 17%, which was more than two percentage points higher than the 15% we experienced in quarter one. As a result, adjusted operating income declined slightly, a significantly higher cost to serve offset the 10% increase in adjusted gross profit in the quarter. All-in, adjusted net income increased approximately 3%, reflecting a lower adjusted tax rate and lower interest expense. Adjusted diluted earnings per share also increased 3% to $0.39, and we closed out the first half of this year very much as expected. Free cash flow for the quarter at $600 million continued to be strong, driving a free cash flow conversion ratio of 108%. Let's shift to a discussion of segment performance starting with Coffee System. I'm happy to report that our Coffee Supply recovery plan has been completed ahead of schedule, with part manufacturing output restored to levels that will provide full service to our partners and retailors. While that success came at a cost, as we discussed last quarter, it sets us up for a strong second half of the year. For the quarter, Coffee Systems net sales were up 9%, driven by both higher pricing and increased volume mix, reflecting strong sequential improvement in sales. For the quarter pod sales grew 10%, led by both higher pricing and higher volume mix, while brewer sales grew almost 6%, led by higher pricing that was partially offset by lower volume due to the 29% volume growth comparison in quarter two last year. Marketing investment in quarter was up slightly. Single-serve coffee category pricing was up nearly 9% during the quarter based on IRi as coffee brands and retailers mitigate the impact of inflation, particularly in coffee with new price actions. We have noted a few industry reports direct linking category volume deceleration in IRi with pricing actions and attempting to draw conclusions on elasticity. In addition to our typical caviar that syndicated data reflects only about 50% of total pod sales, let me also caution you that there is significant noise in the category numbers in quarter two. Due to the impact of supply chain issues, including out of stocks and significantly reduced category, promotional and marketing support. There are also some timing impacts from consumer mobility with regard to out-of-home coffee consumption during the quarter. As we move into the second house, we continue to expect a strong dollar consumption growth in the category with some ongoing volume pressure related to increased consumer mobility compared to the prior year. This is consistent with our prior expectations that at-home attachment rates would eventually return to pre-COVID levels and we are continuing to see this occur. At the same time, we are seeing improvement in office-coffee, which we expect to gradually improve over time. In this dynamic environment we continue to track the relationship between single-served coffee pricing and other forms of coffee, including out-of-home coffee. Despite the increase in single-serve pricing, the gaps between core months have remained consistent as all-forms of coffee have increased in price. Let me shift to some highlights of coffee system growth drivers. In quarter three, we will nationally launch our new K-Cafe smart brewer, which in one machine, the representation of the cumulative enhancements we have made to curate brewers over the past five years. The K-Cafe smart is enabled by our connected Brewer ID Technology that recognizes the pod and adjusts the brew for a perfect Cup. It also features multi-screen technology, which enables a wider range of temperature and strength, including our best ever Brew Over Ice coffee delivery yet. This new brewer also incorporates a new multi speed product to enable consumers to create capuchins, lattes and other specialty coffees, guided by an interactive recipe experience, located in the Keurig App. Taken together, the K-Café Smart enables consumers to create a coffee shop experience in home, at a fraction of the cost, and with greater appeal to younger households. With our continued smart technology development, we remain on track to reach 1 million connected households in the next few years, which continues to unlock new platforms such as SMART Auto-Delivery for pods. The enhancement to Keurig System Quality and innovation continue to be recognized by key industry players and we are pleased to announce the addition of two new Super Premium Coffee brands into the system with Intelligentsia and BLK & Bold joining our roster of Keurig partners. In addition to enabling Keurig system to reach premium consumers, with price points of around $1 per pod, the participation of these events provides a strong endorsement for the quality of the coffee delivered by our new brewers. Last quarter we shared that Community Coffee will also be joining the system as a partner brand. The production of K-Cup pod or Community began this month and our license pods will be available on keurig.com and at retail nationwide later this year. In addition to adding new brands, we have had great success in driving growth in existing brands. McCafé which you will recall joined the Keurig System as a licensed brand a few years ago was the fastest growing brand in Single-Served Coffee this past quarter. Shifting to cold beverages, we again grew or held market share across the vast majority of our portfolio. In carbonated soft drinks, we grew dollar consumption by 11% in the quarter and are holding on slightly expanding the substantial share gain we achieved over the past two-plus years. This past July 4 holiday represented the 23rd consecutive holiday period in which KDP grew carbonated soft drinks market share. We are doing this by leveraging the strength and differentiation of our portfolio, successful innovations such as Dr Pepper and Cream Soda which was recently ranked by IRi as the Number 1 food and beverage Pacesetter for 2021, as well as exceptional in market execution and effective marketing. CORE Hydration and Snapple are two examples of strength in our non-carbonated portfolio. Both of which has been held, backed by supply chain disruptions last year. CORE is the fastest growing brand in the Premium Unflavored Water Category this year with dollar consumption dropped off for the 1% in quarter two. Snapple is benefiting from investment in the Snapple Brand Refresh launched last year, which continues to attract younger consumers and build momentum for the brand, driving dollar market share growth year-to-date. We have also had great success in driving growth for our partner brands with Polar Seltzer becoming the fastest growing and a suite in sparkling water brand in the category, advancing market share two full share points to 10.3% in the quarter and continuing to grow. In addition, Vita Coco grew over 16% in the quarter, advancing Household penetration by 9% and dollar share by more than 4 points to 54%. Within cold beverages, packaged beverages net sales were up 13%, driven by both higher pricing and increased volume mix, with elasticity impact remaining modest. Increased marketing investment and strong in-market execution supported continued market share growth in the quarter. For Beverage Concentrates, net sales were up 23%, reflecting higher pricing, including the benefit of favorable timing related to trade accruals and higher volume mix. Finally, for Latin America Beverages net sales were up an impressive 27%, balanced between higher net pricing and increased volume mix, supported by a significant increase in marketing investment. Elasticity for the segment remained modest. Latin America beverages has been a consistent with strong performance, led by a portfolio with strong brands such as Peñafiel, Clamato, Squirt and Mott's. On a two year basis net sales in the quarter increased more than 50%. During the quarter we announced an agreement to acquire the global rights to the non-alcohol, ready-to-drink cocktail brand Atypique, which is a highly unique offering in the emerging and fast growing non-alcohol coffee segment in Canada. This new platform complements our strong and successful ready-to-drink alcohol portfolio in Canada and provides KDP with incremental growth opportunities in an exciting new category. We completed our minority investment in Tractor Beverage and signed an exclusive sales agreement to expand innovation in food service channel, leveraging the strength of our fountain foodservice sales team. As we announced last quarter, Tractor offers the first and only certified organic, non-GMO beverage solutions specifically tailored to food service operators. While these are great examples of the small but strategic investments, let me turn it over to Bob to provide some commentary on the broader capital allocation and M&A opportunity for the KDP, which will be one of his key focus areas as Executive Chairman.

Ozan Dokmecioglu :

As indicated in our press release, we are including our guidance for full year constant currency net sales growth to the low double digit range, while reaffirming adjusted diluted earnings per share growth in the mid-single digit range. We continue to expect adjusted earnings per share growth in the second half to reach the high single digit range, driven by strong performance in the fourth quarter, leading to meet single digit growth for the year. Supporting this guidance, we continue to expect the following unchanged assumptions. Adjusted interest expense is expected to approximate $430 million. Adjusted effective tax rate is expected in the 22% to 22.5% range and diluted weighted shares outstanding are estimated to be approximately 1.43 billion, assuming no additional share buybacks. Finally, given the current environment, I want to share some detailed perspective on our expectations for the second half. At this point in the year we are lastly covered on input costs and have good line of sight to price realization. Quarter four is expected to be the strongest of the year in terms of earnings per share delivery, while quarter three is expected to look much like quarter two. The primary driver of the phasing of our second half results is the timing relationship between pricing and inflation. You will recall that inflation in quarter one was 15%, which advanced to more than 17% in quarter two. We expect inflation to be even higher in quarter three, largely driven by our Green Coffee positions. Because we are getting the benefit of more pricing in our quarter three P&L, we expect to offset this incremental inflation to deliver EPS growth for the quarter. In quarter four we expect the rate of inflation versus the prior year to be roughly half the rate of quarter three. As a reminder, we will be lapping the significant spike in inflation we experience in quarter four last year and we realize the full benefits of pricing already taken, which will enable us to offset inflation and deliver margin improvement in the fourth quarter. Finally, I want to acknowledge that tomorrow I will assume the CEO role of KDP. I'm honored to take on the leadership of this great company, including our 27,000 dedicated employees and I greatly appreciate the endorsement and support of Bob, our Board of Directors and our Executive Leadership Team. Looking ahead, I couldn't be more excited about the growth potential I see for KDP in this new chapter. We have the opportunity to leverage all the progress we've made since the merger to further strength our brands, enhance our go-to-market capabilities, build our world class team. Doing this will enabled us flawlessly to executive our strategic plan, while standing ready to proactively capitalize on new opportunities that come our way and face whatever macro challenges arise, just as we did in our last chapter. The KDP team has distinguished itself as flexible, nimble and fast and it is these key attributes that will again differentiate us moving forward. I will now hand it back to the operator for your questions.

Bryan Spillane:

Thanks operator. Good morning, everyone.

A - Maria Sceppaguercio:

Good morning, Bryan.

A - Ozan Dokmecioglu:

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

Bob Gamgort:

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

A - Bob Gamgort:

Okay, thank you.

Bonnie Herzog :

Thank you. Good morning, everyone.

Bonnie Herzog :

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

Bonnie Herzog :

Alright, it makes sense. Thank you so much.

Operator:

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

A - Bob Gamgort:

Good morning, Kevin.

A - Ozan Dokmecioglu:

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

Kevin Grundy:

Very good. Thank you both.

Operator:

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

A - Bob Gamgort:

Good morning.

A - Bob Gamgort:

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

A - Bob Gamgort:

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

A - Bob Gamgort:

Sure.

Chris Carey :

Hi! Good morning.

Chris Carey :

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

Bob Gamgort:

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

Bob Gamgort:

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

Operator:

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

Ozan Dokmecioglu:

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

Operator:

Was there a follow-up Mr. Cooper?

Bob Gamgort:

Alright, thanks Brett.

Operator:

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

Bob Gamgort:

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

Ozan Dokmecioglu:

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

Bob Gamgort:

We haven’t talked about that specifically, so.

Operator:

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

Ozan Dokmecioglu:

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

Bob Gamgort:

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

Bob Gamgort:

Okay.

Robert Ottenstein:

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

Robert Ottenstein:

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

Robert Ottenstein:

Terrific! Thank you very much.

Operator:

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

Operator:

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

Operator:

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Keurig Dr Pepper’s Earnings Call for the First Quarter of 2022. This conference call is being recorded. [Operator Instructions] I would like to introduce Keurig Dr Pepper's; Vice President of Investor Relations, Mr. Steve Alexander. Mr. Alexander please go ahead.

Bob Gamgort:

Thanks Steve and good morning, everyone. Our Q1 results reflect different stories of challenges faced and progress achieved across our portfolio. One common thread however is, the continued strong consumer demand for our brands as demonstrated by consumption growth and share expansion. In Coffee Systems the story is one of accelerated supply recovery to enable us to fuel the continued strong growth of the Keurig System, following our addition of six million new households in the past two years. As discussed previously the December-January Omicron wave caused widespread labor outages that resulted in supply shortfalls in coffee pods, at a time when consumer demand was at a record high. As the first quarter progressed, we accelerated our efforts to rebuild pod manufacturing capacity, increase finished goods inventories and improve service levels. Our first coffee pricing actions intended to mitigate inflation in Latin America Beverages. Even though we’re still in the peak portion of the inflation curve the timing of pricing is lagging inflation which leads the pressure on margin. Looking forward we believe there will be an inflection point in which high current costs begin to lap elevated year ago costs, leading to lower year-over-year inflation comparison. At the same time pricing actions will have caught up which we expect will lead to margin recovery. As we look forward, we believe our cold beverage portfolio will continue to perform well throughout the balance of the year and we are confident that our coffee production output and inventory levels will have fully recovered by the end of Q2. Therefore, we have increased our 2022 full year guidance for net sales from mid-single digits to high single digits, while maintaining our EPS guidance at mid-single-digit growth. Looking at Q1 earnings and EPS, Ozan will discuss the key drivers of results in the quarter. But the biggest headlines are the relationship between inflation and pricing and the investments we've made in the business, particularly in coffee. Taken together we delivered modest net earnings growth and adjusted EPS in-line with a year ago. During the quarter inflation which was significant across the board particularly for inputs such as coffee, resins, aluminum and sweeteners, as well as transportation and labor approached 15% which is higher than we expected entering the year. Within our segments, Packaged Beverages again reported another standout quarter with net sales advancing 13% on volume growth of 5% and pricing up 8%. In-market performance also remained very strong with market share growth registered in almost 90% of our cold beverage portfolio led by continued strength of CSDs, along with seltzers, coconut waters, teas, apple juice and fruit drinks. Performance of Snapple and Core continued to improve from the material availability issues faced in 2021 with both brands posting improved market share results in the quarter and upcoming innovation and marketing plans for this summer expected to accelerate this progress. Bai continues to recover from supply issues last year, posting consumption growth for the past four consecutive quarters. Margins for Packaged Beverages were impacted by escalating inflation which outpaced the timing of pricing, as well as ongoing transportation and labor challenges. We expect new pricing actions already announced to the trade to be in market, late in the second quarter. In Coffee Systems, we undershipped consumption with negative KDP net sales for the quarter, comparing to 3.6% K-Cup pod consumption growth as measured by IRI. You'll recall from our fourth quarter discussion that record consumer demand for K-Cup pods was challenged by production shortfalls, as Omicron-related labor availability issues combined with the delayed start-up of our new Spartanburg manufacturing facility pressured our capacity. We prioritized our service recovery during the quarter to partners and customers at the expense of our owned and licensed brands to rebuild our internal inventory levels. While that was the right decision from a Keurig ecosystem perspective, it came at a significant cost to KDP in terms of both revenue and profit. We made significant progress during the quarter in restoring our coffee supply chain with K-Cup pod production, finished goods inventory and customer service all improving by double-digits. We now expect a full inventory recovery by the end of Q2, enabling Coffee Systems to return to normal service levels in the second half of this year. Supporting this recovery is new manufacturing equipment we expect to come online as the year progresses, which will ensure supply to meet strong consumer demand in the second half of this year and in 2023. As we continue to work on coffee recovery and rebuild our finished goods inventory in the second quarter, we expect pod shipments to remain below consumption. That trend is expected to reverse in the second half of the year with shipments outpacing consumption, as improved internal inventory positions will enable us to refill customer and partner inventories and return to driving our owned and licensed brands through marketing and promotion programs. This will result in a much improved top and bottom line performance for Coffee Systems in the second half of this year. Pricing in coffee has also increased to mitigate the impact of inflation. Single-serve coffee category pricing increased 5.4% in the quarter, as pricing actions continued to flow through at retail. KDP-manufactured brands pricing advanced 6.7% in the quarter. Given the escalating inflationary pressures, we recently announced another round of pricing that will be in market late in the second quarter. While navigating through the well-discussed macro challenges over the past two years, we have also maintained our focus on driving long-term sustainable growth through innovation, renovation and partnerships across the full KDP portfolio. Although these topics have received less airtime in our recent conversations, I'd like to take a few minutes to do so now starting in Coffee Systems. You'll recall that in 2021, we debuted a new platform for Keurig with the launch of the K-Supreme Plus SMART connected brewer. This is the first of many new connected brewers to come including the K-Cafe smart later this year. Consumer response to our connected brewer continues to be positive and we believe that we will have more than one million connected households in the next few years. In 2021, we also launched our popular Brew Over Ice feature on one of our smallest footprint brewers, our K-Slim + ICED coffeemaker, which debuted as a Target and keurig.com exclusive. More than half of K-Slim + ICED purchasers were households completely new to the Keurig system. We will be expanding retail availability of this model late this summer. Next week, we are launching the new K-Cafe Essentials model, our first brewer less than $100 that offers coffee lattes and cappuccinos through a built-in milk frother. This brewer has scored an average 4.8 out of five stars in our consumer and influencer review programs and we look forward to its debut as a Walmart exclusive. In terms of coffee innovation, in January, we launched a Snickers-flavored K-Cup pod under The Original Donut Shop brand as an expansion of our flavored platform. This new product is already a top-selling variety where distributed with a national rollout planned for later this year. Lastly we are pleased to announce the Community Coffee the largest family-owned retail coffee brand in the US will be returning as a Keurig partner brand at the end of this year. The relaunch of our partnership after a five year hiatus is a testament to the quality, innovation, service and consumer insights the Keurig ecosystem can provide to coffee brands. We look forward to working together with Community -- the Community team to help accelerate their brand growth. Shifting to cold beverages. We're excited to announce that we have agreed to make a minority equity investment in Tractor Beverage to expand innovation in the fountain and foodservice channels. Available nationally in Chipotle restaurants since 2020, Tractor offers the first and only certified organic non-GMO beverage solution, specifically tailored to foodservice operators. To enable Tractor to achieve widespread distribution across multiple food service channels, we have also agreed to enter into an exclusive sales agreement with Tractor that leverages the strength of our fountain foodservice sales team. KDP cold beverage innovation and renovation continues to be robust and we have recently launched Snapple zero sugar; and Snapple Elements, a new line of teas and juice drinks inspired by the elements fire, rain and air. Snapple Elements line is made from all-natural ingredients with no artificial flavors or sweeteners and less sugar than traditional Snapple beverages. Snapple zero sugar is a rebranding of Diet Snapple, similar to what we've done with several key CSD brands, resulting in increased velocity. During the quarter, we launched two new CSDs, Simple 7UP, a new 7UP line with clean simple ingredients and reduced sugar; as well as Sunkist mango orange to expand our fast-growing Sunkist brand lineup. Finally, returning this summer as a limited-time offer is a fan favorite Dr Pepper Dark Berry, including zero sugar variety. The launch will feature promotional packaging tied to this summer's release of Jurassic World Dominion. I'll now turn it over to Ozan to take you through more highlights of the quarter.

Bob Gamgort:

Before moving to Q&A I want to recognize Steve Alexander for his recent promotion to Vice President of Investor Relations. Many of you on this call have had the opportunity to work with Steve during his 15 years with KDP and Dr Pepper Snapple and have benefited from his strong understanding of the beverage industry. And finally, earlier this month, we announced that I will be transitioning my CEO role to Ozan at the end of July and I will remain Executive Chairman for the following two years. This transition was designed to ensure continuity of leadership and strategic direction for KDP as well as to enable dedicated focus on the new and very significant inorganic value-creation opportunity we have in front of us. I have tremendous confidence in Ozan based on working side by side with him over the past six years and I'm excited about the opportunity to continue to partner with him, the KDP executive team, and the KDP Board of Directors over the next few years. With that, I'll turn it back to the operator for Q&A.

Bryan Spillane:

Hi, thanks operator. Good morning everyone and congratulations to Bob to you to Ozan and Steve on all your new roles.

Ozan Dokmecioglu:

Thank you.

Ozan Dokmecioglu:

Again, good morning, Bryan. Thanks for the question. Let me start with your first question with regards to the coffee capacity and the production availability. As we announced during -- starting actually mid of last year, we were expecting some slowdown ramping up our state-of-the-art manufacturing facility in the K-Cups in Spartanburg slowing down. But during our last call, we also announced that Spartanburg will be turned on primarily in 2023. So that was our stance. In the meantime, we've also gone through a significant consumption demand coming from our consumers. And as we always do starting last year onward, we actually acquired new production lines utilizing the existing technology that we have. And we are commissioning them as part of our ramp-up plans. Therefore, two-third of that capacity already went in and one-third is also going to coming online in the upcoming quarters. Therefore, we feel good where we are with regards to managing our overall coffee production capacity. And also just to add you also asked the question when we will be feeling good in terms of restoring the capacity that we will be requiring and needing. And as we spoke to during our prepared remarks, we have seen sequential monthly improvements of restoring our production capacity. That includes inventory. That includes our service levels to our partners, to our retailers as well as our owned and licensed. And we expect actually to fully restore our capacity including all those spaces sometime in quarter two. Therefore, we feel very good where we are and it took a few quarters to go back to the levels that we were requiring for.

Bob Gamgort:

Yes. Well I'll start Bryan with in-home, which we think is very relevant and we can talk a little bit about away from home. But we put in this strategic pricing investment over a number of years and we've had a lot of investor questions about this as well. So if you go back to 2016, before we implemented it, the cost per cup which is the relevant measure of K-Cup pods versus bag coffee for example was a $0.30 per cup premium. We lowered that to $0.20 per cup during the -- during that investment and we saw tremendous consumer response. Now we're moving up in price, but the game as you point out is really a relative game. And if you look at now the difference today between K-Cup pods and bags it's still $0.20. So we're maintaining that $0.20 differential while we're taking our pricing up which we think is the most relevant comparison. With regard to away from home, it's hard to come back with an exact number to be able to measure that against but we know that we're talking about an average price per pod or price per cup of $0.50 for K-Cup versus $0.30 for bag coffee. You're talking about a multiple of that somewhere between five and 10x depending on what you buy out at retail and that gap continues to get wider and wider. And so we see as people get concerned about pricing clearly, there's a trade-off from away from home to in-home which benefits the entire category. But our price gaps versus other forms of roast and ground coffee have stayed the same at that lower level that we guided to in 2018 2019.

Bob Gamgort:

Okay.

Bonnie Herzog:

Hi. Thank you and congratulations from me as well for everyone. I have a few questions this morning on your guidance. I guess, first on the top line your updated guide implies top line growth in the high single-digit range for the remaining quarters this year plus some. So I guess what gives you guys the confidence that your top line can accelerate? Especially since -- I'm thinking about your Q1 results, which were driven entirely by price realization, so I guess I'm asking about this in the context of the increasing pressures on consumers and kind of a little bit of what you just touched on as it relates to elasticities. And then on the bottom line, I guess, I'm trying to understand how you're factoring in some of the one-time items such as benefits from the gain on litigation settlement that you called out and continued sales leasebacks. I guess it seems like these did help to drive your slight EPS beat in the quarter. So how should we think about these items for the rest of the year? And how many points of growth do you expect from one-time items in your EPS guide? Thank you.

Ozan Dokmecioglu:

Absolutely, absolutely. And thanks for your best wishes as well, Bonnie. So let me start with the strategic asset investment program which we also define as one-time benefits that we have incurred. First of all, as you would remember, we have been implementing these initiatives since 2019. So there is no new news or no new initiative or implementation with regards to that. So over time, we have leveraged, as I was saying, the strategic asset investment program to cover investment and the significant inflationary and macro challenges. So this is important to understand the sources and the use cases. Then we also have occasional benefits that we can utilize in exceptional times, like, this that allow us to continue to protect investment in the growth of our business, which is super important to us, so we can continue to innovate and support our brands, which is one of the reasons why our elasticities have held up to this point very nicely. Going forward, as opportunities arise, we expect to use the strategic asset investment program as an effective tool or the single factor to drive marketing and other investments when required. Exact timing of these transactions is not predictable, because we take an overall holistic perspective and on an annual basis. So that's the important part. And I'd like to take the opportunity to expand for a little -- for five seconds on the other two one-times that you have mentioned, which one of them was the stock comp benefit. Now that we have almost four years of history as a public company, we have transited to estimating our restricted stock for futures raised, as opposed to actual events, which is in line with industry practice. So both practices are 100% in line with the US GAAP, as well as how our peer group is treating this type of expenses. And on the legal fees, over the past few years, we recognize as ongoing expense costs related to our litigation against BODYARMOR. And with the settlement agreement in our favor, we simply recognize the return of our legal fees to ongoing results and that will be it. Thank you.

Operator:

And your next question comes from the line of Lauren Lieberman with Barclays. Your line is open.

Bob Gamgort:

Sure. Bonnie [ph], for me, first, there's really three areas of focus as we go forward. One is continuing to lead the Board, as we've evolved the Board overtime from being closely held to widely held and that also will continue to evolve somewhat over time. And so that's an important part of my role. Second part of it is working with Ozan on the executive team to make sure that the transition is seamless, and that we continue the great momentum that we have on the organic delivery of our business and I have a ton of confidence in that. And then the third part is, to give some time and space for me to work on the inorganic opportunities in particular M&A. Wouldn't be a surprise to anyone that the last 2.5 years or so have been very intensely operationally focused, very much managing it seems like everybody in the industry from one crisis to the next. And while that's critically important and is the right priority it doesn't leave a lot of time to think about and work on the strategic aspects of the business that require a significant amount of time, investment, patience even relationship building to be able to do that properly. And so, I'm certainly looking forward to being able to have more space against that, while always being available to Ozan and the team to jump in and help as needed over the next couple of years.

Lauren Lieberman:

Okay. Thanks so much.

Kevin Grundy:

Great. Thanks. Good morning everyone and I wanted to extend my congratulations as well. First I think just housekeeping maybe on Ozan's replacement at the CFO position. Maybe just are you looking internally for that? Are you looking externally for that? I suspect it is both. Maybe just comment on sort of what attributes you're looking for that candidate maybe timing. But the broader question I have is really around investment levels. I think this is to kind of pick up a little bit on what Bonnie was getting at before excuse me just how you're balancing that with EPS growth. Because Bob, you've been really clear about your commitment to how seriously you take the EPS growth targets and the delivery has been very, very good since the merger in what's been a really volatile environment. But with the onetime items now providing some help the question is really around balance. And number one like, what's in the outlook for brand support now? And what's your willingness to sort of commit to those brand levels, or is there some element that you're possibly willing to pull back if needed to hit the EPS growth target? So just the question is really around balance what's in the guidance and your willingness to pull back if needed to deliver against the EPS growth target. Thanks for all that. I know there's a lot there.

Ozan Dokmecioglu:

Yeah, absolutely, and again, thank you very much as well Kevin. So, on the CFO search as we announced publicly the decision was to go outside and recruit a world-class CFO. And for the fact that -- in order to deal with the complexity of our company, but also and more importantly to bring a CFO that will be able to navigate through the future growth plus the existing complexity of our company. And that's what we are looking for. And the search has already started. And we believe that we will manage the time lines that we have communicated previously in terms of being able to recruit.

Kevin Grundy:

Very good. Thank you, both. Good luck.

Operator:

And your next question comes from the line of Chris Carey with Wells Fargo Securities. Your line is open.

Bob Gamgort:

Good morning, Chris.

Chris Carey:

I just wanted to follow-up quickly on the M&A commentary Bob with your new role and then I'll ask a question on coffee. Just around M&A and priorities clearly the Tractor investment is on the smaller side, but potentially interesting over a long time period. Historically, you talked about reticence for large-scale M&A. So would we expect these types of deals to be more on your radar, or are you open to larger deals, if the category or geography fits? So kind of following up on the prior line of thinking there and then just on the coffee side of the business, I think you said that, your owned portfolio pricing was in the 6% range which is ahead of what you did in the quarter with coffee. Were there any service charges that impacted you in the quarter? And can you just expand on the partner brand pricing and when you would expect total Coffee Systems pricing to better approximate what you're doing from an owned perspective? Really, what I'm trying to get at there is just if you're pricing and whether the rest of the category is following and you're not expanding price gaps too much. Thank you so much.

Chris Carey :

Thanks, Bob.

Andrea Teixeira:

Hi. Good morning, everyone and I will echo all the congrats and best wishes to Bob, Ozan and Steve. So, I wanted to just break down a bit on the new guidance. And for -- isn't that conservative still given that volumes will likely recover from here on the under-shipment comments in hot beverages in perhaps call it low-single at this point? And then, your price/mix should accelerate from the 6% that you posted so far. Isn't there potentially like an upside for that, or we should be thinking in the high single and with the visibility that you have now in terms of costs you're not ready to -- it's too early in the year to call a little bit better EPS given that -- given the puts and takes ahead of you? Appreciate that.

