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.

With that, I'll hand it over to Ozan. Thanks, Bob, and good morning, everyone. I will start with a review of the financials for the first quarter, which was another good one for KDP. I will then transition to our outlook for the balance of the year. Continuing on an adjusted basis, net sales for the first quarter decreased 1.1 percent to $2.5 billion, compared to $2.53 billion in the prior year, which reflected a strong underlying net sales growth of 2.5 percent, driven by higher volume mix of 1.4 percent and favorable net price realization of 1.1 percent. More than offsetting this underlying growth were the expected unfavorable impacts of 2.5 percent from changes in our allied brands portfolio, and 0.6% from calendar timing. In addition, foreign currency taxation was unfavorable, 0.5% in the quarter. Operating income in the quarter increased 10.5% to $621 million, compared to $562 million in the prior year. and on a constant currency basis operating income at once 11.6%. This performance primarily reflected strong productivity and synergies in both cost of goods sold and overhead. Partially offsetting these growth drivers was inflation in input costs led by packaging and also in logistics. On a percentage of net sales basis, operating income advanced 260 basis points in the quarter to 24.8%. In terms of our segment performance for the first quarter on an adjusted basis, net sales for coffee systems increased 1.7% to $968 million in the quarter. This strong performance reflected higher volume mix of 5% that was partially offset by lower net price realization of 2.5% and unfavorable foreign currency translation of 0.8%. On a constant currency basis, coffee system net sales advanced 2.5%. Operating income for coffee systems advanced 7.4% to $335 million, compared to $312 million in the prior year end. And on a constant currency basis, operating income advanced 9%. Driving this performance were the benefits of the net sales growth and productivity. As a percentage of net sales, operating income advanced 180 basis points in the quarter to 34.6 percent. As Bob mentioned, we are beginning to realize some merger synergies in the coffee system segment in both cost of goods sold and logistics. Turning to packaged beverages, net sales for the segment decreased 5.3 percent in the quarter to $1.12 billion, compared to $1.18 billion in the prior year. reflecting a combined 6.6% net sales headwind from changes in the allied branch portfolio that reduced net sales by 5.4% and calendar timing that reduced net sales by an additional 1.2%. Importantly, underlying net sales grew 1.4%, driven by net price realization of 2.3%, partially offset by lower volume mix of 0.9 percent. Also impacting the net sales comparison in the quarter was unfavorable foreign currency translation of 0.1 percent. Core Hydration, Evian, Dr. Pepper, Canada Dry, and Zansk registered strong net sales growth in the quarter, along with growth in contract manufacturing. partially offset by decline in moths and seven-up. Operating income for packaged beverages totaled $160 million in the quarter and was even with a year ago, largely reflecting productivity and merger synergies. The productivity improvement included a $10 million net gain on an earlier-than-expected renegotiation of a manufacturing contract, which we were expecting later this year. These positive drivers were offset by inflation in packaging and logistics. As a percent of net sales, operating margin advanced 70 basis points versus a year ago to 14.3%, turning to beverage concentrate. Net sales for the segment increased 4.8% in the quarter to $304 million, driven by higher net price realization of 7.1%, partially offset by lower volume mix of 2%, and unfavorable currency transition of 0.3%. The net sales growth was fueled by Dr. Pepper, along with increases in crash and big red, partially offset by Canada draft. The shipment volume Decrease for beverage concentrate was due primarily to Canada Dry, Dr. Pepper, and Chouette, partially offset by higher volume for Big Red and Crush. In terms of bottler case sales, beverage concentrates decreased 1.9%, including fountain food service, which was 2% lower compared to the year-ago period. Operating income for beverage concentrates increased 11.7% to $201 million, compared to $180 million in the year-ago period, reflecting the benefits of the strong net sales growth and the shift of marketing into the balance of the year. As a percentage of