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 Investor 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 While the exclusion of items affecting comparability is not in accordance with GAP, 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, our KDP Chairman and CEO Bob Gamgurt, our CFO Ozan Doukmesioglu, and our Chief Corporate Affairs Officer Maria Scheper-Gercio. 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 deleveraging. 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. Ozon 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 One KDP. 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 Initiative, which is providing curing 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 One KDP, 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 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 -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 those 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 is 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. Remember, these data cover primarily in-home consumption and large sea storms. I'll discuss -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 percent, 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 outside 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 percent 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 percent 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 percent in the most recent 13 weeks to 21 percent 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 stocked up or off-trend category. 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 U.S., an area very hard hit by the virus to date. Our focus has been to drive growth and opportunity categories 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 -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 curing 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-wise, and promotion tactics to ensure are 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 occasions at the expense of impulse and fill-in occasions. As a result, e-commerce has been 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 stock 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 HomeTrend 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 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 4 weeks. Within total beverages, we have expanded our share of CSD significantly, growing 1.4 SharePoints in the latest 4 weeks. And we have posted share gains in key categories, such as premium water, -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 helped steady at approximately 82% of dollars as total growth accelerated. And we showed share gains in 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 Ozon to pick up the story from here.

Thanks, Bob, and good afternoon, everyone. Since our press release provides significant detail on our performance, let me touch quickly on our results for the first quarter before shifting to a discussion on some more relevant items, since the environment has changed significantly. At a high level, the first quarter was another very good one for us, reflecting the strength of the business throughout the quarter, as well as the small net benefit of COVID-19 in the final weeks of the quarter. Excluding the impact of foreign exchange, net sales increased 4.5%, with the growth from all four segments and particular strength in packaged beverages. We delivered adjusted diluted EPS growth of 16% in the quarter, fueled by the growth in adjusted operating income. A lower effective tax rate and lower interest expense due primarily to continued deleveraging. Free cash flow in the quarter was strong at $464 million, translating into an adjusted free cash flow conversion rate of nearly 115%. We reduced bank debt by $42 million and repaid $107 million of the structured payable. And we ended the quarter with almost $200 million of unrestricted cash on hand. In terms of leverage, our bank debt to adjusted EBITDA ratio, which we refer to as our management leverage ratio, improved to 4.2 times versus 4.5 times at the end of 2019. This improvement was driven by lower outstanding debt balances and continued growth in adjusted EBITDA, including the inclusion of certain permanent amortization expenses, which were not previously recognized in the calculation of adjusted EBITDA. I would like to take a moment to provide more information on this change. As part of our detailed financial review with the strategic refinancing we recently completed, we determined that certain components of our reported amortization expense were not in the calculation of adjusted EBITDA. This represented approximately $170 million in the trailing 12 months. As a result, we have updated the calculation accordingly, starting in quarter one. The update drove approximately two-thirds of the change in our management leverage ratio. Let me be clear on two things. First, this change does not create a one-time impact, but rather it is permanent and affects all periods. Second, I have described before that we take a very conservative approach in calculating our management leverage ratio, and this change does not affect that stand at all. We still exclude many items that our bank loan governance allow in the calculation, and this item that we are now including was merely an oversight. Let me now touch briefly on liquidity. As announced previously, we completed a strategic refinancing earlier this month that extended our debt maturity and enhanced our liquidity profile. The refinancing included the issuance of $1.5 billion of senior notes, and the refinancing and the doubling of our $750 million, 364-day credit facility to $1.5 billion of borrowing capacity. This strategic refinancing provides additional liquidity to a level that we believe exceeds our potential needs, even in the event of a protracted downturn. Clearly, it was a strong start to the year, but as both Bob and I have indicated, the environment today is entirely different than the one that we operated in for most of the first quarter. Therefore, let me talk about our priorities to continue to be competitive in the marketplace and protect profits and cash flow. There are four buckets to discuss. First, we are so that we can continue to deliver the products