Andrea Teixeira:

Thank you, Ozan. That’s fair.

Brett Cooper:

Thank you. Good morning and congratulations to all. I had two questions if you don't mind. You've spoken about building the infrastructure to be a bigger company. I was hoping you can expand on the most important pillars that you've built or have in place that allows for that leverage. And then the second one is, you have a scaled e-commerce business in coffee, both direct to consumer and third party. So just from the outside we can't always see what's going on. I was hoping you can provide us an update on the progress you've made in preparing for the move in your cold beverage business to e-commerce and/or evolving the customer relationship to a more digital one. Thanks.

Brett Cooper:

Great. Thanks.

Operator:

Thank you. And I'll hand the call back to Steve Alexander for any closing remarks.

Operator:

Thank you. And that concludes today's conference. You may now disconnect.

Operator:

Good morning ladies and gentlemen. And thank you for standing by. Welcome to the Keurig Dr Pepper’s Earnings Call for the Fourth Quarter and Full Year 2021. This conference call is being recorded and there will be a question-and-answer session at the end of the call. I would now like to introduce Keurig Dr Pepper's Senior Director of Investor Relations, Mr. Steve Alexander. Mr. Alexander, please go ahead.

Bob Gamgort:

Thanks, Steve. And good morning, everyone. As you recall, this past quarter represents the completion of our three-year merger plan and the beginning of the next chapter of our transformation and growth, as we detailed for you during our Investor Day in October. With the merger plan now in the record books, I am pleased to report that we met or exceeded all of our key commitments, and we have demonstrated the power of our new company with a significantly faster growing business than at the time of the merger. The volatile macro environment we have faced since the merger has tested the industry and our business. It has also provided the opportunity for KDP to demonstrate the strength and resilience of our business model and our ability to withstand unforeseen events and deliver on our long-term commitments. In terms of a few specifics, our top-line strength over the past three years is a standout, growing approximately 5% on a compound annual basis over the period, almost double the merger target of 2% to 3% growth. More importantly, our sales growth accelerated significantly over the three years, with 2021 net sales advancing nearly 8.5%. Our strength since merger extends well beyond our financial commitments, as we delivered high-quality, in-market performance, including broad based market share growth across our portfolio, and meaningful expansion of new households using the Keurig system. Importantly, we maintain top line growth each year since the onset of COVID. As we've been able to pivot the growth certain segments of our business faster to offset those that were and, in some cases, continue to be negatively impacted. Market share expansion in cold beverages was driven by exceptional strength in CSDs, which have grown 1.5 share point since 2019. In coffee, the Keurig ecosystem continues to expand with eight million new U.S. households added to the system since 2018. Since 2019, we've driven growth in KDP consolidated net sales of nearly 14% and an adjusted EPS of 31%. These results were fueled by strong execution, successful innovation and high impact marketing. On a three-year basis, key financial metrics including adjusted EPS, management leverage ratio and synergy capture were delivered well within our merger target range, with adjusted EPS up more than 15% on a compound annual basis over the post-merger period. We delivered this performance while building a solid foundation for the future, including the advancement of our corporate responsibility agenda, achieving the goals set before the merger and expanding into new areas such as diversity and inclusion, positive hydration, and regenerative agriculture. All of this is underpinned by a talented team and a culture that rewards bold thinking, speed and a mindset of ownership and accountability. Investors who have been with us since the merger have been rewarded by a total shareholder return of 109% which is more than 2x the Consumer Staples sector index and two times the return of the S&P 500 Index. Important to the delivery of these strong results is how we manage KDP. Our playbook includes a range of strategies and tactics that enable us to navigate through volatile conditions in the short term, to stay true to our long-term vision. A good example is our strategic asset investment program, which we initially launched in 2019 and have used each year since, including in Q4 of 2021 to maintain or increase marketing investment in our brand portfolio. Ozan will discuss more in his remarks. Let's talk about the current environment we're facing. At this point in the earning season, you are fully up to speed on the range of issues negatively impacting the CPG industry. Supply chain disruption driven by labor shortages, lack of material availability and broad transportation issues have reduced industry customer service levels and pressured gross margins. In addition, unprecedented levels of inflation across nearly all components of cost of goods and cost to serve necessitated multiple pricing actions across the industry, most of which lagged inflation in terms of timing in the market. These challenges intensified in the fourth quarter with the onset of Omicron, causing significantly higher absenteeism across manufacturing and commercial frontline workforces. It has been reported that 6% of the U.S. workforce was absent at the start of the new year, due to being infected with COVID or caring for someone who had been infected. As significant as that number is, it actually understates the real impact on supply chains. We, for example, experienced absenteeism at key plants in the double digits, which magnified an already challenged labor situation, causing the workforce to drop below critical threshold levels. We're certainly not alone. Our suppliers have inputs, transportation services, and plant equipment are also experiencing these challenges, which has a compounding effect on our operations. Of course, we don't get paid to report the news but rather to deliver our commitments regardless of the macro situation. That's exactly what we've done. By implementing an unprecedented set of actions to increase labor availability and prioritize our portfolio to ensure availability of the fastest turning highest profit items. A tangible example of the challenges we faced and the solutions we've implemented is in Coffee Systems. Record consumer demand for K-Cup pods bumped up against lower manufacturing output and delayed new capacity availability. Both, directly related to COVID. This caused us to tap into our finished goods inventory in Q4, falling below safety stock levels, which impacted service to our partners and retailers. We have successfully rebuilt production output since the height of Omicron absenteeism, but we are now servicing the continued high consumer demand while working to rebuild inventory, which is a process that we’ll continue well into the next quarter. Ozan will talk more about the impact of the supply challenges in his comments. While we're seeing light at the end of the supply chain tunnel, as the wave of Omicron runs its course, inflationary pressure continues to be persistent. To address continued inflation, we implemented several pricing actions over the past six months and announced more pricing in early 2022. To date, our elasticities have held up nicely. Most of the challenges discussed today were reflected in the 2022 outlook we provided at our October Investor Day. At that time, we expected the impact of supply chain disruption and escalating inflation to be significant headwinds for the year, resulting in our projection for net sales and EPS growth to be in the mid-single digit range for the full year. Nearly five months since Investor Day, we continue to believe this guidance for the full year is realistic. Yet it's important to highlight the expected pacing of results throughout the year. Specifically, we expect Q1 to represent our most challenging comparison to last year, as we managed through the peak levels of supply chain disruption and significant ongoing inflationary pressures. EPS performance is projected to improve starting in Q2 reaching high single digit growth in the second half of 2022 which would put us back on our long-term algorithm. Let me take a few minutes to shift back to 2021 to highlight our full year results. Our top line performance continued to accelerate, with full year net sales growth of more than 8% and all four business segments up strongly. Our Packaged Beverages segment was a standout, posting double digit net sales growth for the year, fueled by an impressive 17% increase in the fourth quarter. Our Beverage Concentrates and Latin America Beverages segments also delivered strong double digit net sales growth in 2021. While our coffee business posted net sales growth of 6% due to an almost 6% increase in pod shipments, and a double digit increase in brewer shipments. In 2021, we added nearly three million new U.S. households to the Keurig system, on top of approximately three million new households added in 2020, which means total U.S. Keurig households are now approaching 36 million. Adjusted EPS for the year advanced more than 15% which translated to 31% EPS growth on a two-year basis as previously mentioned. Strong in-market performance for our brands underpins the delivery of our financials. Our LBR portfolio grew market share across nearly 75% of the portfolio in 2021 and almost 80% when looking at results on a two-year basis. Most notable with continued strength and CSDs, which drew consumption by 26% and market share by 1.5 share points since 2019. In fact, KDP took over the number two share position and CSDs in the grocery channel in 2021. The drivers of our CSD performance are widespread and sustainable. While nearly all of our CSD brands continued to perform well, Dr Pepper was again one of the fastest growing major CSD brands in the U.S. last year, and it was the single fastest growing since 2019. When Fortune recently unveiled its Halo 100 ranking for how well brands serve their consumers, Dr Pepper was the only beverage brand in the top 100 and the only FMCG brand in the top 20. Sunkist took over leadership of the fruit CST segment in 2021, fueled by innovation. Since 2019 Sunkist has grown dollar consumption by 35%. With the success of our zero-sugar innovation in 2021, we gained over three share points in zero-sugar CSDs, capturing a third of the zero-sugar category. And later this year we will be launching Snapple Zero Sugar. Looking at other key segments of our cold beverage portfolio, our CORE, Snapple and Bai brands, whose growth was capped in 2021 by supply chain disruptions demonstrated positive in-market performance as product availability improved in Q3 and Q4. Retail consumption was up double digits for both Core and Bai in the quarter, while Snapple was up 5% in the quarter, and ended with double digit growth in December. The Snapple Refresh, which was designed to bring younger consumers into the franchise with new graphics and sustainable packaging is proving to be successful. Our premium water stream continues to be enhanced by strong partnerships. The success of Polar seltzer demonstrates the power of the KDP distribution network, as we continue to expand availability outside the northeast region, achieving a 4.3% share for our first year in the market for which KDP is responsible for the brand. Vita Coco, a long-term KDP partner in which we also made an equity investment in 2021 had an exceptional year, growing dollar consumption 33% and market share by almost seven full percentage points to nearly 51% of the coconut water segment. Switching to coffee where retail dollar consumption of single-serve pods manufactured by KDP in tracked channels grew 2.7% for the year, with higher growth achieved in untracked channels due to continued strength in e-commerce and club and a limited return to offices. Growth would have been even higher if not for the Q4 supply chain disruptions which lead to reduce promotions and increase out of stocks. KDP manufactured share remains strong, increasing to 83.2% for the year. As mentioned previously, Keurig household penetration continued to be exceptional, adding eight million new households to the Keurig system since 2018. Further demonstrating the power of the Keurig system, for the first time ever, unit market share of Keurig compatible brewers surpassed traditional drip coffee makers in the fourth quarter. In 2021, we debuted a new platform for Keurig, with the launch of the K-Supreme SMART connected brewer, which is the first of many new connected brewers to come. The consumer reception has been very strong. And we have line of sight to having more than a million connected households in the next few years. Finally, although we don't give our Latin America Beverage segment much airtime on these calls, I'd like to point out that our team delivered 14% revenue growth and 19% operating income growth, behind particular strength in Penafiel and Clamato. In addition to being a strong contributor to total company results, LAB represents an attractive expansion opportunity for KDP. Before I turn it over to Ozan to talk about our 2021 results and our 2022 outlook in more detail, I'd like to reflect on our long-term outlook as discussed at our Investor Day. The completion of our merger period provides an opportunity to reflect on our accomplishments over the past three years, as well as our potential over the next three years. While we will always manage our business through the challenges of the day, we measure ourselves on long-term value creation, and therefore keep our focus on delivering in the present and investing for the future. As we look to the future one of the most attractive aspects of the KDP investment story is our unique potential to drive outsized returns through a combination of an attractive organic growth algorithm, coupled with the opportunity for significant inorganic value creation. You recall from our Investor Day our outlook was to generate approximately $4 billion of discretionary free cash flow between 2022 and 2024. Since Investor Day, we have received proceeds from our BodyArmor investment, as well as funds from the settlement of our litigation against BodyArmor. Combined, this resulted in cash proceeds approaching $1 billion, increasing our discretionary free cash flow outlook over the three-year period to $5 billion. This cash flow is being prioritized to the highest ROI use of our capital, which we continue to believe is strategic M&A, where we have a differentiated and demonstrated management expertise and track record. Discretionary cash of $5 billion translates into more than $20 billion of M&A capacity, assuming the same reasonable expectations we discussed in October. Coming out of Investor Day, we saw a few headlines suggesting that we were looking for a singular large acquisition. Let me assure you that we remain intentional and disciplined in our allocation of capital and that the significance of our more than $20 billion in M&A firepower represents total capacity for M&A, not a singular or targeted deal size. In the absence of value-generating M&A, we will use our new share buyback authorization to opportunistically repurchase shares. Our effective deployment of free cash flow over the previous three years is a good example of how we think about shareholder value creation through deployment of capital. During that time period, debt repayment was our top priority and a strong generator of shareholder value. However, also during that time, we acquired the CORE, Big Red and Limitless brands, made an equity investment in Vita Coco and several startup businesses, brought 22 independent distributor territories into KDP to strengthen our company-owned DSD system and invested in expanded production capacity and high-return plant and warehouse automation projects. At the same time, we also passed on numerous M&A opportunities, including BodyArmor, one we believe it was more prudent to be on the sidelines or a seller rather than a buyer. With our balance sheet and strong position and exceptional free cash flow in front of us, we're excited about our ability to continue to generate strong inorganic returns on top of our attractive organic TSR algorithm. Let me hand it over to Ozan.

Operator:

[Operator Instructions] Your first question comes from Bonnie Herzog with Goldman Sachs.

Bob Gamgort:

Okay, Bonnie. Good morning and thank you for those questions. Ozan, do you want to talk about the guidance? There were two of them related to guidance, and then I'll come back on the brewer question.