net sales, operating margin advanced 400 basis points versus year-ago to 66.1%. Turning to Latin America beverages, net sales for the segment increased 2.7% to $116 million, compared to $113 million in the prior year. This performance was driven by higher net price realization of 4.1% and favorable volume mix of 1%. partially offset by unfavorable currency translation of 2.4%. On a constant currency basis, Latin America beverages net sales advanced 5.1%. Operating income for Latin America beverages totaled $12 million and was even with the prior year. This performance reflected the benefit of the net sales growth offset by an unfavorable foreign currency transaction impact and inflation in input costs and logistics. On a constant currency basis, operating income advanced 1.3%, turning to interest expense. Interest expense in the first quarter declined $40 million to $131 million, reflecting a $27 million benefit from unwinding several interest rate swap contracts in the quarter and the benefit of our ongoing deleveraging. As previously discussed, our interest expense outlook for the year is supported by our strategy to opportunistically use interest rate swap contracts to manage interest rate risk. Net income for the quarter increased 35.4% to $356 million. compared to $263 million in the prior year, driven by the strong operating income growth, lower interest expense, and the lower effective tax rate resulting from U.S. tax reform enacted in December 2017. Taking all of these factors together, our adjusted diluted EPS in the quarter increased 32% to 25 cents per diluted share, compared to 19 cents per diluted share in the prior year. In terms of leverage, we paid down $414 million of debt in the first quarter, increasing the total amount of debt paid down in the nine months post-merger close to approximately $1.35 billion. We also had $85 million of unrestricted cash on hand at the end of first quarter. The debt reduction in the quarter, along with our growth in adjusted EBITDA, reduced our debt-to-adjusted EBITDA ratio, which we refer to as our management leverage ratio, by almost half a turn in the quarter to 5.1 times. This aggressive pace of deleveraging is consistent with our expectations. in terms of our outlook for the balance of 2019. For the full year, we continue to expect adjusted diluted EPS growth in the range of 15% to 17%, representing $1.20 to $1.22 per share in line with our long-term merger target. We continue to expect net sales growth of approximately 2%, which is also in line with our long-term merger target of 2% to 3%, and includes an approximate 100 basis points headwind impact from the changes in the Allied Brands portfolio. As discussed earlier, this headwind impacts the packaged beverages segment. We continue to expect merger synergies of $200 million in 2019. Consistent with our long-term merger target, And we continue to expect these synergies to fully flow through to EPS. We continue to expect interest expense to be in the range of $570 million to $590 million. This reflects our expectation of significant cash flow generation and continued deleveraging during 2019, as well as the benefit of additional unwinding of interest rate swap contracts. We continue to estimate our effective tax rate for 2019 to be in the range of 25 to 25.5 percent for the year. We continue to expect our diluted weighted average shares outstanding to approach 1.42 billion in 2019, including the 16.7 million of shares issued in November 2018 for the acquisition of core hydration. While we are not providing EPS guidance by quarter, we continue to expect EPS growth versus 2018 to be tempered in quarter two and quarter three due to comping the significant gains on allied brands in 2018 that we discussed last quarter. We understand that modeling KDP as a new company can be challenging, so we share the following perspective for you to keep in mind when doing your modeling. We continue to expect our second-half synergies to be greater than our first-half synergies, as our programs build throughout the year. Based on our input cost coverage, we continue to expect inflation to be the highest in the first half and then moderate in the second half. And finally, in 2019, we continue to expect free cash flow to approximate 2.3 to $2.5 billion, and we continue to be confident that we will achieve our leverage target of below three times in two to three years from merger closing. With that, I will hand it back over to Bob for some concluding remarks. Thanks, Ozan.

