Keurig Dr Pepper Inc.

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Keurig's Dr. Pepper's earnings call for the fourth quarter and the full year of 2019. This conference call is being recorded, and there will be a question and answer session at the end of the call. I would now like to introduce our host for today's conference, Keurig's Dr. Pepper's 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 two press releases, one announcing that we entered into a long-term strategic agreement with Nestle USA to continue manufacturing Starbucks-branded packaged coffee in K-cup pods in the U.S. and Canada. The second press release we issued was for the fourth quarter and full year 2019 results. If you need copies, the releases are available on our website at kerrydrpepper.com. 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 for the full fiscal year, 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 comparability are not in accordance with GAAP, we believe that adjusted and adjusted performer 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-K, 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 fourth quarter and full year 2019 results and our outlook for 2020, our ADP Chairman and CEO, Bob Gangort, our CFO, Ozan Dogmesioglu, and our Chief Corporate Affairs Officer, Maria Sceper-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. to differ materially, and the company undertakes no obligation to update these statements based upon subsequent events. A detailed discussion of these risks and uncertainties is contained in the company's filings with the SEC. Before turning it over to Bob, I'd like to share that KDP is hosting a sell-side analyst event on March 19, 2020, which will be webcasted live. As we get closer to the event, we will issue a press release providing more details, but for now, please mark your calendars for a 2 to 4 p.m. Eastern live webcast.

With that, I'll hand it over to Bob. Thanks, Tyson, and thanks to everyone for dialing in. Two years ago, we laid out a bold vision and ambitious financial targets for our new company. We saw significant opportunity to create an organization focused exclusively on beverages of all formats by being the first to combine hot and cold beverages at scale. and by harnessing an unrivaled distribution system that can reach nearly all selling outlets, using seven different routes to market, ranging from direct store delivery to e-commerce. Since the announcement, we successfully combined our two legacy companies, uniting nearly 26,000 employees into one forward-looking organization with a common platform and culture. We also delivered financial results that have exceeded our three-year targets, invested in a foundation for long-term sustainable growth, and have upped our game on corporate responsibility and sustainability. In 2019, we delivered very strong financial performance, with underlying net sales growth of 3.2%, adjusted operating income growth of 10%, and adjusted diluted EPS growth of 17%. Importantly, the sales performance reflected growth from all four segments, an in-market performance that remained strong. as we grew dollar consumption and gained market share in nearly all of our key categories. And our free cash flow in 2019 was exceptionally strong at $2.4 billion, enabling us to reduce debt by $1.3 billion. As a result, we reduced our management leverage ratio to 4.5 times at year-end, compared to six times at the July 2018 merger close. The strong free cash flow also enabled us to pay down structured payables by $531 million. In addition to delivering strong and balanced results in 2019, we built a foundation for growth upon which we can drive the business faster and more effectively. And we prioritize investment opportunities during that year that we are now beginning to activate. Therefore, in 2020, we are investing to drive the top line and expect net sales growth to accelerate to 3% to 4%. while still delivering adjusted diluted EPS growth in the range of 13% to 15%. Taking the midpoint of that range would place us directly in the middle of our EPS merger target of 15% to 17% through the first two years, with robust innovation, marketing, and in-store execution driving top-line growth in excess of our merger targets. We will deliver these targets while remaining focused on the key drivers that can create value for our companies. We create value in cold beverages by renovating and innovating our brand portfolio to leverage our selling and distribution powerhouse, and by partnering with emerging growth brands that offer us access to new segments and clear paths to ownership. Productivity provides funding for the continued brand marketing and innovation. In coffee systems, we create value through expanding Keurig systems. Secured brewer and coffee innovation combined with effective system marketing drives that conversion. Unique to coffee systems, we share some of the productivity we generate with our partners to lower the price of take-up pods at retail, further driving consumer growth while still continuing to expand our margins. And across the enterprise, we drive exceptional free cash flow that enables us to de-lever and offer shareholder value optionality in the future. As we've said previously, while these concepts are fairly straightforward and simple to understand, when implemented effectively, they are incredibly powerful drivers of value. With that as backdrop, let me take a few moments to emphasize some of the most important aspects of our 2019 results and highlight the areas of investment in 2020 that will drive the accelerated growth we expect. In 2019, our CSD portfolio expanded retail consumption by more than 3%. and grew market share by 60 basis points, with the majority of the portfolio contributing to this growth. In particular, Dr. Pepper and Canada Dry posted dollar consumption growth in 2019 of 5% and 6% respectively, fueled by innovation and effective marketing. These results are particularly impressive given the context of the strong growth these two brands posted in recent years. We continue to invest in innovation and marketing behind our key brands, and the second year of the Dr. Pepper Fansville campaign, the latter of which drove outside dollar and volume performance for Dr. Pepper during the college football season. New partnerships are also an important element of our growth strategy. For example, we tested Ashok in 2019 with beverage entrepreneur Lance Collins, expanding our presence in the energy drink category. Ashok was introduced regionally in mid-2019 and is now beginning its national rollout. Ashok joined Science Energy Drinks, which we acquired as part of the Big Red acquisition in 2018. Science, while small, continues to post impressive growth. In late 2018, you'll recall that we signed a long-term partnership with Danone to distribute Evian water. The launch of this partnership, combined with Core and Buy, has made KDP the number two premium water company in the United States. And we continue to see areas to build out our presence and drive future growth. In coffee, K-cup pods manufactured by KDP were up approximately 4% for the year in IRI U.S. track channels, which, as we have indicated previously, don't capture the accelerated growth we are driving in untracked channels. In 2019, the untracked channels represented about half of the pods we manufacture, and we would expect that number to continue to grow. Our pod shipment growth of 9% The strong performance of our take-up odds was driven by new households