Bob Gamgort:

Yes. Let me talk about the first one, which is about the top line pacing with regard to 2022. You're right the revenue growth has been incredibly strong. If you decompose that growth, we're getting about half of that from volume and mix, which compared to a lot of sectors, is very robust and the remainder of that is coming from pricing. So, I think that's where it gets challenging to forecast, what's going to happen in the balance of the year. We have a great feel for what volume and mix looks like. We're thoughtful about elasticity because we're all entering into uncharted territory here in terms of the price increases collectively that are happening across the industry. And we build it more off of that than we build it off of anticipated pricing going forward. And that's why we thought it's prudent to build a business model that delivers mid-single-digit EPS off of mid-single-digit top line growth. The area we'll have to be thoughtful about and as you look at companies going forward is if top line numbers are exceeded because of additional pricing due to additional inflation, that doesn't mean that any of its ever going to show up in our earnings or EPS. But that's all hypothetical and to come. I think the fact that we build our business model primarily off of volume growth and known pricing is how we got to that guidance. A lot could change between now and this time a year from now based on inflation and pricing trends. With regard to brewer affordability, it's an excellent question because our Number 1 driver of the Keurig system is continued household penetration growth. We've added 8 million households in the past three years, back-to-back years of 3 million households, which is nicely above what we think is our long-term trend. I'll remind everyone that there were concerns. We delivered that 3 million that we had pulled forward from the following year, where we actually had another record year off of demand. We understand very well the critical price points, the threshold price points for consumers at different levels, entry-level, upgrade level. And we also know where there is more sensitivity around pricing and so we've been very strategic in the pricing that we've implemented in our brewers. We've been able to design brewers to value so that we hit an approximately $50 price point and certainly below that on promotion. We know that $100 is the next price point. And then we also know that we have a significant number of brewers that have very low-price elasticity because we offer so much value to them. So even though you'll see pricing move across brewers in aggregate, we will also protect those critical price points and understand that we can lean in more on certain brewers in certain channels where there's less elasticity than others. And we will never be distracted from our overall mandate of driving household penetration.

Bob Gamgort:

Yes. I'm glad to be able to clarify that. First of all, the pressure that we're talking about in the rebuilding inventory is all on the pod side.

Bob Gamgort:

What's quite remarkable is given all of the global supply chain challenges for a product line that is made overseas and shipped on the ocean and the fact that all of our brewers contain chips in them; our team has been pretty amazing in being able to find alternative materials, chips, et cetera to be able to continue supply brewers. So, brewer supply has not been an issue at all. What we're working towards though as we look at a forecast for the long-term, not just for 2022, but as we think about the long-term for Keurig, we think about 2 million new households per year is what we describe as our long-term trend. And then you – there's always a significantly higher number of brewers sold, but a lot of those are due to replacements or upgrades. While they show up in our revenue line, they don't really have a material impact on our profitability. That's why we don't focus on brewer sales, nor do we forecast them for you. What's most important are the brewers that are in place to be able to drive new household penetration, and we're fine on that. With regard to pods, we've had incredible demand on pods now. The demand has been increasing every year. We saw it also remained very strong through COVID, although the composition of that growth shifted from away from to at-home, a little bit of that's going back. The issue is that we've been building demand for pods based on that increased installed household base for the Keurig brewers. And as the fourth quarter hit with – and then later with Omicron into January, we could not supply the current demand. That caused us to draw down our finished goods inventory down to below safety stock levels. And now we're rebuilding that production. Our production is up significantly versus where it was in early January, for example. But now we're serving two masters, we have to solve – we have to continue to serve strong current demand. And at the same time, we have to take some of that production and use it to restock inventory to improve our efficiency. And that's the process that's going to take another quarter or so. But we've seen the bottom of that, and that was really driven by the absenteeism issue that hit in early January, late Q4. And we're improving that now. So, it's all pod-related with regard to inventory, nothing with brewers at this point.

Bob Gamgort:

Okay, Bonnie.

Chris Carey:

Hi. Good morning.

Chris Carey:

So just following up on coffee. Typically, when pods outperform, that's a margin tailwind. Obviously, there were other drivers this quarter. And I wonder if you can maybe just review what you see as maybe structural or a bit more lasting to the margin rate this quarter and areas that you would expect to improve from here on a sequential margin rate. Said another way, is this high-20s level of margin base from which to go forward? Or should they sequentially improve with your supply chain? And then just connected to that, on pricing, so in coffee, clearly getting your own business pricing. Can you just maybe frame the impact of the strategic pricing versus these charges that you incurred and your updated thoughts on pricing of the business going forward? Thank you, guys.

Chris Carey:

Thanks Bob.

Operator:

Your next question is from Kevin Grundy with Jefferies.

Bob Gamgort:

Yes, good morning.

Ozan Dokmecioglu:

Absolutely. Kevin, so with regards to the tax rate, we have initiated and successfully implemented several strategies around lowering our effective tax rate. And when you look to our financials since the onset of putting the two companies together the last three years, I believe we have been quite successful of managing our tax rate. And as I have just explained in our prepared remarks, we expect our tax rate for 2022 to be around 22%, maybe 22.5%. So, that's our ingoing assumptions on the basis of the implementations that we are expecting to deliver the results for us. So, that's number one. And on a normalized basis, probably 2022 levels will more or less sustain, maybe a little bit lower, but not much. So, that's our expectation with regards to overall effective tax rates for 2022 and beyond. So, let's talk a little bit about the inflation in the commodities and our exposures, right? So, as you all know, inflation accelerated throughout 2021, with the fourth quarter in 2021 increasing double digits. It's significantly higher than what we anticipated, and we also expect to continue through much of 2022, with some moderation in the fourth quarter. So as Bob also alluded a little bit ago, we expect quarter one to be the most challenging comparison to last year, when I say quarter one, I mean 2022, as we manage through peak levels of supply chain disruption and significant ongoing inflation. But when you look right now through our overall commodity exposures, we think it will cover six to nine months. Therefore, we feel that we are well covered for 2022, but we continue to layer in some further coverage, albeit at significantly higher rates than last year at this time. And some costs, like transportation, some packaging materials like polypropylene, which is the material for K-Cup, for example, that we can't hedge them because there is no any structured market that we can hedge. Therefore, we believe that we struck a good balance right now with regards to our coverages, the impact of the overall commodity inflation, along with other input costs in 2022 versus 2021. We also, for example, in coffee, had longer positions in 2020 as well as 2021. But our low-cost positions are now fully utilized, which making green coffee, for example, one of the largest percent changes year-over-year in our basket of input costs of KDP. But all these assumptions that we have built in our guidance and in our numbers that we have just reported. Therefore, we believe that we have a good balance right now of dealing and managing the overall inflation, which is arising as a result of all input costs, transportation, along with labor in relation to the guidance that we put along with the margin structure quarter in, quarter out.

Ozan Dokmecioglu:

Thanks.

Operator:

Your next question is from Brett Cooper with Consumer Edge.

Bob Gamgort:

Okay. Yes, Brett, thank you. The benefit of the portfolio that we have is a bit of diversification in terms of different consumer trends, different competitive dynamics, et cetera. And so, if you go all the way back to the commitments we put out there in 2018 and the fact that we've been able to deliver them despite all of these challenges that we're with COVID, now inflation, supply chain disruption, et cetera, that's the benefit of having the portfolio that we have, that we're able to leverage one part of the portfolio to be able to offset challenges in the others. And then you've seen it reversed in certain situations, where coffee was over-delivering to help one side of the business and now the cold business in some cases in Q4 was able to do that. That's great from an investor perspective. With regard to how we take pricing though, we don't think about it that way. We look at pricing at the consumer level segment-by-segment. We understand price elasticities, competitive dynamics. And in an inflationary environment like the one that we're in right now, we're going to push pricing as hard as we possibly can based on our best assessment of the impact on that individual business. And that does put us in a position where we say because we can take pricing in one area, we'll take less pricing in the other. We take the maximum amount of pricing that we can in each individual business until we get to the point where we think it adversely impacts demand to a level in which it's not a great business decision. But the diversification of the portfolio, though, allows us to step back and we deliver consolidated results and have the confidence that we are able to deliver against the guidance that we put forward despite all the uncertainty and volatility that we face. Can we take the next question please?

Lauren Lieberman:

Thanks. Good morning. This is probably a good lead into the last conversation. But I feel like there was, Bob, in your comments over the last few minutes is really sort of passion discussion of the visibility that you think you have to sustain volume growth as you have been keeping the transition in cost and driving consumer behavior. But I was curious how you think about the structural potential of the Keurig businesses. I'm guessing this is where the bulk of the M&A is expected to reside. You've already made all these moves, of course, on route to market So, can you talk a little bit about sort of the structural potential and how you think about volume perhaps versus price mix in those businesses as well? I'd just be curious to kind of hear your same kind of multiyear view on that side of the business. Thanks.

Lauren Lieberman:

Thank you so much.

Operator:

Your next question comes from Andrea Teixeira with JPMorgan.

Bob Gamgort:

Okay. Yes, on the M&A side, what we've talked about is our capacity for M&A. So, we say it's north of $20 billion based on the $5 billion of discretionary free cash flow and some of the assumptions that we put forward in the Investor Day. The clarification we were making today is there were a number of headlines that came out of that where people said we were looking for a $20 billion acquisition. And what we're saying is that we've got significant capacity to continue to do acquisitions of a variety of sizes and our four areas are filling in the white space as we just talked about, continuing to build our distribution capabilities, which we also talked about; adding new capabilities which as we get further along we could explain some of that; and then obviously, we always have the opportunity for some geographic expansion. We operate in North America today, heavily in the U.S., with nice positions in Canada and Mexico. We talked about today Latin American beverages, for example, just continuing to deliver fantastic results that are accretive to total KDP. That's an area where we could see some opportunity for additional investment. So, we have a wide range of targets, all of which are strategic. They range in sizes, but we wanted to clarify that we're looking at a $20 billion plus as capacity, not as a target. Ozan is going to talk about buybacks in a second. With regard to pricing the pricing that we have in the plan is not just what we've already put in place, but also pricing that we've already announced that's happening in the early part of 2022. With regard to the rest of the year we always say we need to be flexible based on inflation, productivity, pricing and marketing investment. And we don't talk about any one lever in the future at the expense of others. We look at all four in combination, and that's how we will continue to manage through 2022. And Ozan, do you want to – I think this will be our last question. Do you want to end this on the buyback conversation?

Andrea Teixeira:

Thank you, both.

Operator:

I'll now turn it back over to management for closing remarks.

Operator:

Thank you. This concludes today's conference. You may now disconnect.

Operator:

Good morning, ladies and gentlemen. And thank you for standing by. Welcome to Keurig Dr Pepper's Earnings Call for Third Quarter of 2021. This conference call is being recorded, and there will be a question-and-answer session at the end of the call. I would now like to introduce Keurig Dr Pepper's Senior Director of Investor Relations, Mr. Steve Alexander. Mr. Alexander, please go ahead.

Robert Gamgort :

Thanks, Steve. And good morning, everyone. As we approach the completion of our three-year, post-merger period, we're looking forward to our next chapter of transformation and growth. We're entering that phase from a position of strength, with topline momentum fueled by new tools and capabilities, robust innovation, and the right team and culture to enable continued success. Importantly, we're also nearing our targeted leverage ratio, which enables us to shift the use of our industry-leading cash generation from debt reduction to a new set of options for increased value creation. We have successfully navigated the macro dislocation that has occurred over the past 20 months and expect to be able to do the same in the face of the new challenges that are causing incremental disruption across the economy. The escalation in input cost inflation coupled with labor shortages and supply chain disruptions, including constraints in transportation, impacted us in the quarter and will likely persist for some time. As part of the offset, we have increased price and utilized a wide range of RGM initiatives across our portfolio, along with stepped up productivity, alternate sourcing and supplier strategies, and other cost mitigation activities. Given the strength of our brands, driven by increased investment in innovation in marketing, we have been successful in limiting the elasticity impact of the pricing to date. Our third quarter results provide a good example of KDP's ability to manage through challenges and deliver strong and balanced results. We posted another quarter of high-single-digit constant currency net sales growth, with all four business segments reporting strong increases. We also delivered double-digit adjusted diluted EPS growth, while increasing marketing investment in the quarter. As discussed last quarter, we believe it's helpful to highlight our results on a two-year basis because we are layering strong current year performance on top of strong year-ago performance, which we believe sets KDP apart from most companies. On this basis, constant currency net sales advanced 13% versus the third quarter of 2019 and adjusted diluted EPS was up 38%. On a year-to-date basis, results were similarly strong compared to 2019. KDP's in-market performance for the third quarter was as strong as our financial performance. We continue to grow share in carbonated soft drinks, reflecting core brand growth, and successful innovation and renovation, most notably our new zero sugar variety. Sunkist continued to post strong double-digit consumption growth behind its new flavor lineup and is now the number one fruit flavored CSD brand in the category. Other CSDs posting strong growth in the quarter were Canada Dry, A&W, and Squirt. The Dr Pepper brand also continued to perform exceptionally well, consistently gaining market share on the strength of double-digit consumption growth. This growth has accelerated with the recent launch of this year's Fansville campaign, which celebrates the passion consumers have for college football and Dr Pepper. In-market performance of our key non-carb beverage brands such as Snapple, Bai, and Core continued to be impacted by supply chain challenges that capped growth. The supply chain situation is already showing signs of improvement with Snapple's latest four-week consumption well above its 13-week trend, and Bai growing consumption by nearly 15% in the most recent periods behind the success of Bai Boost. On a two-year stack basis, in-market performance of our cold beverages was very strong, with nearly 75% of the portfolio's retail sales base expanding market share. We continue to drive our newest brand partnerships and deepen existing ones. In the case of Polar, we expanded availability outside of the Northeast region, achieving a 3.7% share and 60% ACV distribution in markets for which KDP is responsible for the brand. We also invested in Vita Coco's recent IPO. And as part of that transaction, extended our distribution agreement with them. In coffee, our K-Cup pod shipments advanced 6% in the quarter and are up almost 7% year-to-date. This reflects continued strong at-home performance and a modest improvement versus year ago in away-from-home coffee, although the latter continues to be down significantly versus pre-COVID levels. Market share of KDP manufactured pods and track channels was 83%, up almost a full point versus year ago. As we discussed during our recent Investor Day, we expect to add at least 2 million new Keurig households in 2021, continuing our long-term growth trajectory and clearly showing no pullback following our accelerated level of 3 million new Keurig households added in 2020. We will provide a final 2021 household penetration number when we report our Q4 earnings. Brewer shipments grew 2.2% in the quarter, successfully comping a 34% increase in the third quarter of last year. On a year-to-date basis, brewer sales were up 22% versus year ago. And compared to the third quarter of 2019, brewer sales were up 44%. Driving this impressive growth is effective marketing and our comprehensive quality and innovation strategy that is widening choice, functionality, and price points of our brewer portfolio. The most recent example is our new MultiStream Technology, which delivers a richer, more balanced, and flavorful cup of coffee. Our newest brewer is the Keurig Supreme Plus SMART, initially launched on keurig.com in July and now rolling out to retailers in time for the holidays. In addition to incorporating MultiStream Technology, this Internet-connected brewer also features our new BrewID technology, which recognizes the specific K cup pod in use and automatically customizes brew settings. The brewer SMART technology also enhances our successful auto delivery business by utilizing SKU level pod consumption data to automatically replenish consumers via shipments direct to home. Both our auto delivery and broader ecommerce business continued to expand in the quarter on top of the exceptionally strong growth experienced last year. We also continue to innovate in pod sustainability and have begun the introduction of Easy Peel lids to our recyclable K-cup pods in order to make the recycling process simpler for consumers. In addition to the good progress we've made in coffee pod sustainability, the accomplishments in our companywide ESG efforts continue to be recognized. Recently, we received the Reuters Responsible Business Award for the social and human capital category, recognizing our 20-year journey of putting farmers first by improving 1 million lives in our coffee supply. A top 10% ranking among 350 food and agriculture companies by the World Benchmarking Alliance, a United Nations affiliated organization that focuses on improving private sector performance against the UN Sustainable Development Goals. A number two ranking out of 50 of the largest CPGs and retailers in North America by the nonprofit, As You Sow, in their assessment of plastic usage and packaging sustainability progress, and LEED Gold certification for our new Frisco headquarters. Before turning it over to Ozan, I want to highlight the increase in our outlook for 2021 net sales growth to 7% to 8% as communicated in our press release this morning. We continue to expect adjusted diluted EPS growth in the range of 13% to 15% as pricing, productivity, and revenue growth are being leveraged to offset significant and accelerating industry inflation, as Ozan will now discuss in his comments.

