Keurig Dr Pepper Inc.

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Carrick Dr. Pepper's earning conference call for first quarter of 2019. This conference is being recorded, and there will be question and answer session at the end of the call. I would now like to introduce your host for today's conference, Carrick Dr. Pepper, Vice President of Investor Relations, Mr. Tyson Seeley. Mr. Seeley, please go ahead.

Thank you, and hello, everyone. Thanks for joining us. Earlier this morning, we issued our press release for the first quarter of 2019. If you need a copy, you can get one on our website at KeurigDrPepper.com in the Investors section. Consistent with previous discussions, today we will be discussing our performance on an adjusted basis, excluding items affecting comparability and, with regard to the year-ago period, our financial performance also takes into account pro forma adjustments due to the merger. The company believes that the adjusted and adjusted pro forma bases provide 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 and adjusted pro forma bases provide meaningful comparisons and an appropriate basis for discussion of our performance. Details of the excluded items are included in the reconciliation tables included in our press release and our 10-Q, which will be filed later today. Here with me today to discuss our first quarter 2019 results and our outlook for the balance of the year are KDP Chairman and CEO, Bob Gamgart, and our CFO, Ozan Dogmetioglu, and our Chief Corporate Affairs Officer, Maria Scheper-Gurcio. 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 filing with the SEC. With that, I'll hand it over to Bob.

