Keurig Dr Pepper Inc.

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Keurig Dr. Pepper's earning call for the second quarter of 2019. 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, 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 second 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 quarters, today we will be discussing our results on a 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 basis 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 basis 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. 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 me to discuss our second quarter 2019 results and our outlook for the balance of the year are KDP Chairman and CEO, Bob Gamgort, our CFO, Ozan Dovmesioglu, and our Chief Corporate Affairs Officer, Maria Esquepa-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 key 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 the risks and uncertainties is contained in the company's filings with the SEC. With that, I'll hand it over to Bob.

Thanks, Tyson, and thanks to everyone for dialing in. The second quarter was another good one for KDP. All four of our segments again registered underlying net sales growth, with coffee systems leading the performance this quarter. We also grew dollar consumption and held or grew market share in a number of our key categories. A recent slate of innovation is performing well in the market, and we remain confident in our plans in this area for the balance of the year, which I will talk about shortly. Operating income advanced nearly 10%, despite a more than three percentage point headwind related to the comparison against the gain recorded in Q2 last year in connection with the Big Red acquisition and a one-time reimbursement from a resident supplier. The significant operating income growth combined with lower interest expense versus the year-ago period, drove a 15% increase in adjusted diluted EPS for the quarter, which is right in line with our long-term targets. Free cash flow generation of $575 million for the quarter was also robust, which enabled us to repay debt of more than $300 million in the quarter and nearly $720 million in the first half of the year. The quarter marks a significant milestone for us as it closes our first 12 months as a combined company. Before we jump into the details of the latest quarter, we believe it's helpful to recap what KDP has delivered in its first year as a public company. From a financial results perspective, at the time of the acquisition announcement, we targeted a three-year average adjusted diluted EPS growth rate of 15% to 17%. fueled by top-line growth of 2 to 3 percent, combined with expansion in margin resulting from $600 million in acquisition synergies and ongoing productivity programs. We delivered well above the high end of our expectations in year one, with 12-month adjusted diluted EPS growth of nearly 30 percent and operating margins expanding by 250 points as we delivered synergies at the pace we committed to last year. Debt reduction is also an important part of our value creation story, and we are well on track to reach our target of reducing leverage to below 3x by July of 2021, having paid down approximately $1.65 billion worth of debt and returning over $860 million in dividends to our shareholders in our first 12 months. Additional year one achievements include growing retail dollar consumption, and gaining or maintaining market share in the majority of the categories in which we compete. Signing eight new allied and partner agreements, acquiring the core hydration and big red businesses, and strengthening our innovation pipeline. Launching seven new Keurig brewers and over a dozen brand extensions across our coal portfolios. Breaking ground on a state-of-the-art K-Cup manufacturing facility in Spartanburg, South Carolina, where we remain on track to begin production in late 2020. Launching our Drink Well, Do Good corporate responsibility platform and commitment. Leveraging our expanded operations, broadened community presence, and combined resources to make an even greater positive impact for our stakeholders. And most importantly, uniting 25,000 employees under a common mission to become the new challenger in the beverage industry by being the first company to bring hot and cold beverages together at scale. In that respect, we believe we're just getting started towards realizing our full potential. With that year one context in mind, you'll note that the second quarter of 2019 was a continuation of our strong value creation story. I'll start with in-market results based on IRI. Retail market performance was solid in the quarter. We grew our held market share in the key categories of CSDs, single-serve coffee, premium unflavored still water, shelf-stable fruit drinks, and ready-to-drink coffee, among others. This performance reflected the growth of key brands such as Dr. Pepper and Canada Dry CSDs, Core Hydration, Pete's and Forto ready-to-drink coffees, and Snapple juice drinks. In our U.S. coffee business, retail consumption of single-serve pods manufactured by KDP grew approximately 5%, and our KDP manufactured dollar market share was essentially, even with a year ago, at 81.6%. Turning now to the financials on an adjusted basis, our underlying net sales, which exclude the movement in and out of allied brands, grew 2.6% due to volume and mixed growth and higher net price realization. In addition, we also had a modest benefit from the shift of Easter into the second quarter of this year. Offsetting this growth was the expected unfavorable impact in our packaged beverages segment from the changes in our Allied Brands portfolio. Specifically, on a year-over-year basis, the net change in our Allied Brands portfolio reflects Evian, Pete's, and Forto continuing to ramp up as compared to the established Fiji and body armor businesses last year that have since exited. In thinking about the balance of the year, you should expect this headwind to abate in the last quarter of 2019. Adjusted operating income grew nearly 10% or 230 basis points to 25% of net sales, primarily reflecting strong productivity and merger synergies, both of which benefited our cost of goods sold and SG&A. These positive drivers more than offset inflation, particularly in packaging and logistics, as well as the unfavorable comparison versus the year-ago period, which included the previously mentioned one-time benefits totaling $21 million in connection with the Big Red acquisition and reimbursement from a resin supplier in the second quarter of 2018. Adjusted diluted EPS increased 15% to 30 cents in the quarter, compared to 26 cents in the prior year period, driven by the growth of operating income and lower interest expense. Turning now to our segments. Starting with coffee systems, which had a very