Keurig Dr Pepper Inc.

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Keurig Dr. Pepper's earnings call for the fourth quarter and full year of 2018. 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 your host for today's conference, Keurig Dr. Pepper, Chief Corporate Affairs Officer, Ms. Maria Scappa-Garcia. Please go ahead.

Thank you, and hello, everyone. Thanks for joining us. Earlier this morning, we issued our press release for the fourth quarter and full year of 2018. If you need a copy, you can get one on our website at KeurigDrPepper.com in the investor section. As you will recall from last quarter, the discussion of our Q3 performance was largely on an adjusted pro forma basis due to the merger, and our discussion here today will be consistent with that. The company believes that the adjusted pro forma basis provides investors with additional insight into our business and operating performance trends. While these pro forma adjustments and the exclusion of items affecting comparability are not in accordance with GAAP, we believe that the adjusted pro forma basis provides a meaningful comparison and an appropriate basis for discussion of our performance. Details of the excluded items are included in the reconciliation table included in our press release, and are discussed in detail in our 10-K, which will be filed later today. So, with quite an exciting 2018 now in the record books, our attention turns to driving another year of strong performance for KDP in 2019. Here with me today to discuss our results for 2018 and our outlook for 2019 are KDP Chairman and CEO, Bob Gamgord, and our CFO, Ozan Dagmasioglu. Also with us today is our recently hired Vice President of IR, Tyson Seeley, whom some of you already know. Tyson will lead the IR team here at KDP reporting to me. For those of you who don't already know Tyson, I'm certain you will enjoy working with him. 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 risks and uncertainties that could cause actual results to differ materially, and the company undertakes no obligation to update these statements based upon subsequent events. A detailed discussion of these risks and uncertainties is contained in the company's filings with the SEC. And with that, I'll hand it over to Bob.