Robert Gamgort:

Closing out 2021 completes the three-year commitment established in January of 2018 at the announcement of the merger. Clearly, a lot has transpired since then, and throughout this time, the KDP team has remained focused, flexible and resilient. With one quarter left to go, we are confident that we will significantly over deliver our net sales commitment and achieve our 15% to 17% adjusted EPS commitment. I will now turn back to the operator for your questions.

Bonnie Herzog:

I wanted to ask about your topline, which continues to be much stronger than expected, and it's impressive that you guys have taken up your sales growth guidance yet again. So, given this how does this potentially change your thinking regarding your preliminary outlook for 2022? Does it give you any more confidence in your ability to deliver on a mid-single-digit top line growth or possibly above this? And if so, do you think your initial outlook for mid-single-digit EPS growth next year could ultimately prove conservative given that lever? Just wanted to get your thoughts on that.

Operator:

Your next question comes from the line of Chris Carey with Wells Fargo Securities.

Robert Gamgort:

The questions that you're asking are on the minds of everybody in the industry. The fortunate thing is that we operate in a wonderful industry, beverages, and I'm including coffee in that as well, that is incredibly rational. So, the objective is margin protection. And what we've all faced is an unprecedented level of inflation, certainly unprecedented in all of our working careers for the North American market level of inflation. There are three ways to offset that – pricing. And I would include RGM in pricing, and I'll talk more about that. Pricing, productivity, and then there's another lever, which is reinvestment back in the business. And so, we can pull those levers in different magnitudes based on the level of inflation and what we believe the impact will be on the overall business. What we're seeing right now is that there's been a significant amount of pricing across the industry. The data that I have doesn't suggest that we were slower than anyone else. I think we were right in line. Different parts of our business realized the pricing faster than others. So, for example, our BC business has an immediate impact. When you take pricing, it hits the P&L. There's a delayed response in some of our other businesses, as it has to reach retail, and you have to protect some of the promotions in place. So that’s may be what you're thinking about there, but certainly there's been extensive pricing. The impact of elasticities has been better than historical, and in part it's because of the way we've taken pricing and also the strength of the brands. And we've been able to find a way uniquely within I think the industry to continue to have positive gross margin in the quarter, for example, which gives us the opportunity to reinvest back in our business, which makes pricing even more possible because you continue to invest in your brand strength. So, I would suggest that that's the framework we approach 2022, and any prediction I would make in the future about elasticities, where do I think inflation is going to be, how do I think pricing will respond to that, not productive because it's impossible for anybody, including the Fed, to predict what's happening going forward. What I would say is that we manage this in a very dynamic manner. When there is more inflation, the industry has put on more pricing. And we have the other levers that I talked about in terms of productivity and reinvestment to pull to protect margin. And that's why we're confident in the guidance that we put out in October 1 in an environment as volatile as this. We still have the ability to manage our way through that.

Peter Galbo:

It's Pete Galbo on for Bryan. I guess just on Bev Con, obviously, there's a natural gap between shipment volumes and bottler case volume, but I think bottler case volumes were maybe a little bit lighter than we had expected and there wasn't a ton of detail around what happened there in the press release. So, just anything there would be helpful. And I think, Ozan, just there were some comments, particularly on the bottling can part of the Bev Con business, just how are your franchisees managing inflation? How is it impacting their ability to serve – having to do anything kind of to accommodate them for their rising costs?

Ozan Dokmecioglu:

Of course. Particularly on the bevcon, as you were saying, Bob, bevcon comes in two pieces. One is the bottlers and the distributors that we work as well as our fountain foodservice business. And specific answer to the question, Pete, on the mechanism of our bottlers and distributors pricing, most of our bottlers and distributors are on incident pricing, which, as you know, is a quite a bit sophisticated algorithm that starts from the shelf prices, then goes to the bottlers and distributors and reflects to us. Therefore, this is a best-in-class in terms of pricing adjustments that take place in the marketplace. And that also includes the sophisticated revenue growth management strategies that we deploy on a consistent basis. Therefore, as Bob also alluded a couple of minutes ago, the whole sector took some forms and shapes of pricing actions, either shelf price improvements or using a sophisticated revenue growth management strategies. And as a result of that, there's a net flow through to our bevcon business. And given the nature of the bevcon that we ship and sell and transfer the concentrate, the increase in the pricing in that segment reflects in our numbers right away. Right away meaning a little earlier than the packaged beverages, for example, that takes a little bit gap between the price improvements, we turn into the finished product, ship it and sell it across the board. So, that will be our algorithm that make us to realize very good margin improvement from the pricing in bevcon.

Andrea Teixeira:

Just want to kind of like go back to the supply chain points that I think you kind of managed really well. Can you kind of give us an idea of how, at this point, the packaging side will be able to manage and how it positions you into 2022? And, Bob, I wanted to go back to also to – just to clarify your point about protecting profitability. I know it's early to say, and obviously, when you gave the 2022 preliminary outlook, it kind of implies the margins are probably going to be on a gross margin basis. I don't know, but that you're going to have a similar algorithm or protect profitability. Is that still going to be more of financial deleverage and below the line or you may be able to protect your gross margin?

Ozan Dokmecioglu:

Actually, I like to expand a little bit because, obviously, the whole inflation and the pricing algorithm is so interrelated to each other. As we shared with you, and I'm sure you are seeing this every day, like everyone else, we are experiencing a significant increase in inflation, particularly in packaging materials, labor, lately coffee beans, Corning glass, and so forth, which is a broad base of our input costs, combined with transportation. And the latest one, we are seeing pressure on the labor shortage as well as the availability. As we also shared with you a little while ago, we expect overall inflation rate for 2021 to impact us negatively around 6%. And also, inflation has accelerated through 2021, with the second half being higher than the first half. So, what does this mean? This means that we are entering into 2022 at a higher second half run rate. So, we expect that at least the first couple of quarters of 2022 to face tougher comps than the second half of 2021. Having said that, during our Investor Day, October 1, we also shared with you that our long term outlook is for continued adjusted operating margin growth fueled by primarily three things – productivity, mix and overhead leverage – while we continue to invest in our brands to continue to drive our strong growth. Therefore, at this point in time, our 2022 outlook is our best estimate based on a range of assumptions, which is very important to articulate and this is how we have been managing the enterprise for a while, which is a balance between the inflation, pricing, productivity and business investments. Obviously, the more we know, we will update you and the timing of that update would be during our February 2022 call that will announce our quarter four and the full-year results. But in summary, we believe in the strength of our plan and the algorithm that we put in front of you that will deliver over time.

Kevin Grundy:

Congratulations on another strong result. I wanted to kind of zoom out a little bit. I have a more strategic question for you this morning just as it pertains to your distribution assets and the potential to move into alcohol following PepsiCo's announcement with Hard Mtn Dew. As you know, the legacy Dr Pepper company has long viewed its bottling assets as strategic. I think there's been some questions over the years about potentially taking a look at doing something more strategic, spinning them off, refranchising, etc. But it was collectively something the board thought never made a lot of sense. You mentioned the Vita Coco investment there. That's been a long term relationships. It's part of the allied strategy. The Polar deal that you guys entered into made a lot of sense as well. So my question is this. I'm sure the PepsiCo announcement is in no way lost on you. I just wanted you to comment this morning on the potential for Keurig Dr Pepper to move into the alcohol space, to take a look at your own distribution assets. Is that something that you're entertaining? Is that something that you think makes a lot of sense?

Operator:

And your next question comes from the line of Brett Cooper with Consumer Edge Research.

Robert Gamgort:

First of all, I'll start with the team. We're really proud and pleased with the team that we have in place right now. We continue to build capabilities. If you look at where we have drawn team members, especially at the most senior levels, and you see it at the EL, executive team level. But I would also say, at the level of direct reports to the executive team, it's very similar. Wide range of packaged goods experience with a focus on beverages. We like to pull people from all elements of beverages. So we have non-alcohol as well as alcohol experience. We have a number of people who in that individual have experience in both. We also have people who have a number of experiences both within North America as well as international experience. And we think that this combination of skills, experiences, backgrounds and style make us much stronger as a team. And we will continue to add talented team as well as promote and upgrade talent from within as we've done. So, it is a critical part for our ongoing success to make sure that we've got the management team who can really lead the business of the future. So let's talk about some of the future-looking comments or questions that you ask right there. Again, we go back to our original thesis for putting the two companies together is that beverages historically had been managed in silos. And we thought if we took a look at it from a consumer perspective that we would be better off and it's exactly what we've seen, is that consumers don't think about beverages in formats, the silos. They think about needs and occasions and they use multiple beverage formats, brands, products, etc., to satisfy those needs. So, by taking a consumer first, need-based approach, it has really informed our innovation pipeline, both in the cold and hot side to great success, as you see, it's driven our marketing programs. And it helps us think about partnerships going forward, whether that's a partnership like Polar that was our most recent one, in which we have a long term franchise agreement with them, but not ownership. Or partnerships where we have seen investment or ultimately acquire the business as we've done with others. When you think about our distribution assets, which is another area that you point to, we put the company together in 2018, and talked about seven different ways that we went to market. We ranged from direct store delivery, to wholesale direct, to franchise – our fountain foodservice which is our on-premise business. But the other one that we talked about at that time was ecommerce, and there was very little appreciation for ecommerce, particularly in beverage in 2018. And that's changed dramatically. We have seen the percentage of our ecommerce business grow. We've talked to you before. That's north of 10%. It's higher on our coffee business. It grows significantly faster than our average business. And we are in position to be the market leader, the category leader in this space, driven by the historical strength of Keurig. And now with Keurig, where there's always been a substantial ecommerce business, the fact that we are selling brewers that are smart brewers that can recognize the pod, that can trigger an order direct to consumer based on actual SKU level consumption, suggests that we are thinking way ahead in terms of what the next steps are in terms of distribution routes, as well as efficiency. My last point is it ties back to the question that Kevin asked, in addition to portfolio whitespace and finding new points of distribution, we think our CSD asset is a competitive advantage. But we also believe in consolidation and distribution in the industry. And we'll look for ways to continue to consolidate distribution and drive more efficiency and effectiveness through that really important asset to us. So, I think I've covered all of your forward-looking points. If there's anything else on there or anything I missed, let me know.

Lauren Lieberman:

I was wondering if you could just talk a little bit about Polar. I know it's still relatively early, but had been expanding distribution. And I was just curious if you could talk about some of the uptake you're seeing and what you're doing also to build awareness of that brand because it's one thing to put it on the shelf, another for people outside of the Northeast to pick it up off that shelf.

Operator:

Your next question comes from Sean King with UBS.

Robert Gamgort:

Let me talk a little bit about just pricing in total on pods and then, Ozan, why don't you pick up on the partner agreements and potential pricing there. I think pricing is always an interesting conversation in the context of K cup pods because we have intentionally been lowering the price, although I know for analysts and investors that was always something of concern. We always point out that that was an intentional strategy that has continued to drive household penetration. And we knew that the price was too high. And we're able to back up those price investments with strong levels of productivity because, as the price came down, we were able to expand margin. That's certainly the proof point that it was intentional. We had that well under control. We are seeing an increase in the underlying price of coffee. And while that is a lesser component of a finished K cup pod than somebody who's selling roast and ground coffee, it still is of a magnitude where we know that pricing is appropriate and required. So we pass it on immediately in the form of pricing in our owned and licensed brands. And we do think that's the right thing to do, given the inflation. But it's a little more complex in the partner situation as well as private label. And I think, Ozan, why don't you talk that through because it's a good opportunity to remind everyone how our contracts work and what they're likely to see inside and outside of the KDP P&L.

Operator:

Your next question comes from the line of Laurent Grandet with Guggenheim.

Robert Gamgort:

Ozan, you want to pick that up.