Before opening it up for questions, I'd like to provide some closing thoughts on the quarter. We started 2019 on a strong note and are on track to deliver our commitments for the full year. Nine months into the combination of these two businesses, we remain confident in achieving our long-term merger targets and the value creation framework we laid out over a year ago. Our brands are performing well in the marketplace, and we continue to invest in innovation and marketing to ensure we position our brands and our company for future success. Finally, the profit and cash flow generation of the new business remains strong, as evidenced by our synergy delivery, margin expansion, and debt reduction. With that, I'll turn it back to the operator for questions.

At this time, I would like to remind everyone that if you would like to ask a question, the press star followed by the number one on your telephone keypad now. Again, ladies and gentlemen, that's star one for any questions. We'll pause for just a moment to compile the Q&A roster. The first question will come from Judy Hong with Goldman Sachs. Please go ahead. Thank you. Good morning.

So, Bob, I guess I wanted to look at the pod growth in the quarter. And I know you talked about really focusing on the key metrics, which is the category growth on consumption basis and then KDP, manufacturer market share. And I guess both of those metrics kind of slowed in the quarter. So category volume up 5%. Your market share was down a little bit. So maybe you can just provide us some context of what you're seeing from that perspective And then as you think about some of the brewery innovations, how impactful do you think those could be this year? Thank you.

Yeah, thanks for your question, Judy. I see it as very steady performance on a business that doesn't fluctuate much quarter in, quarter out. So on a 52-week basis, the category was up seven. On the latest quarter, it was plus five. I mean, that's all within the normal range of movement. If you look at our KDP manufactured share, On a 52-week basis, it was just around 82. On the quarter, as you point out, it was around just above 81 share, which we talked about was down slightly versus a year ago. If you look at the latest four weeks of IRI, covering April, which we just got in, we're back up to almost 82 and we're up versus a year ago. So I look at the movements that you're talking about all within sort of the margin of error, and I don't see anything significant in those numbers at all.

And then just in terms of innovation, how you think that could be, how much do you see that as impacting?

Our household penetration has continued to march up now on a nice pace, mid to high single digits for the past couple of years. Innovation, marketing, in-store merchandising, addressing a lot of the barriers to household adoption, price. For example, we talked about pods, price of machines. Quality of machines is up significantly. All of that combined is what's driving that steady increase in household penetration. And our eyes are squarely focused on the 61 million households that we identified back in our investor presentation that are drip coffee consumers that really should be converted to single serve. And every piece of work that we do, whether it's brewer innovation or marketing or all the other pieces I just listed there, are targeted at bringing those people in, and it's going along very nicely. This latest introduction, the K-Duo Brewer, specifically addresses one of the barriers to growth that we know that people have, which is barriers to system adoption we know people have. I want to be able to make single serve during the week, for example. On the weekend when I have company over, I want to be able to make a large batch. I don't want to have two machines on the counter. So for the first time, we're giving them – platform of multiple machines under this platform that allow them to do a full carafe of coffee using regular drip brewing process, as well as a single-serve K-cup with no compromise in quality, all in one machine. So all of this is what continues to drive that steady march upward in our household penetration. Great.

Thank you.

Okay. Thanks.

The next question will come from Lauren Liburn with Barclays. Please go ahead. Great. Thanks. Good morning. Hi, Lauren.

Hi. I wanted to just talk a little bit, again, about, like, longer-term strategic vision. And I know, you know, part of the rationale for the creation of the company was filling in white space, capitalizing on kind of the scarcity value of the distribution assets that you now have. So you're kind of a year in. I wanted to know if you could comment, one, on the ability to kind of source brands to fill in white space. And I know you've got, you know, the tuna with Runa and Adrenaline Shock, but those are arguably with existing relationships that you had, you know, with Lance Collins and with Zyta. So ability to source. And then also on the distribution side, how effective do you feel your assets are versus competition, you know, particularly when it comes out to building out these sort of smaller challenger brands? Thanks.

Yeah, I think in both cases, both in terms of our portfolio and in terms of our distribution and selling capability, I think one of the exciting parts about our business is how much opportunity for gain we have going forward. One metric is to say how good is our existing portfolio or how good is our existing distribution system today versus our peer set. But I think the more important metric for value creation is where do we think we can go from here? And we have more white space to fill. You can see that when you take a look at your numbers, and we're going about doing that. And we have a great opportunity to continue to improve our distribution system, both in terms of its effectiveness as well as its cost structure. And you can see that starting to flow through as well. So that's the exciting part of the opportunity going forward. Your point about sourcing new deals – I wouldn't dismiss the fact that the two new deals that we came in here are because of relationships. Relationships are really important in this industry, and they allow you to cut through a lot of noise. And the fact that, you know, I'll just use Ashok as an example, the fact that we were able to make the core acquisition, which was founded by Lance Collins, which continues to do incredibly well. By the way, that business is now, if you look at the latest IRI, On a 52-week basis, it's $225 million. If you look at it on a run rate basis, it's significantly higher, and it's still growing at close to 60%. I tell you, that's a really good addition to our portfolio. The fact that after we closed that deal, we're able to sit down and partner on an opportunity in an area where we have white space, I think is a competitive advantage that we have these strong relationships rather than going out there. And the last part, I would say, is we see a lot of deals. The good news is we're in a position where a combination of our ability on sales improving our distribution system off of the strength that it already has. And the fact that we have white space is known by others, and so we get a steady inflow of ideas. The issue here is not where do we source them from and which ones we choose. It's to make sure that we don't overpay for any of these things. And I think that the big shift that you're seeing with us, certainly, but with others within beverages is there's no desire to pay these crazy high multiple sales. We'd rather partner with people earlier in the process when things are more reasonable and grow the businesses together. So it's not about, are they available? It's a question of, will they add value to our portfolio? And I think we're showing good business planning.