consumers want and drive share gain, as we have across the majority of our categories in the most recent period. Clearly, this strategy is working for us based on the numbers Bob just walked you through. Second is top line discipline. As you expect, in times like this, we are prioritizing profitable business over chasing unprofitable volume growth in order to protect profits. While this may seem like an obvious concept, it takes discipline and staying close to retailers and the consumer to understand what products to emphasize and which ones are not critical in the environment we are in. First, beyond being smart on top line discipline, there are cost levels in the P&L that we are using to ensure bottom line delivery. For example, marketing investment. We have reviewed our marketing strategy and will continue to reduce spend in areas where it is not justified in the current consumer environment. As the reopening of the economy occurs, we will redeploy marketing resources where we believe it is appropriate and where the return on investment is greater. Travel and entertainment and discretionary spending are two other cost levels that we are using. At this time, we have eliminated all discretionary spending and will assess these costs on a go-forward basis. Fourth, and finally, is maximizing cash flow. CapEx is one of the most important areas of cash we continue to support the business with necessary CapEx investment, but we expect some projects to be delayed. In some cases, these will be discretionary delays because the project is a strategy or doesn't support growth, and in other cases, there are delays due to COVID-19 impact on suppliers and vendors. Given all of this, we have confidence in our target, which I will speak to momentarily. We have a unique business model with a broad portfolio of brands and seven distinct route to markets. Further, we continue to be heavily into our integration and synergy mode, which means we have deep understanding of our cost structure, which includes our productivity programs. This gives us great confidence in the levels we have to control those costs, which brings us to guidance. In terms of the foliar, we have confidence in our ability to deliver adjusted EPS growth of 13% to 15%, given our ability to control cost levels in the organization that I just spoke about. We also have confidence in our deleveraging targets and continue to expect our management leverage ratio to be between 3.5 times and 3.8 times at the end of the year, giving the uncertainty and variability with the current economic and consumer environment. We expect that sales growth will likely be at the low end of our 3 to 4% range on a constant currency basis. While the path to achieve these targets will certainly be than what we originally planned, we have confidence in our ability to execute and deliver on our commitments. And finally, point 19 is likely to have a large impact in the second quarter. We know this may make modeling of our segments difficult, so let me give you some examples. In coffee, we would expect net sales to be up mid single digits, as the increased consumption we are seeing in our at-home business outweighs the pressures from our -from-home business. In packaged beverages, we would expect net sales to be about flat, as continued out performance in serving categories such as CSD and juice in large format retailers is largely offset by softness in other categories such as premium water and continued weakness in the convenience and gas channels. Beverage concentrate net sales will be significantly impacted by our fountain food service business, which will continue to be a drag due to the weak restaurant and hospitality environment until the economy starts to open up and consumers gain confidence returning to public life. As such, net sales for this segment are likely to be down in the mid teens in the second quarter. Latin America beverages net sales will be about flat on a constant currency basis, reflecting a modest impact from COVID-19. On a reported basis, foreign exchange translation is expected to have a significant unfavorable impact in the quarter, and as a result, we expect reported net sales for this segment to also be down in the mid teens. With all of these puts and takes, we would expect total KDP, constant currency net sales to be about flat in the second quarter. With that, let me turn it back to Bob for some closing remarks.

Thanks, Ozon. While we are very pleased with our Q1 performance, which followed a strong 2019, we recognize the need to make bold changes to win in this very different environment, and we continue to pivot accordingly. As we look to the future, we don't have a better crystal ball than anyone else. We built our plans on the assumption that the second quarter will reflect most severe impact of home sheltering, followed by a gradual reopening of the economy starting in Q3 with offices and schools first. This will be followed by restaurants and travel, and still later, large gatherings and events, most likely when a combination of testing, treatment, and vaccines are available. We expect consumer spending to be impaired for a longer period of time, with the shift towards a value mindset elevating in-home consumption of food and beverage. We are also developing our game plan for how to market and create demand for our brands in this new environment, where both the consumer and the retail landscape will show lasting change. The most important takeaway from this conversation, as evidenced by our comments on this call, is the optionality we have to successfully navigate in this changing environment due to the broad beverage portfolio we manage, combined with our diverse and flexible selling and distribution system. Finally, we would not have been able to deliver the Q1 results we share today, nor have the confidence in our guidance we provided, if not for the loyalty, dedication, and professionalism of our team. Our frontline employees are executing exceptionally well at keeping our plants safe and running, all to ensure our customers and consumers have the products they need during this crisis. Our team is demonstrating KDP at its very best. With that, we'll turn it over to the operator for your question.

To ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question is from Brian Slane.

Hey, good afternoon, everyone. Hi, Brian. Just two questions for me. One is, thinking about the flow of 1Q to 2Q, I think one of the questions we're getting quite a bit this evening is just, it seemed like previously that there were some sales that would have been pulled into 2Q out of 1Q. So, if we're going through a reduction or deceleration sequentially, just what changed since there? So, maybe I'll start with that and then I'll go to the telephone.

Sure. So, as we said on the call, and I'll pause after this part to make sure that I'm answering your question that you had in mind. When you think about the first quarter, as we said, we had modest impact on our top line sales from the consumer behavior related to the shelter at home. It really impacted us in our DSD segment because you see an immediate reflection of sales in that segment. And that shows up in PB as our overall segment. Interestingly, in coffee, we started to see consumer behavior at home begin to pick up, but we get the immediate hit from the away from home segment because that's the office coffee piece that we ship directly in. So, we see negative of that immediately. We also see the negative fairly quickly of the fountain and food service business as well. So, that's what explains Q1. So, very solid performance with a little bit of upside on the revenue, almost all in the PB business with some negative in the rest of our business. We take a look at Q2 and Ozon gave you some very clear specifics on how we see the shaking out. We see growth in coffee driven by away from home, I mean by at home, offset by away from home. We see the pluses and minuses that I talked about. These are massive swings in categories of retailers delivering flat in PB. And then the area where the fountain and food service business really hits us is in our BC segment. So, we can net those all out assuming really a rough Q2 for the industry. We see ourselves coming in around flat total, then obviously improving from there but based on our outlook for the full year. So, does that get at the question or was there more clarity? No,

no, no, I think so. I think the, you know, relative to maybe where external expectations were, it's really the fall off in beverage concentrates in Q2

that

is going to be severe and probably is again just thinking at an enterprise level is what a lot of it drives the sequential change. So, that's helpful. And then just one other one and related to beverage concentrate and the fountain food service piece. Can you remind us, you know, how big that is, this percentage of the segment? And then also my recollection is that geographically it's a little bit more skewed to the Dr. Pepper Heartland market. So, as we're beginning to kind of try to model out beyond QQ and do scenarios beyond that, if you could just give us a little help there geographically where you're more exposed in the US.

Thank you. Sure. If you look at the fountain food service segment, as we described it in our 2018 investor day, right after we announced the merger, we talked about that being 20% of the legacy DPS business. And so, it's a smaller portion of the total business all combined. It is a significant portion of the BC segment and that's why you see impact there. And the numbers that, you know, are coming out of restaurants, which are widely available, explain the magnitude of the decline combined with that exposure to our portfolio. So, that's really not a surprise. We do see it improving as the year goes on. We are, from a geographic standpoint, we are now really national in coverage. The legacy was that it was in Dr. Pepper's Heartland in the South and the Southeast, but not anymore. We really have national coverage. Remember, Dr. Pepper is the most widely available carbonated soft drink in restaurants. And so, as a result, we, by definition, have national coverage. And we see the geographic skews based on the degree of the consumer impact, but we're going to perform like the country in total on average.

So, just tracking QSR traffic in general is probably the best way to kind of look at it from the outside.

Absolutely, and we're very heavily exposed to the QSR segment. And, you know, there's some signs of that improving with drive-throughs and we hope with the gradual reopening of the economy, that's going to pick up. But again, our estimation is the biggest hit will be in Q2, and I think we've modeled a very significant hit in all of our numbers to make sure that we're able to pressure test our P&L to deliver on EPS and cash.