Robert Gamgort:

I think just to build on that, as I said before, just to reemphasize, our objective is margin protection. Our levers to pull are a combination of pricing, productivity and reinvestment. And we have different mechanisms in different contracts to be able to protect margin against that, using that entire basket. And in the case of coffee, which has been the most inflationary item within the manufacturing and delivery of a K cup pod – as we said, we're not responsible for it for most of our partners. And in the case of our own brands, we immediately took pricing, which by the way, as you can see, didn't really show up at all in Q3 based on the timing of the pricing and the lag on that. So, that's the actual pricing that we put in place, and we've seen across the industry as more to come.

Dara Mohsenian:

Just a follow up on that. Look, obviously, the guidance for 2022 is below your long-term algorithm because of the cost pressures. So clearly, there's some ability not to fully price away those commodity costs. Theoretically, with the conversations we've been having today, heritage DPS is in good shape to do that. You talked about some pricing on your owned and licensed brands. So just to be very clear, I assume the gap for 2022 is that the cost pressures you're seeing on the manufacturing side for your partner brands, understanding you're not responsible for the coffee grounds themselves, but you're not fully getting the pricing to offset that. So, A, is that the case just to be explicit about it? Seems clear, but just to be explicit. And, B, is that more just a lack of ability to sort of respond short term and you can make up for that in future years as you think about it? Or is it more just the contracts are set the way they are in terms of pricing and the way the relationships work, it's more of sort of a standard pricing over time as opposed to responsiveness to commodity costs. Just to clear that up?

Dara Mohsenian:

Can I just follow-up with one question? If you see manufacturing costs continue to move up on the partner side in coffee, do you think you can get incremental pricing over time? How do you think about just that piece of it? I understand there are a lot of moving pieces and you're still delivering solid growth for next year. But I'm just trying to understand that one piece of it. Obviously, we're seeing a lot of responsiveness to the costs on the heritage DPS side, right, a very strong pricing this quarter. So I'm just trying to understand that one piece of it.

Operator:

And your final question comes from the line of Robert Ottenstein with Evercore.

Robert Gamgort:

Let me hit the first one and then, Ozan, you want to talk about hedging and duration of our positions and how we think about that. Yeah, on the international side, with regard to M&A specifically, as we talked about in our Investor Day, we're really excited about being able to use our high levels of discretionary free cash flow to look beyond debt reduction as we're just about to reach our long-term leverage targets. And we talked about the capacity to do $20 billion worth of M&A. There are four areas that we talked about in that portfolio, whitespace distribution and consolidation within distribution, adding capabilities to our business. And then we also talked about market expansion or international. So, it's one of the top priorities. I don't want to rank them because it's going to be dependent upon not just our needs and our opportunities, but what is available and what kind of partners are on the other side. We've got really nice business in Mexico. We hadn't talked about it very much. And we were proud to share with you the business that we built in Mexico at Investor Day. Similarly, in Canada, we have a nice business there that we have really driven nicely. And we believe that both of those markets are – we've got a position there with management, infrastructure capabilities that are scalable. And so, we see opportunities in those two markets. And then I really don't want to talk beyond that because our objective is to make sure that we leverage the investments that we already have in place and scale them before we look at completely open territory, although that's not off the table, and see a lot of exciting opportunities across all of North America, not just in the US. Ozan, you want to talk about the hedging in our commodity position.

Operator:

I would now like to hand the conference over to management for closing remarks.

Operator:

This does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.

Operator:

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Keurig Dr Pepper's Earnings Conference call for the Second Quarter of 2021. This conference call is being recorded, and there will be a question-and-answer session at the end of the call. I would now like to introduce Keurig Dr Pepper's Vice President of Investor Relations, Mr. Tyson Seely. Mr. Seely, please go ahead.

Bob Gamgort:

Thanks, Tyson, and good morning, everyone. Since we spoke last quarter, consumer mobility across North America has continued to increase, with improving trends in travel, grocery and retail and recreation translating into changes in growth trends in beverage category segments and retail channels. Just as we experienced in 2020, the COVID recovery period in 2021 is creating significant volatility in demand, which has required us to remain nimble and flexible in managing our business. One area in which mobility remains challenged is offices, which continues to be a headwind for us in coffee. While we've experienced some improvement year-to-date and expect more over the balance of the year, we project the recovery of office mobility to lag other areas of the economy. Mix management was key to our success in 2020 as we were able to drive growth in on-trend segments and channels to offset those that were structurally challenged by COVID. While managing demand mix continues to be critical this year, we also face the added challenges of input cost and labor inflation, transportation constraints, labor shortages and supply chain disruptions, making 2021 arguably more difficult in many respects than 2020. We expect another 6 to 12 months of macro volatility before a more predictable operating environment emerges. Key to stabilization will be a return to both school and the office environment, the course of the COVID virus and its variants, the impact of reduced or eliminated government subsidies, the catch-up of global supply chains to meet unprecedented demand and an improvement in the labor market. Despite all the challenges, we remain confident in our ability to deliver our EPS guidance for 2021 while increasing our revenue growth target to 6% to 7% for the full year. Our updated financial outlook offsets the challenges I mentioned a moment ago with new pricing actions announced across most of our categories, along with continued productivity and efficiency efforts and the improving performance in our higher-margin beverage concentrates and fountain food services businesses that both benefit from increased mobility. It's important to note that we still intend to reinvest any earnings upside into growth investments. At the midpoint of our 2021 guidance range we will have achieved the three-year financial algorithm that we communicated at the time of our merger, delivering annual adjusted diluted EPS within our target range of 15% to 17%, revenue growth well above our target range of 2% to 3% and our leverage ratio at or below 3x by the end of this year. We will share our outlook for the business and update our long-term algorithm for total shareholder return at our upcoming investor event in September. Details regarding the virtual event will be shared next week. Turning to second quarter results we announced this morning. We posted another strong quarter, highlighted by double-digit growth in adjusted diluted EPS and high single-digit growth in constant currency net sales. These results were broad-based and balanced across the Company with growth driven by both core business and innovation. Because we're one of the few companies layering strong current year performance on top of strong year ago performance, it's also helpful to highlight our results on a two-year basis. Comparing the first half of 2021 with the same time period in 2019 shows constant currency net sales growth of 13.5%, adjusted operating income growth of 19.5% and adjusted diluted EPS growth of just under 30%. We expanded our market share of total liquid refreshment beverages over the previous two years, driven in part by our 1.4 share point increase in carbonated soft drinks. Total K-Cup pod shipments increased nearly 15% over the same time, and brewer sales are up nearly 50%. Looking specifically at the second quarter, more than 70% of our cold beverage retail sales base expanded market share, reflecting continued growth of CSDs driven by core brand strength and innovation, the most recent being our new Zero Sugar lineup which is performing exceptionally well. Growth in key non-carb beverage brands such as Snapple, Core, Bai and Evian was good for the quarter but could have been even stronger had it not been for supply disruptions, which I will discuss in a few moments. In coffee, our K-Cup pod shipments were essentially flat in the quarter successfully lapping the very strong year ago period that was driven by peak at-home consumption. Comparing K-Cup pod shipment volume to 2019 removes some of the significant noise and timing for that business. For the quarter, K-Cup pods grew nearly 10% on a two-year basis, demonstrating the underlying long-term growth trends in our coffee business. Keurig brewer sales in the quarter increased by nearly 30% compared to a year ago, some of which was influenced by government stimulus and the timing of Amazon Prime Day. Finally, with regard to coffee systems innovation, we were excited to announce earlier this week the launch of the K-Supreme Plus Smart Brewer, marking our first launch of a connected brewer for the broader consumer market. We look forward to talking more about the new Brew ID technology and the growth platforms it creates for us at our upcoming Investor Day event. Shifting from demand to supply, nearly all CPG companies have discussed supply disruptions in 2021, and we're certainly not immune to these challenges. We continue to be effective d in supplying K-Cup pods and CSDs, and we've been able to overcome chip shortages and ocean transportation limitations to supply the high levels of demand for our Keurig brewers. However, our non-carb beverage portfolio has been negatively impacted by supply disruptions, especially Snapple and Core, which is evident in the latest Scanner numbers. I'll use Snapple as one example of the type of challenges that we and most other CPG companies are facing in the current environment. As we discussed on previous earnings calls, we started rolling out our refreshed Snapple bottle on the West Coast in November of 2020. That new package substitutes post-consumer recycled plastic or rPET for glass and non-recycled plastic. And it also contemporizes the Snapple brand look and feel. The consumer reception has been very strong, with Snapple growing share for the first six months of the year as we increased recruitment of younger consumers, exactly what we intended to do with the refresh. However, an unexpected shortfall in committed glass bottles from our supplier required us to transition our new rPET packaging faster, which pressured material availability from our supplier of rPET and stretch the startup curve of our new production lines. We're navigating through this challenge and other disruptions that have become the new normal in 2021 to maintain our guidance. However, we do expect some sales and share pressure on key non-carb beverage brands throughout the third quarter. Our learnings on how to successfully manage our business through the volatility of COVID continue to serve us well as we build an increasingly resilient organization. Before I turn it over to Ozan to discuss our segment performance in detail, I'd like to mention the great progress we continue to make in the area of ESG, which we know is important to an increasing number of investors. We recently issued our annual corporate responsibility report that highlights our performance against our previous ESG goals, increases our ambition through new ESG goals and expands our impact in new areas such as diversity and inclusion and health and wellness. If you haven't done so already, I encourage you to read the CR report, which is available on the KDP corporate website. Ozan, over to you.

Bob Gamgort:

Thanks, Ozan. Before handing it over to questions, I want to highlight that earlier this month, we celebrated the three-year anniversary of the Keurig Dr Pepper merger. Transaction that was based on our vision to create a North America-focused beverage company that approach the consumer and customer beverage experience in a more contemporary way. In the three years since we've accomplished a great deal and we are on track to achieve all of the financial commitments we made back in January 2018. We will continue to demonstrate what we believe it takes to be a modern beverage company, and we look forward to sharing more details with you in September. I will now turn it back to the operator for your questions.

Bonnie Herzog:

Thank you. Good morning everyone. I guess I was hoping for a little more color on your Packaged Bev volume in the quarter, which was definitely strong especially considering you were lapping a tough comp from the pantry loading last year. Could you guys give us a sense of how maybe the growth progressed through the quarter and your expectations for this business in the second half? And I'm also curious how much of the strength was driven by the rollout of your new zero line and how incremental that has been on your portfolio? And maybe any early reads on the rollout from retailers in terms of securing incremental space? Thank you.

Bonnie Herzog:

Okay. So as I think about the second half, you expect some of this momentum to continue. Would that be fair, Bob?

Operator:

And your next question comes from Kevin Grundy with Jefferies. Your line is open.

Bob Gamgort:

Sure and good morning. The last part we will cover in some depth at the Investor Day, which is coming up, so I'll wait for that event to talk about beyond 2021. With regard to 2021, we're seeing strength across the board. So in the decomposition of the year-to-date numbers that you've seen, you've seen strength in every single segment, and you've seen some mix benefits. So for example, fountain foodservice and beverage concentrates, which are among our most profitable items, were negatively impacted in the year ago period. We're getting a good rebound on that. We're seeing continued strength in at-home coffee. Certainly not at the peak of consumption in home that we did a year ago, but we've been talking about that expectation since Q2 of last year. And then brewer sales continued to be exceptional. We're projecting for the rest of the year that those will be flat. But as Ozan said earlier, it certainly takes aside the concerns that many had that the incremental households we gained in 2020 and the extra brewer sales were a pull forward. That's certainly not the case. So quite simply, we're seeing strength across the entire business. That's given us the confidence to take our revenue expectations up. And then anything in a first half, second half or quarterly comparison is really driven by the volatility of a year ago. And that's why I think it's really important to look at two-year numbers to take the noise out. And it's easy for all of us to get enamored with one quarter performance. We've always taken a long-term view. And you're seeing a lot of rebound from other companies, but the reality of it is if you compare our numbers to 2019, our revenue was up almost 14%. Operating income is 20%, as I said before. Earnings per share is up about 30%. I think that's the real way to evaluate performance.

Bryan Spillane:

Good morning everyone. So Bob, maybe just to step back a little bit further, and I guess I wanted to get your perspective on two things. One is just given all of the supply chain, I guess, challenges or constraints, and this is -- we're hearing this across a lot of companies, just how you're thinking about the balance of reinvestment or like stimulating demand while it's just becoming more challenging to produce things. And then maybe if you can also comment on just this whole environment with inflation and labor force being tight and just -- have you seen this before? How does it change the way you think about just kind of how you're running the business day-to-day over the next year or so? I'm just trying to get a sense of just do things have to change because this just environment is so dynamic.

Bryan Spillane:

Okay. And then just -- and maybe not even specific to KDP, but just would your expectation be that like it just doesn't stop at the end of the calendar year? Meaning this -- some of these sort of factors could continue for a while? Or should the baseline expectation be that within the next six months or so, this should start to settle out?

Operator:

Your next question comes from Lauren Lieberman with Barclays. Your line is open.

Bob Gamgort:

Good morning. Yes, we have certainly been more efficient in our marketing, and that's a continuation of a trend that's been in place for a while now. The nature of marketing has moved from being more broad targeting to more precise targeting. We have a significant number of tools and metrics available to us today that weren't available even a couple of years ago. And so the efficiency of our spend continues to increase, and that got pushed to an extreme during COVID, in which we were able to continue to generate demand, as you point out, with significantly lower levels of spend. I think part of that was efficiency and a big part of that was a unique situation a year ago. And if everybody pulls back at the same time, really, its execution, in-store availability, the right promotions that were driving a lot of demand, and we did that very well. But our intention is to continue to ramp our spending back up. You see a big jump in our numbers this quarter versus a year ago. I think everybody experienced that. We, along with pretty much everyone in the industry, is not fully back to 2019 levels of spending, but we're ramping our way up. And I think we're doing it for two reasons. One is there are a lot of cost pressures on all of us right now and a lot of volatility. So it's prudent to be able to keep some in reserve as you're increasing your spend to say let's ramp it up versus go all at once because we need some offsets to volatility going forward in addition to productivity, efficiency and the pricing that we've put in place. And that's what I just said is true for everybody in the industry right now. I think the second part is it gives us an opportunity to really test efficiency. If you ramp it up, you can see where your next dollars being spent and it's a good return on investment. And that gives you the confidence to add the incremental dollars beyond that back. So our track is to continue to increase over time. We'll talk more about what the long-term projection of that is when we get together in September, but that's how it's playing out right now in 2021.