The next question will come from Brian Spillane with Bank of America. Please go ahead.

Hey, good morning, everyone. A couple of questions. First, maybe a follow-up to Judy's question about innovation. Bob, can you just talk about, you know, initially, I guess going back a year or more ago, you know, the first sort of wave of newer brewers was sort of lower price point, right? You know, the mini, more entry-level price points. If you're adding more premium-priced brewers, just some perspective on, you know, whether – You know, that's kind of activating, you know, higher-income households or, you know, just how that's tracking right so far.

Yeah, I think our ambition a couple years ago, as you referenced, was, first of all, to introduce better machines across the board, both in terms of the quality as well as, you know, do they deliver new features and benefits. And price point is critically important. So job one was to cover the price range. So between the K-Compact the K-Mini, as you referenced, all the way up to the K-Elite. We covered the sort of the core, I call it, you know, base Keurig Brewer from a price point as low as $49 all the way up into around $150, $160. As part of the next move is the getting into new occasions. So specialty coffee with the K-Cafe, the cappuccinos and lattes was really important for us. K-Duo is critically important. As I said, one of the top five barriers to system adoption is the desire to be able to produce a large batch of coffee on occasion without having to machine. So I think they cover the whole price range. And even you'll see when we look at the K-Duo line, it is a line of actually three different brewers at a wide range of price points. So it's a combination of features, benefits, aesthetics, but also price points. And we know, and we talked about this in our investor day back in March of 2018, we actually know that there's an opportunity on the high end of brewers, not just the low end. that there are people who are willing to pay significantly more for a better-looking brewer and one that delivers additional benefits. And so we're filling in all of those areas of white space in our brewer portfolio.

And then just maybe a follow-up on Lauren's question about sourcing deals. Does your ability to use equity, I guess like you did with Core, give you maybe a more attractive set of – you know, value options, I guess, for people who are, you know, looking to sell? Does that kind of give you an advantage in a way to the ability to offer some equity? I think it definitely does.

You know, a number of people have said that we're probably out of the M&A game because we're focused on delevering and, therefore, we can't take on more debt to make acquisitions. And my first response is always, well, we were able to do a great acquisition with Core using our equity in a win-win scenario that was attractive to both sides. So I think we have a lot of optionality for deals. And, again, what I'll reiterate is it's not an issue of being able to source deals. The real issue is can we create win-win scenarios where we have a deal structure and a price point that allows us to create value, not destroy value. And it's been fairly well documented. When you take a look at a lot of the big-name beverage deals that trade at north of five or six times sales, every single one of those has destroyed value, even when it's a good brand. it's destroyed value because you can never pay that back. And look at Core, for example. Core's a business that's on fire. It's of scale already. When you take a look at it, we paid around two times sales for that. And we used equity to do that. That was a tremendous value creation mechanism It was also strategically sound for us, and it was a win for the seller as well. So, again, we have lots of optionality. The door is open. We're talking with lots of people. It's a matter of picking the right brands and the right partner to do business with.

Okay, great. Thank you. All right, thanks.

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

Good morning. The coffee business seems to be a centrally managed operation. I was wondering if you could talk about how you see running the ready-to-drink beverage business going forward, whether that business is managed more locally or regionally versus centralized, and then what that means for brand efforts and introduction.

