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 third 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 third quarter of 2019. If you need a copy, you can get one on our website at kerrydrpepper.com in the Investors section. Consistent with previous quarters, 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 basis provide investors with additional insight into our business and operating performance trends. While these pro forma adjustments and 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 today to discuss our third quarter 2019 results and our outlook for the balance of the year are KDP Chairman and CEO Bob Gamgort, our CFO Ozan Dogmesioglu, and our Chief Corporate Affairs Officer, Maria Saper-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. Before diving into the discussion of the quarter, I wanted to take a moment to share the overall value creation model for KDP that we frequently discuss in our investor meetings. While we always have a number of detailed items that we cover in our quarterly earnings calls, it's helpful to remain focused on the key drivers of value, which are fairly straightforward. We created KDP with the mission of providing consumers with a beverage for every need, whether hot or cold, available everywhere they shop and consume. We set ambitious three-year goals on both top and bottom lines to grow revenue 2% to 3%, operating income 11% to 12%, and EPS 15% to 17%. fueled in part by $600 million of synergies and free cash flow conversion in excess of 100% to enable rapid deleveraging to below three times. In cold beverages, we lead the non-cola CSD segment and have meaningful positions in a number of high-growth and on-trend cold beverage segments. For example, we're the number two player in premium waters. We're also one of three companies with near national retail reach through our direct store delivery system. We create value by renovating and innovating our portfolio to leverage that selling and distribution powerhouse, and by partnering with emerging growth brands that offer access to new segments and clear paths to ownership. Productivity provides funding for our brand marketing and innovation. In coffee systems, we create value through expanding Keurig's system household adoption by converting drip consumers to single serve. Keurig Brewer and coffee innovation combined with effective system marketing drives that conversion. Unique to coffee systems, we share productivity with our partners to lower the price of K-Cup pods, further driving consumer growth while still continuing to expand our margins. Across the enterprise, we drive exceptional free cash flow that enables us to delever and offer shareholder value optionality in the future. With five quarters behind us as an integrated company, we've demonstrated that our value creation model is working, with significant potential still in front of us. With that as perspective, let me now turn to the third quarter results. All four of our segments again registered underlying net sales growth, and we continue to perform well in the marketplace, growing dollar consumption and market share in a number of our key categories. This top-line performance, which was balanced between volume mix growth and positive net price realization, along with synergies and productivity, drove another quarter of strong underlying adjusted EPS growth of 13%, excluding a 6 percentage point year-over-year headwind from lapping one-time gains in Q3 last year, which Ozan will discuss shortly. Our cash flow generation also remained very strong, enabling us to pay down $423 million of structured payables and reduce debt by $71 million in the quarter. To date this year, we have generated over $1.6 billion of free cash flow, with our cash flow conversion at an impressive 130%. We continue to build our roster of brand partnerships during the quarter by agreeing to a long-term master licensing and distribution agreement for McCafe packaged coffee in the U.S. You may recall that we agreed to a similar arrangement with McCafe in Canada in Q4 of 2018. The U.S. McCafe agreement will go into effect during the second half of 2020. While McCafe was previously a partner brand in the Keurig system, This new licensing agreement gives us the added responsibilities of coffee sourcing, manufacturing, distribution, selling, and marketing the brand in all forms across all channels. This new agreement is a testament to the strength of the overall Keurig system and KDP's capabilities in coffee. Retail market performance based on IRI was again solid in the quarters. We grew dollar consumption and market share in several of our key categories, including CSDs, premium water, shelf-stable fruit drinks, and shelf-stable apple juice. This performance reflected the growth of key brands such as Dr. Pepper and Canada Dry CSDs, Core Hydration, Snapple Juice Drinks, and Mott's Apple Juice. As is always the case when managing a broad portfolio, we have a few categories that require additional focus. Falling into that territory are buy-in, Snapple Peas, and the ramp-up of new Allied brands. We believe we have good line of sight to improve performance across all three of these areas, which I'll speak to in a few minutes. In our U.S. coffee business, volume consumption of single-serve pods manufactured by KDP grew approximately 2% as measured by IRI, which we know greatly understates actual growth. As we discussed at a recent conference, what's reported in the tracked channels only represents about half of our total K-Cup pod business, with untracked channels, particularly e-commerce, experiencing higher growth rates. For comparison, our pod shipment growth in the third quarter was 6.1%, and over the past 12 months, K-Cup pods have grown 8.6%. These growth rates are more representative of the growth in the broader category. Dollar market share of KDP manufactured pods and track channels remained strong at 81.4% in the latest 52-week period. In terms of high-level financials on an adjusted basis, our underlying net sales, which exclude the movement in and out of our portfolio of allied brands, grew 3.1%. with growth from all four segments. This performance reflected strength of vol mixed growth and higher net price realization. In addition, we also had a modest benefit from an extra DSD shipping day in our packaged beverages segment. Adjusted operating income grew 8% in the quarter, reflecting the strong underlying net sales growth, productivity and merger synergies, partially offset by inflation, primarily in packaging and logistics. Operating income growth would have been even higher if not for the unfavorable comparison versus a year ago of a one-time gain related to the Big Red acquisition. Ozan will cover the details of that later in the call. The underlying adjusted EPS growth of 13% reflected our balanced top-rank growth and operating income performance, along with the benefits of continued debt reduction and a lower effective tax rate, all key tenants of our three-year merger targets. Turning now to our segments, starting with coffee systems, net sales increased 1.1%, fueled by a higher volume mix of 3.1%, partially offset by lower net price realization of 1.9%, and unfavorable foreign currency translation of 0.1%. The higher volume mix for the segment was driven by pod buying growth