Thanks, Tyson, and thanks to everyone for dialing in. We got off to a good start in the first quarter. All four of our segments registered strong underlying net sales growth, and our brands continued to perform well in the market. In addition, we drove double-digit growth in operating income, which combined with significantly lower interest expense than last year, and a reduction in our effective tax rate enabled us to deliver adjusted diluted EPS growth of more than 30%. The integration of the two legacy businesses continues to progress well, and the strong financial performance during the quarter was supported by merger synergies, which, as expected, began to flow through in a meaningful way. As we've indicated previously, we expect $600 million of synergy capture over the next three years to contribute to EPS growth of 15% to 17%, while ongoing productivity will enable us to increase investment in the business to support continued top-line growth. Our cash flow generation remained very strong, enabling us to repay more than $400 million of debt in the quarter and continue to deliver rapidly. Our confidence for 2019 continues to be high, supported by some exciting innovation in our coffee systems and packaged beverages segments hitting the market in Q2. In addition, you've likely heard that we've made some moves in the energy space, having signed distribution agreements for RUNA Clean Energy Drink, and Adrenaline Shock, or Ashok, a functional clean label energy drink. We also made a minority investment in Ashok. Still early days, and we'll have more details to follow on our next call. Turning now to the highlights of the quarter, starting with in-market results based on IRI. Retail market performance started off the year strong. We registered dollar consumption growth across our portfolio and grew or held market share in nearly every category. Our CSD, premium unflavored still water, ready-to-drink coffee, and shelf-stable apple juice portfolios all grew share, driven by solid performance of Dr. Pepper and Canada Dry, core hydration, Pete's and Forto ready-to-drink coffee, and Moss apple juice. In our U.S. coffee business, unit consumption of KDP-manufactured single-serve pods was essentially in line with category growth of 5%, and dollar share of pods manufactured by KDP was 81%, down slightly versus a year ago. While we generally don't talk about in-market results of our coffee business in Canada, it is worth pointing out this business posted strong market share growth of 7.4 points to 68% in the quarter. The strength was fueled by our new partnership with Tim Hortons, the leading coffee brand in Canada. In addition, given that we secured the license for McCafe pods beginning in 2020, we have great visibility to continued strong growth in Canada for the next two years. Turning now to the financials on an adjusted basis. Our underlying net sales grew 2.5%, driven by growth in both volume and mix, and net price realization. This excludes the two expected unfavorable impacts in our packaged beverages segment, from the changes in our allied brand portfolio and calendar timing that we discussed with you last quarter. Specifically, on a year-over-year basis, the net change in our allied brand's portfolio reflects Evian, Pete's, and Forto now ramping up as compared to the established Fiji and Body Armor businesses last year that have since exited. The second impact reflects unfavorable Q1 calendar timing versus a year ago, resulting from the shift of Easter into Q2 and having one less shipping day in Q1. Operating income grew nearly 11%, or 260 basis points to 24.8% of net sales, primarily reflecting strong productivity and merger synergy, both of which benefited our cost of goods sold and SG&A. These positive drivers more than offset inflation, particularly in packaging and logistics. Adjusted diluted EPS increased 32% to $0.25 in the quarter compared to $0.19 in the prior year period. This increase was driven by the growth in operating income as well as lower interest expense and a favorable effective tax rate. Turning now to our segment, I'll start with coffee systems. Net sales increased 1.7%, fueled by higher volume mix of 5%, partially offset by lower net pricing of 2.5%, and unfavorable foreign currency translation of 0.8%. This relationship between volume mix and net pricing is consistent with our previously communicated expectations for strong volume growth to more than offset moderating price investment in pods to deliver revenue growth in coffee systems. The volume mix growth for the segment was driven by a 7% increase in K-cup pod volume and a 12% increase in brewer volume, partially offset by lower pod shipment mix driven by the growth of branded partners. Regarding the strong brewer growth in the quarter, as discussed previously, we do not believe that brewer sales are an effective metric in predicting household penetration, which is the real driver of coffee systems, because it doesn't capture the machine replacement cycle. In addition, brewers do not behave like a traditional FMCG business, in that the timing of shipments does not match consumption well, especially on a quarterly basis. Operating income for coffee systems increased more than 7% in the first quarter, reflecting the growth in net sales and ongoing productivity. We also recently began to realize merger synergies in cost of goods sold and logistics. In the next several weeks, we will be launching our newest addition to our brewer lineup, the K-Duo Brewer. K-Duo provides consumers the ability to brew a large pot of coffee through a traditional drip system in addition to a single cup through K-Cup Pot. The combination of these two technologies in one machine eliminates the need to have two different brewers on the kitchen counter. K-Duo is the latest example of our robust, consumer-centric innovation program designed to drive new household penetration of the Keurig system by addressing, in this case, one of the top five barriers to system adoption. The KDUO is currently shipping to retailers, and we expect the brewers to begin reaching shelves over the summer, with the fall home entertaining and gifting season being the key time period for retail sales. The KDUO launch as well as the recently introduced K-Cafe and K-Mini, will be supported with significant marketing investment across traditional and digital media platforms. Turning to the packaged beverages segment, net sales for packaged beverages were significantly impacted by the expected unfavorable items discussed previously, namely changes versus a year ago in our Ally Brands portfolio and calendar timing related to Easter, and one less shipping day. Collectively, these items amounted to a 6.6% growth headwind to the segment in Q1. Excluding these two items, packaged beverages underlying net sales grew 1.4% in the quarter. It's important to note that the allied brand's impact will continue to be a headwind until the fourth quarter, when it will reverse to a positive impact versus a year ago. Driving the underlying net sales growth for packaged beverages in the first quarter were Core Hydration, which continued to register exceptionally strong growth, with a nearly 60% increase in retail sales in the quarter, and Dr. Pepper, reflecting the impact of higher pricing. Canada Dry also performed well, successfully lapping its almost 17% net sales growth in the first quarter last year, driven by the launches of Diet Canada Dry Ginger Ale and Lemonade and Canada Dry Ginger Ale and Orangeade. Contract manufacturing also performed well in the quarter. Operating income for packaged beverages was even with year-ago periods, largely reflecting strong productivity and merger synergies offset by inflation, particularly in packaging and logistics. Looking ahead to the upcoming summer months, We're excited about the innovation plans for packaged beverages. We recently introduced a limited edition Dr. Pepper dark berry variety in conjunction with Marvel Studios' Spider-Man Far From Home movie that hits theaters in early July. We also started shipping innovation behind Snapple, namely three lemonade varieties. The innovation behind both Dr. Pepper and Snapple is performing very well in the market in early weeks, and we expect momentum to further increase as we enter the summer months and activate marketing support. Turning now to the beverage concentrate segment. Net sales, which represents our sales of concentrates to bottlers and syrups to fountain customers, increased nearly 5% in the quarter, driven by strong net price realization of 7%, partially offset by lower volume mix and unfavorable foreign currency translations. The growth in net sales continued to be fueled by Dr. Pepper, as well as increases for both Crush and Big Red, the latter of which we acquired last year. Operating income for beverage concentrates advanced 12% in the quarter, reflecting the strong net sales performance and timing of marketing investment that is skewed to the balance of the year. Finally, turning to Latin America beverages. Net sales for the segment increased nearly 3% in the first quarter, reflecting both higher net price realization and favorable volume mix, partially offset by unfavorable foreign currency translation. Operating income for Latin America beverages in the first quarter was even with the year-ago period, reflecting growth in net sales entirely offset by an unfavorable foreign currency transaction impact for packaging materials, as well as inflation and input costs and logistics.