Yeah, I think they're both a mixture of sort of central and sort of decentralized management. By its very nature, a DSD system, has a central component to it. We're selling to, for example, to national retailers. That has to be all coordinated and it has to be executed flawlessly in every retail outlet. So there is a heavy component that's centralized even within the DSD system. But to your point, the game is won or lost, store by store, shelf by shelf, day in and day out. And with the DSD system, you have a tremendous amount of latitude to influence merchandising and distribution at the local level. It's why we like it so much. That's why there are only a few systems, and we're one of them, that can get a single bottle or can merchandise nationally in every small outlet in a cold format. That is a very local action. So the real magic is the combination of the centralized decision-making with an execution force that can be coordinated locally. That's how sort of the magic happens.

The next question will come from Sean King with UBS. Please go ahead.

Thanks for the question. I guess given the accelerated product cycle we're seeing in brewers, what sort of risks do tariffs pose or any effort in place to kind of mitigate the regional risks there?

Sure. So we watch this tariff situation closely. If you take a look at the next wave of tariffs that have been announced, because you've got to break them down to the individual items that are impacted. That one impacts our accessories and some warranty parts. So at this stage, it's a minimal impact. We're talking less than a million dollars. Now, if that continues to expand, it starts to impact more and more of our business. But at that point, it impacts everything in the consumer electronics and appliance world, and I imagine there will be a price reaction, meaning pricing will be taken in response to that. But we continue to look for opportunities to diversify our supply base, and we've already done so, to make sure that we're spread, our risk is spread geographically as well. So right now we watch it, no immediate impact, and we're taking a lot of action to mitigate any future impact. Great. Thank you. Sure.

The next question will come from Peter Grom with J.P. Morgan. Please go ahead.

Hey, good morning, everyone. Thanks for taking the question.

Good morning. Go ahead.

So I appreciate the color on your recent partnership and investments, but on your output brands going forward. So the bigger picture question, obviously, energy category growth is very attractive. So with greater competition in the category with Bang and the potential Coke energy launch, how do you see these brands fitting in? Are they incremental to the category? And do you see them gaining share, or do you see them gaining share from the traditional players like Oscar and Russell?

Thanks. The energy segment is attractive both in terms of its absolute size as well as its growth rate. And it's the case in every consumer category where there's a large attractive segment. It begins to fragment. And so you start to break things out in terms of differential benefits, clean energy, more fitness-oriented energy. And that's the normal pattern you see in every large high-growth segment. And so the point is we can be a player in that as well. The important point to emphasize goes back to the distribution part of it is brands are part of it, the equation. The other part of it is also distribution. And there are only a few systems of scale that can take advantage of putting those brands in the right point of distribution, and we happen to be one of them. So it makes perfect sense for us to play within the energy space And as I've said a number of times, in a lot of these large, fast-growing, attractive categories, we don't have to be the number one or even number two player in some of these segments. We just have to have a meaningful business that's incremental to our portfolio that allows us to participate in these really attractive categories. And energy is an area where we have a lot of white space, and therefore we view that as purely opportunity for future growth, which is why we're entering into this with multiple players. In addition, by the way, we talked about Ashok and Runa today, but remember, we also have Forto Energy Shots. We also acquired the Zions brand as part of the big red acquisition, which is growing really nicely right now off of a relatively small base, but in terms of growth, it's doing quite well. And so we look at any space like energy as an opportunity to attack it with multiple brands and multiple ideas to be able to get our fair share of that sector.

Great. Thank you.

The next question will come from Bill Chappelle with SunTrust. Please go ahead.

Thanks. Good morning.

Good morning.

Just going back to the pod sales in the quarter and kind of the mix, I guess one, can you just help me understand where we are in terms of the price negotiations from a year ago? Have we fully lapped that and going forward? And then second, how should we look at the health of of the company-owned brands? I mean, I understand the mix is going to naturally be like decline or be more towards distributed brands, but do you see that changing or do you see the trajectory changing at all as we move through this year?