Okay, thanks, Bob. Appreciate it. Sure.

Okay.

Your next question is from Laura Lieberman.

Great. Thank you. I just wanted to talk a little bit about brewer trends because I know this quarter there was a difficult comparison, but also you had mentioned in the release supply from Asia and some thoughts about some shipments shifting from first quarter to later in the year. So, I guess, one, what are you seeing in terms of brewer sell through from retail? So, I think with, you know, people at home, not everyone had the courage to start when the crisis hit and they only can make coffee at home. So, what do you think on that front? What might you be doing to shift your marketing specifically for brewers, you know, as you look forward? And then third, anything you can share on innovation plans? I'm going to guess that, you know, how we all got together in March. We would have heard a bit about brewer innovation plans for this year. Maybe that's shifted a bit just given the environment, but would love to hear any update there if there is one. Thanks.

Sure. Let me just say overall, the coffee business in the at-home portion is performing remarkably well. And I'll reiterate something I said earlier because it is notable. We are seeing a significant uptick in consumption per machine. As I said, that's something we haven't seen in a long time. And we have that connected brewer network, about 10,000 internet connected brewers, to allow us to see on a real-time basis what's happening. And it was really striking to see the tick-up happen the first couple of days and it has remained at an elevated level. So, we're getting growth off of the existing machine because of that behavior. And where it's something you say, what happens in the future when it all normalizes, there's a lot of indication that that's going to stick at a higher level than it did. There's a lot of noise in our ability to read what's going on with household penetration. And remember, we're six weeks into this. And there's great demand for brewers. And there are other indicators that you can look at, like search terms for coffee makers, securing in particular being elevated. The biggest shift is where consumers are buying their brewers. More has moved online than before. We're seeing good growth in mass channels. Remember, the entire specialty channel where we sold a considerable number of brewers has been largely shut down. So, the demand for brewers among consumers is very high. They've had to alter where they're able to buy them. And as a consequence, we've altered our marketing vehicles more online and targeted to where the consumer is searching. We'll see how that shakes out over the coming month as consumers know where to get the machine that's easier for them to buy. With regard to the supply chain side of it, yeah, there's been some minor disruptions, but nothing that has gotten in the way of selling any brewers. Originally, the whole crisis started off in China. So, we were happy to be diversified outside of China. We've seen the crisis move into other Asian markets. We've actually shifted a little bit of production back to China. And so, again, we've got a lot of optionality now that we've spread our production base to be able to react to that, to make sure that we are able to supply the brewers that people want. And your point about innovation is absolutely right. When we were supposed to get together for our analyst day in February, we were going to show you the rest of the lineup for the year, not only for brewers, but for our beverage portfolio in total, which we believe is a very, very strong lineup of innovation. We did talk to you about the newest brewer that had just been launched, which was the K-Slim, about a $100 price point, reservoir brewer, very different and upgraded industrial design. That was an indication of where we were going with our innovation. We'll talk to you about that on our next call, because from an innovation perspective, we will still be launching our brewer innovation in the third and fourth quarter of this year.

Okay. And then just the last of the pieces on marketing, you know, anything you're doing in terms of marketing differently for the system, in terms of driving health attention. Yeah, we've

moved even more online, because that's where the consumer is going to find brewers. E-commerce has been a real growth engine, not only on the coffee side of the business, but on the total beverage side of the business. We had always talked about at the time of the merger, that because of the Keurig legacy, not only in selling within e-commerce, but having our own -to-consumer e-commerce site that we were well-developed, probably ahead of everyone on e-commerce, that's serving as well on the Keurig side as well as the total beverage side. So I think that the move online, which has accelerated dramatically in the past six weeks, again, a lot of that is continuing to evolve. It will always be a combination of mass vehicles and targeted vehicles, but as more and more brewers shift online, it's very attractive for us to target to a consumer who has raised his or her hand and is interested in buying a coffee maker to be able to target them with the right message right at the time of sale.

Thanks so much. Sure. Your next question is from Peter Grahame.