Thanks, Maria, and thanks to everyone for dialing in. We are very pleased with the strong results delivered in Q4 and for the full year of 2018. And we're especially proud of the progress we have made in creating our new beverage company. We expect to create sustained shareholder and stakeholder value over the long term. We have largely completed our integration, bringing together 25,000 employees under a unified culture and harmonized processes. And we have established a singular focus to capture growth across the majority of beverage occasions in North America. Most importantly, our in-market business momentum never lost a beat while we were in progress of integration, a real testament to the quality of our team members and the strength of our integration program. We drove growth across the majority of our portfolio in 2018, are on track to deliver our synergy goals, and are in position to deliver the overall value creation targets we communicated at the time of the merger, even in an environment that has become much more challenging over the past year. Let's talk specifics for 2018 before we speak to our expectations for the coming year. I'll begin with in-market results based on IRI. Retail market performance was strong across most of the business. Our CSD portfolio registered market share growth in both units and dollars, with strong dollar performances from both Dr. Pepper and Canada Dry, and to a lesser extent, A&W, Squirt, and Schweppes. Outside of CSDs, we gained share in multiple cold beverage segments, such as enhanced flavored still water, premium unflavored still water, ready-to-drink coffee, apple juice, vegetable juice, and mixers. Our coffee portfolio also delivered strong results in 2018, driven by unit growth approximating 10% for pods manufactured by KDP, outpacing category growth of approximately 8%, In dollar terms, KDP manufactured pods grew over 4% in a category that advanced approximately 3%. As a result, the dollar market share of pods manufactured by KDP advanced to 82%. Turning now to total company financials on an adjusted pro forma basis. Net sales were up 2.3% for the year, with strong revenue growth registered for all segments except coffee systems which was up in volume but essentially flat in dollars due to our previously discussed strategic pod pricing investment. Operating income advanced approximately 7% to $2.6 billion, with double-digit growth in the second half of the year, more than offsetting flat performance in the first half. For the year, the profit contribution from growth in net sales and continued strong productivity was partially offset by increased inflation in input costs and logistics. Further, the operating gains from changes in the Allied Brands portfolio in 2018 were less than those realized in 2017. Adjusted diluted EPS advanced 22% to $1.04 for the year, squarely in line with our targets, reflecting the growth in operating income and lower interest expense as well as the benefit of non-operating income recorded in 2018 related to a cash distribution from Body Armor and a gain from the acquisition of Core, also benefiting the comparison with a lower effective tax rate in 2018 due to U.S. tax reform. Turning to our segments on an adjusted pro forma basis, I'll start with beverage concentrates, which posted strong results for the year, Net sales, which represents our sales of concentrates to bottlers and syrups to fountain customers, advanced approximately 4%, driven by growth in both net realized pricing and volume mix. The increase in net sales was driven by very strong growth of Dr. Pepper and A&W, as well as increased sales for Squirt, Schweppes, Big Red, and Canada Dry. Operating income for beverage concentrates advanced 5% for the year. reflecting the strong net sales performance and slightly lower marketing spend. Turning to packaged beverages, packaged beverages delivered 4% growth in net sales for the year, reflecting volume mix growth of 5.4% for continuing brands, partially offset by the anticipated unfavorable impact of 1.2%, resulting from changes in the allied brands portfolio during the year. Pricing for the year was essentially even with a year ago, driven by the pricing actions implemented in late Q3 that offset lower net price realization earlier in the year. Driving the net sales momentum was double-digit revenue growth of Canada Dry, reflecting successful innovation. Dr. Pepper also registered growth for the year, driven by the particular strength of our college football marketing campaign, Fansville, which featured an engaging storyline that played out over the course of the season. Core and Buy also posted very strong growth, partially offset by Fiji, Vitacoco, and Hawaiian Punch. Contract manufacturing also contributed to the revenue growth for the year. Operating income and packaged beverages declined approximately 10% for the year, primarily due to inflation that was not covered until we took pricing late in the third quarter. as well as the impact of gains recorded from allied brands being lower in 2018 than 2017. Partially offsetting these factors were the benefits of net sales growth and productivity. Illustrating the importance of our late-year pricing actions, operating income for packaged beverages accelerated in the fourth quarter, growing more than 8%, which Ozan will cover shortly. As we head into spring, we see the benefits from the launch of diet Canada Dry ginger ale lemonade and the introduction of Canada Dry ginger ale and orangeade, both of which will be supported by marketing investment. In addition, we have continued innovation plan for Dr. Pepper and Snapple, among other brands. Turning now to Latin America beverages. Latin America beverages had a strong year, with net sales advancing 4% and operating income up 28%. The net sales performance reflected higher net pricing of 5.5% and favorable volume mix of approximately 1%, partially offset by unfavorable foreign currency translation of 2%. Pena Fial led the growth in net sales, along with Clamato, Squirt, and Mott. Operating income for Latin American beverages grew 28% to $82 million for the year. primarily reflecting the growth in net sales as well as the favorable impact of comparison to a year ago write-off of prepaid resin inventory and, to a lesser extent, productivity. Now turning to the coffee system segment. Coffee systems had a solid year with volume mix up 3.2%, driven by strong K-cup pod volume growth, offset by lower net realized pricing of 3.7%. reflecting the previously discussed strategic pod pricing investment, which continues to moderate. K-cup pod volume grew 7.4% for the year, driven by increased household penetration of the Keurig brewing system, which expanded by 7% and is now approaching 22% on a rolling 52-week basis ending December. Somewhat counterintuitively, brewer volume declined 1.5% despite the growth in household penetration. This is the result of increased brewer quality, which has led to consumers holding onto their brewers longer and has also resulted in fewer returns. Brewer sales were also impacted by the discontinuation of select legacy brewer models, partially offset by the success of our recently introduced K-Cafe and redesigned K-Mini. Since 2016, our entire brewer lineup has been refreshed or replaced with new models. The launch of K-Cafe, which was supported by the second year of our Brew the Love campaign featuring James Corden, has been well-received in the market. K-Cafe enables consumers to make lattes and cappuccinos at home using any K-Cup pot. The consumer reviews of the new brewer have been exceptionally strong. In addition, our updated K-mini brewer platform, which features a modern sleek design and improved coffee quality and temperature, is another example of our robust innovation pipe program designed to drive new household penetration in the Keurig system. Operating income for coffee systems was up a strong 9% for the year, primarily reflecting volume growth and strong productivity, partially offset by strategic pod pricing investment. inflation, and higher marketing. As you know, partnerships are a key element of our coffee system strategy, and in 2018, we added Tim Hortons, the iconic coffee brand in Canada, which was previously unlicensed, and Panera, the well-regarded bakery cafe brand in the U.S. We've also signed an agreement with Met Cafe in Canada, previously an unlicensed brand, which we will begin distributing in 2020. We also added and expanded multiple private label partnerships in 2018. And finally, the strong pace of brewer innovation will continue in 2019. While too early to share the specifics today, on our next call we will have the opportunity to discuss our 2019 innovation plan, which will begin shipping in Q2. We will also be increasing our investment behind Keurig brand marketing this year. Before I turn it over to Ozan to provide more detail on the latest quarter and 2018 full year, I'll speak to our 2019 targets. For the full year, we're targeting adjusted pro forma diluted EPS growth in the range of 15 to 17%, representing $1.20 to $1.22 per share. This growth rate is the same as the long-term target we communicated at the merger announcement over a year ago, despite an increasingly challenging operating environment marked by higher inflation and CSD industry volumes that are somewhat pressured by the elasticity impact of pricing. To navigate these pressures, we are strengthening our productivity efforts and investing in innovation, marketing, and retail execution to continue to drive market share gain. With that, I'll hand it off to Ozan.