So let's start with the pricing piece of this. You know, as we talked about in the past year that we should expect pricing to decline, and we said that would happen for a couple of years. And it's not One of the things that I'd like to comment on is it's not something that surprises us. It's totally expected. And it's part of our strategy, even more importantly. So we've driven significant productivity, which we've reflected in pricing to our partners, which has allowed us to sign multi-year contracts with all of them. And it's also allowed the pricing to be passed on to the consumer, which addresses the number one barrier. Previously, it was the number one barrier to household penetration, which was the price of pods. This is all part of the strategy for us. And you can see the fact that this was intentional and part of our strategy by two metrics. Category is growing. Our KDP manufactured share is very healthy at 82%. And the margin in our coffee systems continues to grow despite the pricing. So those are all the sort of proof points I would give that this is not an accident. This is part of a broader strategy. Having said that, we talk about moderation and pricing over time. And you're seeing that happen. So if I take a look at KDP manufactured price at retail, that's an IRI metric, 52 cents a pod. That's down from 53 cents a pod, which was the case for almost all of 2018. So you're talking about a penny drop over a year on that. Where did that come from? If you actually go and look at it in detail, you'll see brand by brand, the brands aren't dropping their prices. You're seeing slightly more mix going towards private label, which is inherently lower price. Therefore, it's diluting sort of the overall price. But it's not individual brands dropping their price. It's more of a mix. And the other element that's happening is as this category gets more established, we're all shifting our packs to larger sizes, which makes sense. With the amount of consumption that goes on in the number of households now that have the system, buying a 10 or 12 pack of pods doesn't make sense anymore. So you're seeing a shift to bigger pack, which on a per pod basis actually reduces the price slightly, but from a margin standpoint is a win for everybody. I don't see the retail price as really a significant negative, and as I said before, it's all expected. The other thing I would point out to you, as we said before, is we have multi-year contracts with the great majority of our partners, so we actually know what our pricing is to them for the future. And you're starting to see that as well. The other metric you can look at is within our own quarterly releases, you can see the pricing headwind that would be in our net revenue line. And about a year ago, that was a 6.5% decline. You looked at by the end of the year, it was minus 3%. If you look at this quarter, it's minus 2.5%. So everything that we've been saying over the past year or so is all coming true, which is moderation in pricing and everything else moving in the right direction. it's going to continue for a period of time. And we've been consistent on that. And it's not like, okay, that's over with this year. It's going to continue for a period of time. But everything else is exactly as we described.

And then just to follow up the second part of my question, the company-owned brands, kind of the health there and what you do. And I understand you're relatively agnostic, but, I mean, I imagine you still make a little better penny profit. So just trying to understand kind of how you see that or what you're doing to maybe stabilize that, if anything.

Yeah, it actually has more of a revenue impact than a profit impact. And the reason is when we sell a company-owned brand, we reflect the revenue of everything in that brand. Whereas when we sell a partner brand, in some cases, we're only reflecting the revenue we get for converting the pods for them. So it has more of a dilutive impact on revenue than anything else. And remember, when it's your own brand, you also have to apply overhead and marketing expenditure to it. So that's why we say from a profit impact, we're more agnostic. From a revenue standpoint, it has more of an impact on us. Look, where we sit here today, is we manufacture 82% of the pods that are in the marketplace right now. That's the most important metric of all. And the composition within there has shifted slightly. Our owned and licensed business is around 23% of all pods sold. Our partners are about 50% of the market. And then we produce private label that represents about 9% of the market. The fact that the owned and licensed side is declining a little bit right now is all part of our greater strategy. And as I always point out to people, At one point, we had 100 share. And so as we continue to add more brands, including private label brands, to the marketplace, it causes the system to grow, but it dilutes our share. And that's been going on in this business since the beginning, actually, to be honest with you. I mean, you go back and look. There were years in 2014, 2015 when the share loss was greater than it is right now.

Got it. Thanks so much. Okay, thanks.

The next question will come from Bonnie Herzog with Wells Fargo. Please go ahead. All right.

Thank you. Good morning. I wanted to circle back to your legacy Dr. Pepper portfolio with a couple of questions. First, how does your innovation pipeline for this business look this summer compared to last year? Is there a significant step up? I guess I had the sense from you guys that you thought this was a big opportunity, so kind of wanted to hear how much progress you've been making there. And then on price realization in packaged BEVs, you did see an improvement in the quarter, so wanted to get a sense from you on how sustainable you think this is and maybe the elasticity and possibly how much more room you see to take further pricing as well as maybe opportunities to push further in the small package sizes to drive better price realization and top line. Thank you. All right.