Bob Gamgort:

Sure. When we get together in September, we're going to talk about the investments that we've made in the areas of R&D and product development. That's both on the hot side as well as the cold side of the business, and we'll give you some real examples of that. You point out route to market, which is critically important in beverages and something that we think is very unique. So the investments that we've made in our DSD system, which has been a big driver of growth, we've talked about it in bits and pieces over the earnings call. But when we get together, we'll be able to do a more holistic view of what we've done over the past three years and where that's going. And that's a big source of investment for us. E-commerce is another area. It's hard for you all to see the sales that we're generating in e-commerce because it doesn't show up in IRi right now. But when you see, the disconnect, sometimes between our shipment numbers and the IRi numbers, with the shipment numbers being stronger, and that happens over time, you know that we're getting some significant growth out of e-commerce. And that's a big investment area. And then just purely from a brand perspective, we would -- as we add more money, we would add to the number of -- add to our portfolio the number of brands we advertise. So right now, we focus our advertising on our largest brands. But we've got some midsized brands in there that are deserving of advertising as well, and that would be the next area that we would fund once we get to what we think is threshold on the large brands. So, there's a lot of opportunities for investment. We're very selective and test our way through it. But again, these are some of the themes that we look forward to sharing with you in September.

Andrea Teixeira:

Good morning. So, I wanted to discuss a little bit more, Bob, if you can, on the pod attachment rate. So I think you guys said last April that it is too elevated. Your comments so far on the call have been very positive against the historical levels but a bit of peak, right? So -- and I wanted to kind of also get a little bit of -- because I believe you, Ozan, spoke to pricing during the quarter or planned pricing. So with the benefit of a few months since your last comment, can you update us what you're seeing as the office reopened and the at-home could moderate? Obviously, as you're seeing probably less than 1:1 trade-offs with away from home more than offsetting the at-home kind of moderation at this point. And on the beans, on the coffee beans and the green coffee, I think it's not that much of an impact for you, but can you kind of explain to us how protected or hedged you are and what are you embedding in your guidance? Thank you.

Andrea Teixeira:

That's super helpful. But the like if I can just ask on that, what are you seeing in terms of like any rebounds to your private label or the ones that you represent, as you said, the brand that you have passed through, how is that reacting?

Operator:

And your next question comes from Steve Powers with Deutsche Bank. Your line is open.

Bob Gamgort:

Yes, that's a good way to think about it. And the pricing and the costs never match up exactly, and that's why we always create some margin for us to smooth that out, but that's a reasonable assumption.

Bob Gamgort:

Absolutely. Yes, I think it's a good time to talk about that. Ozan, would you like to jump in and update Steve and everyone on those projects?

Operator:

And your next question comes from Sean King with UBS. Your line is open.

Bob Gamgort:

Yes, it's a little jumping ahead a little bit. I mean clearly, we think about this and going into '22, but I wouldn't have any read-through in terms of trying to predict what that means for us in 2022. I think we've done a really good job of recognizing the challenges and being able to mitigate them pretty substantially if you take a look at what's happened last year and what's going on this year. And look, I can't forecast that. I can tell you that we all hope that things start to return to more normal in 2022.

Bob Gamgort:

Yes, it's really hard to do that in the moment. We're always able to do that in hindsight, and we do quite a bit of analysis of understanding how much of these are brewer upgrades versus straight-up replacements versus completely new households or even a secondary placement in an existing household. So, that's something that we dig in answer we're able to see in hindsight. For perspective, a year ago, we added 3 million net new households, and we sold 11 million brewers. So that gives you an idea of how much household penetration growth we were able to drive, which was substantial, almost 10%. But at the same time, we continue to offer better brewers with new features that are encouraging people to upgrade. And although an upgrade is not something that we profit from in the moment because we don't make money on the brewers, as you know, it really is a serious recommitment for those households to stay with the Keurig system for the long haul because the model is dependent upon not just bringing in new households, but also keeping our current households, which we do at a very high rate. And so right now, it's hard to know the breakout we are offering really attractive brewers that offer new benefits. We just launched this week the K-Supreme Plus Smart Brewer. If you go online and look at some of the reviews both on our website from consumers as well as from the media, it's getting terrific reviews. And I just think this will be yet another reason for people to upgrade. So something we'll share with you when we have it, but it's a very, very bullish indicator in terms of the health of the business from both the current households as well as new households.

Chris Carey:

Just following up on the line of question around pricing. I guess I'm conscious that you're seeing like polypropylene inflation in one of the categories where you have a stated strategy to actually lower pricing. Obviously, you have the new plants coming online. You're announcing pricing in the back half. But I guess, can you just comment maybe on like holistically how you think about offsetting inflation? And certainly, one could argue an area like packaged beverages probably has a bit more maybe like structural pricing power in North America right now than does pods. And so maybe just comment on that. I guess it's -- you're seeing positive pricing in coffee systems this quarter for the first time. I realize that's mix driven. But I just wonder if we're on the verge of seeing that stabilize and potentially rebound with inflation, if you're comfortable with that concept. So anything just around conceptually how you're thinking about offsetting inflation with pricing on a sort of a total portfolio basis would be helpful?

Chris Carey:

Thanks so much. And I appreciate it's the end of the call, I'll keep this quick. But just on the road to zero, is there a way to think about how long this launch could go before getting fully penetrated? You're running two to three shares, but obviously, other offerings from competitors have had kind of like years of runway. Just how you're thinking about the time horizon from which this can continue to benefit the portfolio? So thanks so much for that.

Operator:

All right, there are no further questions at this time. I'll hand the call back to the Company.

Operator:

Thank you, ladies and gentlemen, for joining us today. That concludes today's conference. Thank you all for joining. You may now disconnect.

Operator:

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Keurig Dr Pepper's Earnings Call for the First Quarter of 2021. This conference call is being recorded, and there will be a question-and-answer session at the end of the call. I would now like to introduce Keurig Dr Pepper's Vice President of Investor Relations, Mr. Tyson Seely. Mr. Seely, please go ahead.

Robert Gamgort:

Thanks, Tyson. And good morning, everyone. I hope you and your families are well. As we enter spring cautious optimism as in the year, vaccine rates are approaching 50% of the US adult population and growing across North America. Higher levels of consumer mobility are evident in retail, restaurants and entertainment. And there is an increasing belief that the worst of the pandemic is behind us. If the last year has taught us anything, however, it is that our role is not to predict the future but rather to be nimble, responsive and prepare for whatever we may face in the future. This same mindset enabled Keurig Dr Pepper to deliver meaningful outperformance in 2020 and a strong start to 2021. While some companies have been devastated by the impacts of the crisis, others have experienced a windfall from it. We on the other hand have succeeded despite the pandemic, by driving the parts of our business that are performing well to overcome the declines we've experienced in areas structurally challenged by COVID. While that may sound easy and concept, it is very difficult to execute in the real world. And I would like to thank our 27,000 team members across KDP, who continue to step up to meet the challenge. In the first quarter of 2021, we delivered strong performance across the board, highlighted by double-digit growth in both net sales and adjusted diluted EPS. We also reaffirmed our outlook for another strong year of double-digit adjusted diluted EPS growth. Despite the specter of rising inflation, in part by increasing our net sales growth expectations from 3% to 4% to 4% to 6%. This sets us up for a solid 2021 and positions us to achieve our ambitious three-year merger targets ending this year. Let me now provide key highlights of the first quarter. Our net sales grew by 11%, with all four business segments posting growth, driving this performance with continued strong in-market execution across the business. In cold beverages, we continue to perform well, with more than 80% of our cold beverage retail sales space expanding market share during the quarter. We believe a helpful way to assess both our results and those of the broader industry, given the unique volatility of 2020 is on a two-year stack basis. Over this time period, nearly 90% of our cold retail sales space grew market share and our consumption was up nearly 17%. LRBD performance continues to reflect KDPs broad-based strength and CSD, premium unflavored water, Snapple teas and fruit drinks and others. During the quarter we launched new zero sugar varieties across our CSD portfolio, which has helped to solidify our number two CSD manufacturer status in key retail accounts. We're also seeing KDP brands take over leadership position. The latest being Sunkist becoming the number one fruit flavored CSD brand, fueled by the zero sugar introduction and flavor-line extension. In the past few months, we launched innovation behind Bai with Bai Boost, made with clean ingredients, including plant-based energy from tea extract, Bai Boost has been well received by retailers and consumers in early days. Finally on cold beverages, our new brand partnership and the growing sparkling water segment with Polar is performing well. National ACB has grown to 55% with more distribution to come, as shelf resets are completed across the country. Our coffee business posted an exceptionally strong quarter, with net sales advancing 17% on a constant currency basis, due to a 14% increase in pod volume growth and a 61% increase in brewer volume. The latter primarily being driven by a roughly 40% increase in consumer sales, and some benefits of shipment timing between the quarters. Approximately half of the 14% increase in pod volume was due to strong consumption in the quarter, with the remainder driven by differences in pod shipment timing relative to the unusual year ago period. The fact that pod volume growth in track channels registered at just above 3% for the quarter, demonstrate the trend that we've been discussing for some time, take a pause are experiencing significantly higher levels of growth in untracked channels, particularly e-commerce. Sticking deeper into untracked channels highlights further the growing importance of e-commerce. Strength in at-home pods has been tempered by continued weakness in the away-from-home channel, as the return to offices continued to be slow. We do expect improvement over the course of 2021, especially after Labor Day when we anticipate the rates of office re-openings to accelerate. On a two-year stack basis, dollar consumption of positive track channels was up 11% with two-year shipments up more than 20%. For total KDP we delivered very strong bottom line results in the quarter, with adjusted diluted EPS growth of nearly 14%, despite lapping the sale leaseback gains in the first quarter of the year. We also continue to generate high levels of free cash flow, enabling us to pay down debt and improve our management leverage ratios of 3.5 times at the end of the quarter. Since the merger, we have reduced our leverage ratio by 2.5 turns while also investing meaningfully across the business. Let me now hand it over to Ozan to walk you through the financial results for the quarter and provide further details on our outlook for 2021.

Robert Gamgort:

Thanks, Ozan. Before moving to Q&A, I would like to provide a brief update on corporate governance. As you are aware, we transitioned from a controlled company to a widely-held one in 2020. Since that time, we've enhanced our board structure, increasing its independence and diversity, and establishing the role of lead independent director. I want to highlight - or announced it yesterday that we welcome Lubomira Rochet, as a new Director to our Board. Since November, we've added four new directors, each of whom brings a unique experiences and fresh perspective to the Board. Finally, many of you have asked questions about our post-2021 outlook. We plan to hold an Investor Day shortly after we report our Q2 earnings, during which we look forward to sharing insights on our long-term strategy and financial expectation. Details for the conference will be provided in the near future. I will now hand back to the operator.

Bonnie Herzog:

All right, thank you. Good morning.

Bonnie Herzog:

Hi. I wanted to ask you guys about you know, the brewer sales in the quarter, I was hoping just to get a little bit more color on, you know, the much better than expected sales that you guys reported and how impactful some of the innovation that you've put in the marketplace has been? And then in looking forward, how should we think about your brewer’s sale to the balance of the year, especially in the context of some of the tougher comps that you're going to be facing? And then separately, thinking about attach rates on a go forward basis, you know, especially given some of the brewer volume growth that you've seen. I guess to me, it seems like if you're attach rate hold, this really could be a meaningful driver behind pod volumes in the coming quarters and years. And if you could just touch on that or is that the right way to think about it? Thanks.

Operator:

Your next question comes from the line of Bryan Spillane with Bank of America. Your lines open.

Robert Gamgort:

Morning.

Ozan Dokmecioglu:

Sure. Good morning, Bryan. And like you have heard, likes of many of our peer group of companies, we have increased our outlook for inflation over the past month. And when you looked at the major reasons of the inflation, you would see that primarily around the packaging likes of aluminium, glass, as well as polypropylene, the material that we use in the K-Cup pods, that includes corn inputs that translates for us as the high fructose syrup. \And then, in the past one month, we were expecting already an inflationary environment in the transportation and the overall logistics, but we have seen an uptick in those. And we also service our increased volume using at times off the spot rate, which makes it a little bit higher inflationary environment. And right now, we believe that we have included a healthy amount of inflation expectations, in our view to go period. And some of the input costs, especially transportation, which is translates for us as freight, as well as polypropylene are not really hedge above in terms of there not regulated market, so we can perform some of the hedging activities that we have then. And - but nevertheless, Bryan, we feel very good with our expectations and how much inflation we have increased in our outlook and build for the rest of the year. And for the commodities and the other input costs, there are other measurable items, as we always use widely hedging techniques to protect and bring price stability and then forecast transparency for the year to go, they are all intact. But please make no mistake, that hedging or forward purchasing provides high certainty for a period of time. And in a persistent inflation is just postponing, is not really mitigating the inflation as such. But in short, we feel very good with our expectations for the rest of the year. And we believe we de-risked our P&L as much as we could.

Lauren Lieberman:

Great, thanks. Good morning. I want to talk a little bit about marketing plans for this year, as you mentioned in the prepared remarks industry - the cold drinks industry, everyone reduced spending significantly in 2020. And then you guys had tremendous results regardless. So I just want to talk about how your marketing plans for ‘21 possibly have changed with inflation being so much worse, you know, than initially anticipated. I'm sure marketing is up year-over-year, but just how much, anything that you can offer, how that may have shifted. And then also the mix of that spend, you know, again, given the very strong returns on the relatively low level of spend in 2020. How is that informing your thought process on what actually needs to be spent to support this business? Thanks.

Operator:

Your next question comes from the line of Andrea Teixeira with JPMorgan. Your line is open.