strong quarter, in part due to timing. Net sales increased 4.3%, fueled by higher volume mix of 8.3%, partially offset by lower net price realization of 3.5%, and unfavorable foreign currency translation of 0.5%. The volume mix growth for the segment was driven by shipment volume increases of nearly 13% for K-cup pods and 19% for brewers. This growth was due to the underlying strength of the business timing related to some earlier shipments as requested by our branded partners. Partially offsetting this growth was lower pod shipment mix due to higher timing related sales increase to branded partners for whom we only record a tolling fee. You'll note that the timing impact of partner shipments drove our total pod shipment volume in the quarter to be above our consumption rate. On a longer term basis, you should expect our pod shipment volume growth to be in line with category growth which has been approximating 6%. The strong brewer volume growth also reflected some benefit of timing related to the retail inventory bill for our back-to-school and the holidays, as well as the K-Duo innovation launch and Amazon Prime Day, the latter of which was a record-breaking day for us this year. Specifically, the K-Mini had the highest one-day volume of any brewer deal on Amazon, and the K-Cafe had another strong quarter. Our new K-Duo lineup of brewers provide consumers the ability to brew a large pot of coffee through a traditional drip system in addition to a single cup through K-Cup pods. Early feedback from consumers is very positive, and we have confidence that this innovation will continue to bring households that were not previously single-serve users into our system. With K-Duo essentials now on shelf, KDUO and KDUO Plus shipping later this month, and our recently introduced K-Cafe and K-Mini already in the market and performing well. We are supporting these innovations with significant marketing across traditional and digital media platforms starting in Q3. We're also excited to announce that our marketing campaign features the return of the talented and energetic James Corden as our brand ambassadors. We will continue with our Brew the Love campaign, this time putting the spotlight on the new K-Duo brewer. Operating income for coffee systems increased more than 8% in the second quarter, reflecting the strong growth in pod sales and productivity. One final note on coffee systems. We continue to keep a close eye on the recent news out of Washington regarding additional China tariffs. Recognizing this is an ever-changing landscape, If the current proposal planned for September is enacted, coffee systems will face a headwind approximating $10 to $15 million in the remainder of 2019. As Q4 is our peak quarter for brewer shipments, and we would have little time remaining in the year to implement steps to offset. As we've mentioned previously, we've already taken actions to diversify our brewer supply base, and we continue to explore additional opportunities to mitigate the impact that potential tariffs may pose, all of which would benefit us in 2020. Turning to the packaged beverages segment, net sales for packaged beverages were again significantly impacted by the expected unfavorable impact from the net changes in our allied brands portfolio, which amounted to a 6.3% headwind to the segment in the second quarter. Excluding this impact, as well as the 0.5% benefit we had from the shift of Easter into the second quarter, underlying net sales grew 1% in the quarter, driven by net price realization of 2%, partially offset by lower volume mix of 1%. Driving the underlying net sales growth for packaged beverages in the quarter was the continued strength of Dr. Pepper and Canada Dry, each fueled in part by innovation. In the second quarter, we launched a limited-time offering of Dr. Pepper Dark Berry, which was released in conjunction with Marvel Studios' Spider-Man Far From Home. In addition, Diet Canada Dry Ginger Ale Lemonade and Canada Dry Ginger Ale Orangeade, which were launched earlier this year, continued to perform well. Also contributing to the underlying sales growth in the quarter were Sunkist and Core Hydration, as well as Contract Manufacturing. On the other hand, buy was soft in the quarter. We recently regained some distribution that we lost in Q2 last year and are increasing in market support. We expect these actions to improve buy performance over the next few quarters. Operating income for packaged beverages in the second quarter advanced 18%, largely reflecting strong productivity and merger synergies, as well as higher pricing and the timing of marketing investment. partially offset by inflation, particularly in packaging and manufacturing input costs. Looking ahead to fall and the start of college football, we're excited to announce the return of our highly successful Fansville marketing campaign behind Dr. Pepper. As you may recall, the Fansville campaign had a storyline that evolves over the course of the college football season, culminating in the college football championships. In addition to TV, the campaign includes digital and social media, print advertising, in-store support, and our usual college tuition giveaway program. The Fansville campaign was very effective last year, and we expect it to resonate with consumers again this year. Turning now to the beverage concentrate segment, which represents sales of concentrates to bottlers and syrups to fountain customers. Net sales increased 3.1%, driven by net price realization of 4.4%, partially offset by lower volume mix and unfavorable foreign currency translation. The growth in net sales continued to be fueled by Dr. Pepper, as well as increases for Canada Dry, Schweppes, and A&W. Operating income for the beverage concentrates segment advanced 4.2% in the quarter, primarily reflecting the growth in net sales. And finally, turning to Latin American beverages. Net sales for the segment increased 3.7% in the second quarter, reflecting both higher net price realization and favorable foreign currency translation, partially offset by lower volume mix. Operating income for Latin American beverages of $20 million in the second quarter of 2019. was approximately $6 million below the year-ago period, primarily due to lapping a $5 million benefit related to the reimbursement by a resin supplier in the year-ago period, as well as the impact of inflation. Partially offsetting these drivers were the benefits of net sales growth and continued productivity. As I discussed up front, the newly combined organization is highly focused in executing well. accomplishing a great deal in a short period of time. We're pleased with how this quarter contributed to our successful year one, while recognizing that we're only just beginning and our sights are set on much more. With that, I'll turn it over to Ozan.