Let me talk about the innovation piece first, and I'll come back to the pricing piece. On the innovation front, As we talked about on the call here, we've got last year a really strong year on Canada Dry, the business growing about 15%, partially driven by innovation of Canada Dry ginger ale and lemonade, which continues to be strong this year, but also just growth on the base Canada Dry business, driven by a lot of good things, including some very good marketing behind that. That continues into this year, and we're introducing now a diet version of Canada Dry Ginger Ale and Lemonade, which was a request from consumers and retailers based on the success that they saw. And then we're introducing a ginger ale and orangeade version of that. We've got a limited edition version of Dr. Pepper. You're seeing limited editions do well in the marketplace. And clearly there's good social media buzz right now going on on Dr. Pepper. We're seeing a bunch of variants increasing on our Snapple business, Lemonade focused. And then even Sunkist brand is doing quite nicely right now behind innovation. So we're really pleased with the level of innovation that we see on CSDs. We've got a strong pipeline. that will continue going forward. And you see it in the fact that we continue to gain market share on our total CSD business, which is probably one of the most important indicators. In addition to the innovation on our own portfolio, remember, we're still in the very early stages of a number of our new partner brand agreements. We're just ramping up Evian as we speak. Pete's and Forto are growing nicely right now. Again, very early days on that. And then we just talked about some of the energy deals that we've entered into. So our team is really busy out there. They've got a lot of innovation to sell, and the traction that all of that innovation is getting in the marketplace is really encouraging. Let's talk about the pricing side. If you take a look at where we were in the fourth quarter, which we discussed on the last call, the category of CSDs I'm talking about now was up about 6% in price, and we were up about 6% in price. The difference was our elasticity was significantly better than the category. So the volume loss that we saw associated with that price increase was about half the level that the category saw. And that's why we were gaining share in IC at that point. If you look at the first quarter, you see that it looks, if you go in the IRI or Nielsen numbers, it looks like our pricing actually went up fairly significantly versus the fourth quarter. In fact, IRI shows our pricing up 7.5%. That is specifically related to timing and strategy around certain promotions. And I could even pinpoint it down to certain pack sizes and certain geographies where you'd see a very significant increase in year-over-year pricing. That's 100% due to change in some tactics and timing around promotion. If you look at the Easter time period, it continued. We were up 6%. Category was up 3.5%. So we were way above the category on pricing. Again, it's all promotions. and we were up 6.5% in revenue during the Easter time period. So we're pleased with where we're at. The pricing is obviously, there's no concern about its sustainability. It's clearly sticking, and we're growing revenue and share as a result. But there'll be some recalibration on our promotions from time to time as we dig into this and understand sort of promotion returns and effectiveness even better. We're doing a lot of fine-tuning on certain PACs. Your point about small PACs, the whole industry is doing well on small PACs. we have a significant amount of upside to get more brands and more distribution on that, and that's good from a consumer standpoint. It's good from a pricing and profit standpoint as well. So we still have a lot of runway in front of us on that opportunity.

Okay, thank you.

Okay, thanks.

The next question will come from Amit Sharma with BMO Capital Markets. Please go ahead.

Hi, good morning, everyone. Good morning.

Good morning, Amit.

Bob, just in response to Bill's question, that was a really helpful discussion on the pod pricing and the mechanics, right? Just on that topic, one of the things you said was brands are not dropping prices, and that's clear looking at the IRA data. But the question is that, look, if category volumes have softened a little bit, if they continue to soften, should we worry about brands becoming a little bit more worried about those volume declines and then start to drop prices or at least ask you for a little bit more on the pricing front? And that accelerates the pricing declines that you expect to moderate from here on.

Yeah, I will talk about sort of brand pricing dynamics. I don't want to talk about a hypothetical category starts to slow because we have no indication of this. And the fact that We're plus five on a quarterly basis versus plus seven. Like I said, that's all noise, to be honest with you. We don't want to react too strongly to those kind of numbers quarter to quarter. I think if you take a look at what's really interesting within the pod business, there's a lot made about growth and private label, which is fine. It's an entry-level price point for consumers. It brings them into the system. It's the brand's opportunity now to trade people up to their favorite brands at higher quality to pay a more premium price on that. But that's where I see a lot of the reporting on. What gets missed in that conversation is what's also growing significantly in the pod category is the premium price brands. Those brands that are still priced close to $0.70 are still growing and gaining share within the system, and you're not seeing really any reduction in price at the premium level at all. In fact, you see some brands actually in the last quarter, due to promotion, went up slightly in price. So it tells you that you're getting all kinds of consumers into the system. You're getting people that are very price sensitive. You're also getting people now who recognize the quality and are willing to pay for it and look for their favorite coffee shop brands in a pot as well. And in that segment, you've got Pete's and Starbucks and Dunkin' are in there. And collectively, if you add them up, they're all growing share as well. So I think it's a very healthy situation in the pod market, and you're seeing it start to settle out in this sort of good, better, best pricing structure that you see in almost every category.