that we brought onto the Keurig platform. Specifically in 2019, we expanded the number of U.S. households regularly using a Keurig brewer by approximately 7%, bringing the total number of U.S. households in the Keurig system to around 30 million at year end, with an additional 3 million households using the Keurig system in Canada. This growth was driven by robust brewer innovation and the Brew the Love marketing campaign featuring James Corden for the third consecutive year. Our most recent brewer innovation, the K-Duo, fills an important need for households that want a single machine that can brew both a single cup and a carafe. K-Duo has been extremely well received by consumers both in terms of units sold and star ratings. And finally, on coffee, the long-term agreement with Nestle announced this morning recognizes the strong partnership we've had with the Starbucks brand for almost a decade. With this agreement completed, along with the long-term master licensing and distribution agreement we recently signed with McCafe in the U.S., we have every major branded player within the Keurig system committed for at least the next five years. In 2019, we launched our Drink Well, Do Good corporate responsibility platform. along with multi-year goals for our supply chain, the environment, health and well-being, and communities. A significant area of environmental focus for both the industry and KDP is plastics, and in late 2019, in partnership with the ABA and industry peers, we launched the Every Bottle Back initiative. We are also on track to make every K-cup pod recyclable this year, after reaching this important milestone in Canada last year. Finally, in 2019, we rolled out our KDP values and competencies to the entire organization, uniting all of our employees under one common culture, fostering an environment in which everyone at KDP operates with shared purpose and common goals. As I mentioned up front, we have a good line of sights of delivering sales growth in 2020 above our long-term target range by investing in a number of platforms across the business. starting within a nation which we expect to be a meaningful growth driver for this year. In CFDs, we plan to support our flagship Dr. Pepper brand with the first quarter launch of regular and diet Dr. Pepper cream soda, which would drive continued growth for the Dr. Pepper and increase frequency and volume to the category. Also launching in the first quarter is Canada Dry Bold, which takes the extremely popular and on-trend Canada Dry ginger ale and dials up the flavor impact. We are also rolling out our new lineup of 10-pack mini cans behind many of our CSD brands, including Dr. Pepper, Canada Dry, Sunkissed, A&W, and 7-Up. These mini cans are consistent with the consumer trend to enjoy carbonated beverages while controlling portion size and caloric intake. While this format has been a significant driver of category growth, until now KDP has not had full representation across its brands. For buy, we are introducing the first flavor innovation behind the brand since it was acquired in 2016, with the introduction of Bing Cherry, rolling out nationwide as we speak. This is just one of many actions we are taking to support the brand this year, and we look forward to sharing additional details during our March 19th webcast. As mentioned previously, A-Shock Energy drinks will roll out nationally in 2020. Also, as you've likely seen, we purchased Limitless, a lineup of lightly caffeinated sparkling waters early this year. Not only do we plan to build that distribution of Limitless as the year progresses, but we also have developed flavor innovations that we plan to introduce as well. While starting from a small scale, both Ashok and Limitless will be solid contributors to growth in 2020. In coffee, we are in the process of launching our next wave of updated brewers, starting with the K-Slim Brewer, which is currently available on Keurig.com, and will be expanded more broadly over the next few months. At just five inches wide, the Caseland Brewer features an impressive 46-ounce reservoir, a simple user interface, and is the first reservoir brewer to feature our next-generation Curie branding and design. We look forward to sharing more brewer innovation with you as the year progresses. All brewer and beverage innovation will be supported by significant marketing investment throughout the year, behind both existing and new campaigns. In 2020, we also have plans for increased investment in our networks. This includes capex spend and expense behind new manufacturing facilities we plan to bring online in 2020, including our Spartanburg, South Carolina facility, which once up and running will be the largest and lowest cost K-cup manufacturing facility anywhere. Also coming online in 2020 is our manufacturing and warehouse facility in Allentown, Pennsylvania, which will produce primarily non-carbonated beverages, Both of these facilities will be significant sources of productivity once they ramp up and will support the future growth of our brands. Investment in our networks also includes improvements in our routes to market, including our company-owned DSD network. We'll elaborate more on this during our webcast in a few weeks, but at a high level, this means investments in sales technology and training for our field team. and the acquisition of select independent distribution territories for incorporation into our company-owned DSD. All of this is to ensure that our retail coverage is as efficient and effective as possible, allowing us to drive maximum value from this important asset. In 2020, we will also continue to geodiversify our brewer supply footprint across Asia. In addition, we have established a center of excellence for brewer R&D and supply chain management, based in Singapore. This center, which started up in late 2019, locates our teams closer to where our appliances are manufactured, allowing us to move faster and more efficiently. And finally, in 2020, we also plan to make investments behind our sustainability initiatives. As you are already aware, all of our K-Cup pods we manufacture will be recyclable by the end of this year. Recyclability has been a large barrier to adoption for many consumers, and we plan to promote this news with stepped-up marketing and in-store support. Also in 2020, we will launch our first 100% post-consumer RPET bottle. We look forward to sharing more information about this later in the year. During 2019, we received many questions from you on what a future KDP looks like once we move beyond 2021. You're beginning to see a robust pipeline of growth platforms across multiple segments, combined with a temporary route to market, and supply chain infrastructure, all of which point to a compelling future for our company. Our 2020 outlook represents a year of accelerating growth behind steps of investments in our brands, network, and people. Some of these investments will produce returns quickly. For example, the innovation of marketing that we are rolling out is expected to translate to accelerated top-line growth in the coming quarters, while other investments will take a little bit longer to show results. For example, Spartanburg and Allentown will be significant sources of productivity and capacity for our business, although benefits won't start to flow through until after this year. Most importantly, these are all critical investments to drive sustained future growth and value creation starting this year. With that, let me now hand it over to Ozan.