Keurig Dr Pepper Inc.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Keurig Dr. Pepper's earnings call for the first quarter of 2020. 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 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 afternoon, we issued our press release for the first quarter of 2020. 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 performance on an adjusted basis, excluding items affecting comparability. The company believes that the adjusted basis provides investors with additional insight into our business and operating performance trend. While the exclusion of items affecting comparability is not in accordance with GAAP, We believe that the adjusted basis provides 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 this week. 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 first quarter 2020 results are KDP Chairman and CEO Bob Gamgart, our CFO, Ozan Dovmeseoglu, and our Chief Corporate Affairs Officer, Maria Schiapagurcio. And finally, our discussion this afternoon 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 filings with the SEC. With that, I'll hand it over to Bob.

Thanks, Tyson. Let me start by expressing my sincere hope that everyone dialed in is safe and healthy. I want to thank you all for joining us this afternoon. As you can see from our Q1 results, we started the year in a strong manner with financial delivery very much in line with our long-term targets and with continued strong free cash flow and deal leverage. We expanded market share across the majority of our portfolio and believed that we were just getting started as we began to introduce our best lineup of innovation yet. The continued underlying strength of our business is reflected in the results we reported today as COVID-19 had only a modest impact on it in the first quarter. Ozan will take you through some of the relevant highlights from the first quarter that carry over into the full year, but I want to acknowledge that Q1 represents a very different environment than the one we're operating in today. Therefore, I want to focus my comments on the second quarter and beyond, addressing a number of topics that I believe are most relevant to our investors at this moment. Specifically, we will discuss how consumer behavior has recently shifted and share our assumptions for how we believe that will evolve going forward. Explain how those shifts have impacted our portfolio, positively and negatively. We'll do this through the lens of both product categories and retail channels. Review the critical steps we've taken to date to navigate this unusual situation. and how we're managing the business and channel mix to ensure continued success in the short term and in the long term. And finally, we'll provide a more granular view on financial expectations by segment for the next quarter and update you on our outlook for earnings, cash generation, and deleveraging for the full year. KDP has a remarkably flexible and resilient business model. And our organization is executing very well in this unpredictable and challenging environment. We believe our discussion today will shed new light on how our original merger thesis, which delivered exceptional value in its first seven quarters, is more relevant now than ever. Before getting into that discussion, let me start by thanking our 26,000 employees for their extraordinary efforts that are enabling us to restock store shelves with essential products. I also want to thank the new frontline in North America, from healthcare workers to logistics providers to employees at retail, who are out there every day helping us all through this difficult time. Early in the crisis, we refocused the organization under a new set of priorities called 1KDP. The K represents keeping our employees safe and healthy. The D represents delivering for our customers and consumers. And the P stands for providing for our community. We could fill this entire call with discussion of the wide-ranging steps we have taken to protect our employees. from increased sanitation, physical separation, new health screening, making our own hand sanitizers and masks when supplies got low, and providing enhanced incentives to our frontline and increased benefits to all employees. Similarly, we could elaborate on our Fueling the Frontline initiative, which is providing Keurig commercial brewers and hot and cold beverages to hundreds of hospitals and tens of thousands of healthcare workers who are working tirelessly to help those in their community. If you're interested in learning more about these and other programs, you can find details on our website. However, given that this is an earnings call, I'm going to focus the remainder of this discussion on the D in 1KDP, how we're delivering for our customers and consumers, as that drives our top line and mix. I will then turn it over to Ozan to review all of the levers we have available to manage costs in order to drive strong profitability and cash flow. As the majority of the country began operating under stay-at-home restrictions in March, we saw immediate behavioral changes among consumers and continue to see what may be lasting shifts in what consumers are buying and where they are shopping. We are only about six weeks into this crisis, but we are gathering more and more insights as we progress. This is an incredibly complex and evolving landscape, which is best visualized as a matrix, with product categories on one axis and retail channels on the other. We are actively managing the intersections within that matrix, between product categories and channels, prioritizing resources to deliver what consumers want, while focusing on the highest ROI opportunity and navigating the differential growth and profit mix impacts of each. We think about product categories as falling into one of three buckets. Those that were purchased under an initial stock-up mindset, primarily in March, and are no longer growing and in some cases, declining. Those that continue to be purchased for ongoing in-home consumption, many of which are expandable in nature. There's potential for some of these categories to continue to grow at elevated levels post-crisis as consumers find or rediscover a role for them in the new world. Finally, there are categories that aren't as relevant to consumers' current needs and have been negatively impacted by this crisis, some of which will return to the previous growth levels after the crisis abates, others that may not fully recover. Let's look at the recent IRI data to illustrate what we're talking about here. And remember, these data cover primarily in-home consumption and large C stores. I'll