Got it. And thank you so much for that. And then one quick for Rozan. Rozan, interest expense came in well below our expectations, and the street was a little bit higher too. But you're keeping your full-year interest guidance unchanged. Are you expecting it to trend up higher as we go through the quarters? Or why would it be going higher?

Yes, we are keeping our full year guidance that we put out there a couple of months ago. And the reason maybe you see quite a bit favorable as well as lower interest expense versus last year, as we have disclosed, there's a good healthy interest rate swaps that we have unwind in quarter one. Obviously, we had some plans with regards to the unwinding throughout the year, but as you know, we need to react how the market provides the opportunity or the other way around for us, and we saw a good opportunity, and we unwind a healthy chunk of our interest rate swaps, which took it lower than on an expected basis maybe. But our full year, either the unwinding or the estimate on the interest rate as well as the interest expense does not change.

Perfect. Thank you so much.

Okay, thanks. The next question will come from Nick Mody with RBC. Please go ahead.

Yeah, thanks. Good morning, everyone. Hi, Nick. Two quick questions. Good morning. On the Evian business, Bob, maybe you could just talk about, you know, my understanding is Fiji is having some issues as they've gone self-distribution and there are a lot of out-of-stocks, so just wanted to get an update on Evian and kind of how you're seeing that play out and if you're actually seeing that at retail. And then the second thing is on the brewer innovation, you know, one of the things you talked about as you were launching some of these new systems was you were looking to expand the demographic rings of the portfolio, particularly with the more affluent consumers. And so I'm just, I was hoping you can give us an update on that.

Sure. On the Evian business, again, Evian's a little different than a Pete's or Forto or an Ashok situation in that it was a going business. So what's happened over the past quarter is we're taking over responsibility for that brand at the large customer level, as well as building the distribution at the small outlet level. So if you take a look at total distribution before and after, it's about the same. But if you take a look at small outlet that you can track, you see a steady increase in the distribution availability in convenience stores. And then we have a separate metric that we take a look at because it's not available in syndicated, which is up and down the street accounts. where we're getting distribution, and we're seeing a really nice build on the small outlet distribution of Avion. And again, back to your point earlier about sort of water brands in total, I've said it a couple times, it's really hard to get that store-by-store distribution, especially up and down the street, merchandise cold. And it's really Coke, Pepsi, and Dr. Pepper that are capable of doing that. And that's why any brand that works its way into those three systems is previously didn't have that capability is going to see a gain in distribution and sales growth as part of that. So, again, still early days for us on Evian, but we're pleased to see in the small outlet areas in particular the distribution build, and we're very bullish on that brand going forward. With regard to brewer innovation, yeah, we're seeing all demographics coming in. And if you take a look at sort of what is our opportunity set right now, we talk about more than 60 million households. There's a wide range of income that goes within those segments. And we've got brewers that are at the $50 price point, now all the way up to around $200 or even slightly north of $200 coming out with some of the new items. And it attracts a wider range of demographics into our system, which we think is good. I think that's also partly reflective of why the premium segment, as I pointed out before, the most expensive pods in our system. or actually growing in the absolute and gaining market share, I think is also reflective of a higher-end consumer with more appreciation for quality coming in to the Keurig system. So, again, all part of the strategy, and we're excited with the progress that we're making there.

Thank you so much.

All right, thanks.

At this time, I would like to hand the conference back over to management for any closing comments.

Thank you, everyone, for dialing in today. We know that we didn't – We're unable to get to all the questions, but the IR team is around all day today, so feel free to give us a call, and we look forward to talking. Thanks, everyone.

Ladies and gentlemen, thank you for participating in today's conference call. You may now disconnect.