of 6% and brewer volume growth of 8%. Partially offsetting the growth in volume this quarter was lower pod mix, reflecting the mixed impact of higher shipments to branded partners for whom we only record a tolling fee. As we enter the important retail holiday season for brewer sales, our new lineup of K-Duo brewers is now fully on shelf and performing very well. As you'll recall, the K-Duo lineup of brewers 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 pods. The line is receiving great consumer reviews online, and we are excited about the incremental households that they will unlock. The KDUO lineup is being supported with increased marketing across traditional and digital media platforms and continues to feature James Corden as our brand ambassador. Consistent with our discussion on our last earnings call, we expected Q3 to be a bit out of sync, which is exactly what transpired. Adjusted operating income declined 3%. Dulo mismatched this quarter in the timing of pricing, inflation, and brewer investments, including media, market research, and innovation development costs, compared to the positive offsets of productivity and volume. As we discussed consistently, the nature of this business leads to volatility in results from quarter to quarter. But when viewed over a slightly longer time frame, the growth we continue to drive becomes quite clear. For perspective, on a trailing 12-month basis, K-cup pod volume advanced 8.6%. Total coffee systems operating income grew nearly 5%, and operating margin expanded 100 basis points. Quarterly results have fluctuated both above and below these numbers, sometimes meaningfully. However, we remain focused on the real underlying drivers of growth. Turning to the packaged beverages segment. Reported net sales for packaged beverages were again significantly impacted by the unfavorable impact from the changes in our allied brands portfolio, which amounted to a 5.8% segment headwind in the third quarter. Excluding this impact, as well as the 0.6% benefit we had from an extra DSD shipping day, underlying net sales grew a healthy 3.1% in the quarter. driven by net price realization of 2.7% and a higher volume mix of 0.4%. As mentioned previously, the impact from Ally Brands will switch from a headwind to a tailwind in the fourth quarter and represents a top-line driver in 2020. Driving the 3.1% underlying net sales growth for packaged beverages in the quarter was Dr. Pepper, Canada Dry, and Core Hydration. the latter of which continues to register very strong growth, with an over 30% increase in retail sales in the trailing 52 weeks. In the case of Canada Dry, double-digit net sales growth was driven by successful innovation launched earlier this year, as well as strength in the core brand. The Fansville College football campaign behind Dr. Pepper is also in full swing, delivering strong results for our flagship CSD brand. The campaign is resonating well with consumers and is driving additional in-store displays, higher inventory on display, retail dollar growth, and volume performance that continues to outperform the category. As we enter the championship drive of the college football season, the campaign will feature new media content, on-pack consumer offers, strong in-store execution, digital and social media, as well as the return of our college tuition giveaway program. We are also rolling out our Green Bottle campaign with a handful of brands, including Canada Dry, in conjunction with the holidays. This campaign is always well-received at retail, and we expect it to provide good support behind our brands during a key selling season. Also contributing to underlying sales growth in the quarter were Mott's, Sunkist, and A&W, as well as contract manufacturing. As mentioned earlier, there were a few areas where we see performance trailing our expectations. Buy, Snapple T, and some of the new additions to our allied brands. Buy performed below the category in the quarter, and we are implementing a number of programs to address performance, which we will share with you early in the new year. While we have regained buy distribution that had been lost in Q2 of 2018, we're not experiencing the lift in velocity expected behind our marketing performance. As we close out this year and head into 2020, our focus behind Snapple T will be on brand renovation. And finally, let me touch briefly on our allied brands portfolio. To refresh everyone's memory, we had significant changes in the allied brands portfolio at the time of the merger, hence our discussion since that time of the concept of underlying net sales. As we said on previous calls, the negative comparison to a year ago of allied brands turns to a tail end in Q4 and is no longer a factor as we enter 2020, which will enable us to drop the discussion of reported versus underlying growth. Our total allied brands portfolio generates approximately $350 million in retail consumption and represents 3% of our cold beverage sales. While not large in the absolute, we expect these brands to provide access to higher growth segments. To that point, the ramp-up of the new brands to the Allied portfolio is progressing slower than expected. The reasons are slightly different for each brand, but in total, we see a delayed response in realizing the full growth potential of these brands. As a result, we now expect the year-over-year net changes in the Allied brand's portfolio to result in a headwind to total KDP net sales of approximately 200 basis points versus 100 basis points forecasted at the beginning of the year. The great news is we expect KDP's total underlying net sales growth to approximately reach 3% for the year, which is at the high end of our target, driven by very strong growth on our own brands that has been able to offset the slower start on allied brands. We also continue to plant seeds to support future growth. such as Ashok's Smart Energy Drink, which, while still quite early, is performing well in the market. We'll discuss more about that in early 2020. Operating income for packaged beverages in the third quarter advanced a strong 23%, largely reflecting the growth in underlying net sales, strong productivity, and merger synergies, as well as the timing of marketing spending. partially offset by inflation, particularly in packaging, ingredients, and logistics. And finally, we expect to exit the fourth quarter this year with strong sales growth that will fuel our momentum into 2020. Turning now to the beverage concentrate segment, which represents sales of concentrates to bottlers and syrups to fountain customers. Net sales were up nearly 9% in the quarter. driven by both net price realization and volume mix growth. The strong volume performance was driven in part by our fountain food service business and is reflective of the strength in our core brands such as Dr. Pepper, Canada Dry, Sunkist, and Big Red. Operating income for beverage concentrates advanced a strong 20% in the quarter, primarily reflecting the strong growth in net sales, as well as merger synergies and productivity. And finally, turning to Latin America beverages, net sales for the segment increased 1.5% in the third quarter, and operating income of $25 million declined slightly, resulting from higher marketing spending and inflation. With that, I'll hand it over to Ozan.