Robert Gamgort:

Yeah. Ozan, will likely talk about the EPS side, the earning side of it and the pluses or minuses? Andrea, thanks for the question. We did something that we usually don't, which gave guidance on a quarter because of the volatility. So we're certainly doing in the earning side, but we do not plan to give guidance for quarter-by-quarter on the revenue side. But Ozan, do you want to talk about the earnings visibility that we have and why we decided to give some extra color on Q2?

Operator:

Your next question comes from the line of Chris Carey with Wells Fargo Securities. Your line is open.

Robert Gamgort:

Sure. Good morning. Thanks for your question. The - this environment is anything but steady state, as we sit here right now. And as we said upfront, it appears to be returning to more of a business as new normal, whatever that's going to be when it settles basis. But way too early in this year, for us to even think about steady state. We have our entire organization remaining on their toes. We're looking for changes in the environment, none of us went into this year expecting the level of inflation that we're seeing right now, for example, and we don't know if it's temporary, or if it's sustained. So I don't know what steady state looks like. And when we get towards the end of the year, we'll probably have a better view on that. I mean, your question is, what's the longer term growth outlook for this portfolio and whatever that environment is? I won't steal any thunder from our Investor Day, which we'll be doing right after our Q2 earnings, because that will be the topic. What does the KDP outlook look like both from a strategy and a financial algorithm post-2021. At that point in time, we'll have more data on what the marketplace looks like. And that'll be a very robust part of that conversation.

Steve Powers:

Hey, thanks. And good morning, everybody. Two questions, if I could, I guess, maybe Ozan for you just to round the 2Q key versus balance of the year question. I think, you know, I appreciate the color you gave to Andrea’s question. But if you could just hit maybe for us a little bit more specificity on what you expect to get better in the back half versus 2Q, whether it's the cost environment, or the cost savings momentum, pricing benefits, or otherwise. Just looking for a bit more clarity on where the back half acceleration has to be sourced from relative to what you said about 2Q? And then Bob, what I really wanted to ask about was just the relative strength of packaged beverages on the top line, not just this quarter. But what we've seen over the past several, there's been tailwind in that business, but you've, I think, pretty consistently exceeded expectations. And I'm curious, if there are things you can, you know, you know, hammer home for us in terms of where you attribute or what you attribute outperformance to. Part of that, I think, is that your market shares are stronger in future consumption channels where consumers have been biased to shop this past year. To the extent that's true, I guess maybe you could talk about that. But I'm also curious if you feel you see opportunities to leverage the strength you've had in those channels into future gains and immediate consumption channels when traffic builds as we go forward? Thank you.

Ozan Dokmecioglu:

Yes. Yes, Bob. Good morning, Steve. Thanks for the question. So in order to bring a little bit more color, let me try to break up a little bit more. And then - and we go from there. So as I said, we do believe that we have a good planning stance, not only for Q2, but for the remainder of the year. So - but let's make sure that we all agree on one thing is still we are not 100% out of the woods in terms of the pandemic environment. We still don't know exactly how all these things going to play out and how the macroeconomic situation going to react, and most importantly, how the mobility is going to be impacted. As we said in numerous number of times, we did not get any windfall from the pandemic environment. This was a ruthless prioritization in terms of managing the mix, along with the innovation and the categories that we operate. Therefore, we also said that we have seen some pressure in our - for example, in the coffee side, away from home business, that primarily serves the offices, as well as the hospitality sector. On the cold beverage side, the most negatively impacted part of our business was the fountain foodservice, as we discussed, again in numerous number of occasions. The good news with those, starting quarter two onwards, we are going to lap those negative numbers that we have seen in 2020. And with the increasing of the mobility, we do expect those two parts of our business to start to perform better than 2020. And albeit, we already started to see month in month out since January onwards. So we don't know and we don't have a real crystal ball in terms of how the mobility is going to be impacted and what would be the puts and takes on our business. Having said that, we also have a good understanding and some expectations in terms of how our top nine we look like in relation to the crisis stability that we believe now we have in our overall cost of goods sold portfolio, that goes back to the inflationary comments, and I have just made, which a good chunk of our portfolio that is hedgeable and we are taking all the necessary measures to assure up the rest of the year. And for the other input costs, like soft polypropylene and trade that there are not regulated markets that we can hedge, that we believe we put the incremental inflationary environment that would be applicable for our business for the rest of the year. And as we also discussed, we have several levels actually in case the inflammation goes further to put into the service, likes of productivities, cost controls, pricing whenever it is appropriate, as well as our increased volume profile to support the bottom line. Therefore, we are very fortunate in terms of having several resources in order to fight back even further inflation that may happen, given that we don't know exactly what we don't know at this point in time. And therefore, when we step back and look at it, we will also continue to ramp up our remainder productivity problems, as well as merger synergies more in the second half of this year. So when we add up all these puts and takes, we believe that we have quite a bit of healthy profit and loss profile to deliver our EPS commitment of 13% to 15%, with the associated top line. Therefore, the good news is that we have built in all these, again, puts and takes into the remainder of 2021 and came up with the full year profile that we have been talking. Bob? A - Robert Gamgort Yeah. Let me - I'm going to add one thing to that, Steve, before I get to your second question. To bring together your question and Andrea's question, you know, sometimes we get into the details, which are important, we lose the big picture. So let me just step back before I move on and say the big picture on it. The second quarter, we said is going to be below our 13% to 15% annual guidance, but still double digit. So we're talking very strong performance in second quarter. The biggest driver of that fact, in Q2, if you want to look at why is Q2 below the balance of the year is this reinvestment in marketing in 2021 compared to a quarter a year ago, we're marketing across our business and the entire industry was - had a dramatic pullback, I view that as a position of strength, not as a cost. But obviously it shows up on the earning side for one quarter. So all of that detail is really important. But let's not lose the big picture of what I just said. I think this is actually a very, very strong position. With regard to our results of our packaged beverage business, it's two things, its brand strength and its outstanding execution of retail with regard to the brand strength. We have you know talked about our share gain on Dr Pepper, Canada Dry for years, which continues to say and I won't build - drill down deeper into those because we talked about those all the time, but we're getting broader share strength across our portfolio. So I mentioned one today this deserves a little bit of a call out which is Sunkist, which has now moved to the number one fruit flavored CSD share position. We never talked about Sunkist, but we've had innovation, renovation and marketing behind that brand. And you see that it respond, and I could keep going throughout our CSD portfolio to talk about that. Beyond CSDs, we've had fantastic results on brands like CORE, Snapple, we're in the middle of a Snapple reinvention right now, which is a completely new look to it, new bottle 100%, post consumer recycled, et cetera, et cetera. So I won't go through this laundry list. But there is real brand strength and it's not accidental. It's driven by innovation, renovation and really strong marketing and that will continue. With regards to execution, it's more than just we're getting the blocking and tackling right. We have added really strong leadership to that side of the business. We've upgraded the data and technology that helps aid our decision making. We have real strength in things like - on areas like revenue growth management, which allows us to be very precise in our promotion program. And then finally, we've made 14 investments, some are substantial, like the Honickman partnerships. Some are very small, but we made 14 transactions in our route to market to take some independent businesses and move them over to our businesses in which our thesis is that when we can consolidate the supply and distribution, we're able to execute better market, and that's showing up and that's not going to slow down. So it's really the combination of those, your point about C store versus others is really not a major factor here. If you want to look at our relative C store performance, I can make it really simple for you. The single biggest reason why we are not as large as some of our competitors is because we don't have a meaningful position in energy or sports, but particularly energy. And energy is a big category in C stores. But it's nothing beyond that.

Kevin Grundy:

Great. Thanks. Good morning, everyone. Thanks for taking the question. Bon, a question for you on Polar and the company's sparkling water strategy more broadly. So you spent a little bit of time, you mentioned distribution opportunity for the brand. It also seemed like it contributed to the strong package beverage result in the quarter building on Steve's question a moment ago. So a few questions, please. What is the ACV opportunity? I think you mentioned it's 55%. What is the ambition? Where do you think that can go? And where are those shelf space gains going to come from, as you as you expand? Have you been pleased with the existing velocity, as you've expanded here at existing retailers? And then Bob maybe just more broadly on the company's sparkling water strategy, just more broadly, given the attractiveness of it, and it continues to be one of high growth categories in the beverage space a lot there? Thank you.

Operator:

All right, thank you. That concludes the Q&A session of today's call. I'll hand the call back to Tyson.

Operator:

Thank you, presenters. And thank you ladies and gentlemen. That concludes today's conference. Thank you all for joining. You may now disconnect.

Operator:

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Keurig Dr Pepper's earnings call for the fourth quarter and full year of 2020. This conference call is being recorded, and there will be a question-and-answer session at the end of the call. I would now like to introduce Keurig Dr Pepper's Vice President of Investor Relations, Mr. Tyson Seely. Mr. Seely, please go ahead.

Robert Gamgort:

Thanks, Tyson, and good morning. Before getting started, I'd like to express my best wishes to everyone that you and your families are well. It's hard to believe that we've all been operating under the pandemic for almost a year. And while vaccines are providing hope for a return to normalcy later this year, the spike in COVID cases in January, followed by extreme weather in February suggest that 2021 will be another unpredictable year. At the start of the pandemic, we put in place our ONE KDP plan, which prioritize keeping our employees safe and healthy, delivering for our customers and consumers and providing for our communities. These priorities have served us well. Additionally, our success in navigating this crisis to date has been aided by using data and technology to leverage the breadth of our portfolio and the unique reach of our distribution network to effectively manage portfolio and channel mix. In 2020, we delivered at or above the high end of the annual guidance we established at the beginning of the year. And the 2021 guidance we are providing today points to our confidence in achieving the 3-year merger commitments communicated in 2018, despite the macro environment becoming significantly more challenging since that time. As you saw from our earlier announcement, we are increasing our dividend rate by 25%, starting in the second quarter of this year. This reflects the line of sight we have to continued strong free cash flow, which enables us to simultaneously increase our return of value to shareholders, reach our deleveraging target by year-end and invest in expanded production capacity, innovation and technology. In fact, our dividend payout ratio, even after the 25% increase announced today, remains below 50% of free cash flow. Finally, we're fully committed to deliver both TSR and ESG. In 2020, we achieved nearly all of our aggressive sustainability goals. And in 2021, we have signed up for new and expanded ESG goals, including health and well-being and diversity and inclusion. We will publish specifics for each in our corporate responsibility report in June. All of this underpins our journey from 2 separate companies to a combined new challenger in the beverage industry to a Modern Beverage Company with an exciting future. We look forward to sharing our long-term vision and plans for KDP when we conduct an Investor Day in the second half of this year. Let me take a few minutes to step back and provide key highlights of our 2020 performance. We delivered accelerated constant currency net sales growth of 5% in 2020, with strong momentum exiting the year. Driving that revenue growth were exceptionally strong in-market results across the business. In cold beverages, we gained market share in more than 90% of our retail base, including market share growth in excess of 1 full point in CSDs. This was driven by double-digit consumption growth of Dr Pepper and Canada Dry, our largest CSD brands, as well as A&W, 7UP, Sunkist and Squirt. Dr Pepper & Cream Soda became the #1 new flavor in the CSD category in 2020, while Canada Dry Bold also performed exceptionally well. Canada Dry is now the only CSD brand to achieve volume and dollar growth for the past 14 consecutive years. Strength in cold beverages extended well beyond CSDs, with KDP share growth in premium water, ready-to-drink tea, shelf-stable fruit drinks and Mott's apple juice and sauce. As we discussed on previous earnings calls, the pandemic required us to manage mix across channels, beverage segments and even pack types to react to dramatic shifts in consumer shopping and consumption patterns. This is driving growth in multipacks and cans sold in large outlets and e-commerce to offset slowdowns in fountain foodservice, convenience and gas channels and as a result, impulse packs. Our speed in pivoting to these changes was enabled by new uses of data and technology, consistently strong in-market execution, leveraging our highly developed e-commerce capability and a flexible and resilient supply chain team. Our coffee business also had a strong year. Consumer purchases of Keurig manufactured K-Cup pods registered double-digit growth, while brewer shipments grew 21%, which reflects a combination of new households entering the system as well as existing households upgrading their brewers. Household expansion of the Keurig system was very strong this year with approximately 3 million new households entering the system. That translates to 10% household growth, nicely above our longer-term pre-pandemic trend of approximately 7% growth per year. Not surprisingly, the consumer shift to work-from-home meant at-home consumption of K-Cup pods was strong throughout the year, while the away-from-home channel, which is focused on offices, remained a significant headwind. And while we expect the away-from-home business to improve slowly over the course of 2021, we will begin to lap the 2020 declines in the second quarter of this year. In addition to our strong top line results, our bottom line performance was also strong for the year, with adjusted diluted EPS growing 15% to $1.40, which represents the high end of our 2020 guidance. This was achieved by offsetting significant mix headwinds and operating cost pressures with revenue growth that was above our targets, continued strong productivity and merger synergies and reductions in discretionary spending. We also drove strong free cash flow, which enabled us to reduce our indebtedness and improve our management leverage ratio to 3.6x, while also making significant capital investments, specifically

Operator:

[Operator Instructions]. Your first question comes from the line of Bonnie Herzog with Goldman Sachs.

Robert Gamgort:

Yes. Okay. I'm going to take the first one, and then I'm going to turn it over to Ozan to talk about Spartanburg. Coffee attachment rates have been very steady for years. And in the past, we've talked about the best proxy for household penetration growth is actually pod volume growth because of attachment rate being so stable. In the early part of the shelter-in-place, we saw an increase in attachment rates, as you would expect. Obviously, we got some benefit from that in the early part of this, but we've seen it normalize over time. And our expectations going forward is that it does normalize over time. So we did get a short-term benefit from that, but remember, that was offsetting a significant hit that we were getting to our office coffee business. So all of the guidance that we put out there for 2021 does anticipate a more normalized attachment rate. Ozan, you want to talk about Spartanburg.