discuss away-from-home channels and their impact on categories and mix in a few minutes. In the two weeks of March ending 3-22, which represents the early days of the crisis in North America, growth of total liquid refreshment beverages, or LRB, spiked to 30.2%, with all categories growing above average as consumers prepared for an extended stay at home. If we dig in further into these data, we see that the real outsized performance during those weeks was driven by consumers stocking up on categories such as mainstream water and sports drinks. Since then, LRB has softened considerably, growing 5% in the latest four weeks and declining slightly in the latest week. as the one-time purchase of some of those same categories, such as water and sports drinks, are not being repeated. However, beneath the total performance of LRB, there are areas of ongoing strength, representing categories of products experiencing expandable consumption and ongoing replenishment, as I discussed earlier. For example, CSDs remain very strong. growing nearly 10% in the latest four weeks. Categories like juices and mixers also continue to demonstrate strength. Not surprisingly, in-home coffee consumption has also been very strong due to the expansion of work from home and the inability to visit coffee shops, with single-serve coffee accelerating from 9% in the most recent 13 weeks to 21% in the latest four. The majority of our portfolio has exposure to the bucket of expandable consumption and ongoing replenishment, while less of our portfolio is exposed to one-time stock-up or off-trend categories. We certainly have mixed challenges to manage, as strength in our CSDs, juice, applesauce, and mixers has been partially offset by softness in buy and snapple. which have been impacted by both weaker category trends nationally and the fact that they are highly developed in the Northeast region of the US, an area very hard hit by the virus to date. Our focus has been to drive growth in opportunity category in order to offset the drag in others. Our single serve coffee business is showing very strong growth and has the potential to enhance its relevance in consumers' lives well into the future. The IRI data indicate not only accelerating category growth, as I mentioned earlier, but also an increase in average retail price per pot. Yes, you heard that correctly. This is in part due to the growth in premium brands, which are outpacing that of value brands. It seems that when consumers are moving their away-from-home coffee consumption to in-home, they're also bringing their favorite coffee shop brands with them. Single-serve coffee category growth is being driven by a combination of the long-term trend of growing household penetration combined with an increase in consumption per existing brewer, something we haven't seen before. We know this from our Connected Brewer panel, a network of approximately 10,000 Internet-connected brewers that has been providing point-of-consumption data for three years. As we look to a future in which a recession seems to be a near certainty, we also see further opportunity for the Keurig system to expand as consumers shift more of their coffee preparation in-home. A study completed by IRI over the last few weeks indicated that 27 percent of consumers are making coffee at home more often than before the crisis. and two-thirds say that behavior will continue even when restrictions end. We also know that CSDs are remarkably resilient to a recession, and we have a wide range of pricing, tax size, and promotion tactics to ensure our continued relevance should consumers become more value-sensitive in the future. Let me turn from product categories to retail channels. to give you our perspective on the other side of the beverage industry matrix that I described up front. Growth has been driven primarily by large retail outlets, namely grocery, club, and mass, as consumers have increased stock-up occasion at the expense of impulse and fill-in occasion. As a result, e-commerce has exploded, while C-stores and small outlets have been weaker. Similar to the discussion of how we're managing mix across product categories, we're also actively managing mix across retail channels and customers. Our company-owned DSD system has performed remarkably well, enabling us to reach and restock growth customers, while our highly developed e-commerce capability has enabled growth across our full beverage portfolio in this increasingly important channel. Our supply chain has also pivoted significantly to provide the right formats and sizes to deliver on these growth opportunities, as well as securing raw materials and packaging to keep our products flowing. Not surprisingly, the most significant drag on our overall performance has been our fountain and food service business on the cold side, and our office coffee business on the hot side. The impact of the crisis on restaurants has been well documented, and while the work-from-home trend has helped our at-home business, it has negatively impacted our office coffee business. All of the discussion to this point has been about the macro trends in the industry and our exposure to them through our portfolio and route-to-market coverage. However, the quality of execution determines our ultimate success. Effective mix management requires bold moves and rapid and aligned decision-making. Industry players who are used to operating with predictable demand and relatively small fluctuations in volume are now required to manage a volatile mix of categories, moving at double-digit rate changes versus a year ago, both positive and negative, in order to land on a good outcome. Since the crisis, we have implemented a new management case with near-daily executive team meetings and sales and operations planning meetings, enabling real-time decisions and ensuring organizational focus on clear priorities. These efforts are paying off, as indicated by the latest IRI share data. We increased our share of total beverages over the past 13 and four weeks. Within total beverages, we have expanded our share of CSD significantly, growing 1.4 share points in the latest four weeks. And we've posted share gains in key categories such as premium water, ready-to-drink tea, juice drinks, shelf-stable juices, and energy in the most recent period. In the coffee business, The share of pods manufactured by KDP has held steady at approximately 82% of dollars as total growth accelerated. And we showed share gains in key owned and licensed brands, such as Greenmount and the original Donut Shop. With that clarity on revenue and mix, let me now turn it over to Ozan to pick up the story from here.