Hey, good afternoon, everyone. Hi. So I just kind of wanted to follow up on Brian's question, but more around Q2 coffee guidance for mid-digit digit growth. I know back in March you mentioned that most of the benefit from the stock up would really occur in Q2. So does the mid-digit guidance reflect that benefit? And then you mentioned pod pricing is actually in positive territory, and with some of these category changes likely permanent, how should we be thinking about pricing for pods through the balance of 2020 and beyond? Thanks.

Yeah. First of all, coffee is not stocked up. Coffee is elevated consumption. And again, we know that because we have access to our connected brewers, through our household panel. So that's the conversation we had earlier. When you look at elevated growth in a number of beverage categories, we had to make the conclusion which of these were one-time stock up, which of these are ongoing consumption, and which of these are really categories that will be off-trend. And coffee is clearly in the category of being elevated consumption. So this is not a stock up behavior, but rather a shift in fundamental behavior that's on there. The mid-single digit that we're talking about here is a representation of significantly higher growth on that, on the at-home side of our business, driving that offset by an office coffee business that has plummeted very similar to trends you'd see in the restaurant business. The net of that is that we come out nicely ahead because we have both sides of the equation covered. But there's no mistake that the office coffee shutdown or slowdown has certainly been an offset to the explosive growth we're seeing at home. So that's the way that we take a look at coffee in total. Again, a lot of this behavior in the in-home side will stick. If we think that there is a recession coming, we will absolutely see more consumption moving in-home, especially as people have discovered how easy it is to make coffee at home. And that's part of what's driving the pricing trend that we talked about. As people move from purchasing coffee out of home to in-home, they're bringing the premium brands with them. So the IRR or Nielsen numbers that you can see over the past month or so show premium brands growing at a faster rate than value brands. You see great improvement in the trends that are owned in licensed portfolios at the positive contributors pricing. And then you're seeing more of the category being purchased at full price, not waiting for a deal on all combined. That's leading to an elevated price within POD. I have no idea how to forecast that for the rest of the year. What I would say is, as we talked before, we have great line of sight to the pricing that we charge to our partners. And that doesn't change this environment. A positive price impact, like you're seeing right now, does have a good profit contribution to our owned and licensed portfolio, but doesn't have an impact on the long-term pricing agreements we have with our partners.

Thank you.

Your next question is from Bonnie Herzog.

Thank you. Good afternoon, everyone. I wanted to circle back with a question on your guidance. I guess I am wanting to reconcile something you had said last quarter about the first half. You had originally guided that first half sales and EPS growth would be tempered, given several factors such as higher investments and lower productivity and synergies. Could you guys touch on how much of that you shifted in the quarter, such as maybe pushing out investments or pulling forward some of the savings? Just trying to think through that. And then I guess I'm trying to get a sense of how confident you are that you're going to be able to hit your guidance, especially if things don't recover for a while in light of the recession we're in. I guess I'm thinking about it in the context of down trading pressures increasing, especially in your pod business. Just can you touch on what is in your guidance as it relates to that? Thank you.

The first quarter results that we delivered are reflective of everything that we said on the last call in terms of the sequence of timing of impacts. I won't go through all those. I think it's well documented in the earnings release and nicely covered by Ozon on the call. No big surprises in the first quarter other than we outperformed. And we could talk about where that performance came from, but there are a number of factors. I would suggest that for Q2 and on that guidance that we gave back at the end of the fourth quarter, it doesn't even matter anymore. It's a company operating in this environment. They have completely zero-based their budgets and they look at the new world. That's how we've thought about it. While we assume some gradual recovery beginning in Q3, those are the words we use, we have pressure tested our P&L to be able to deliver in the priority that Ozon talked about, which is being competitive in the marketplace, continuing to gain share, protection of cash and earnings in that order. We have every confidence in our ability to do so. Otherwise, we would not continue to reiterate that.

Okay. Thank you.

Your next question is from Steve Powers.

Yes. Hi. Can you hear me? Yes, Steve. All right. Great. Hey, I guess I wanted to build a little bit on what you've already said and just dig further into visibility into the coffee system and pod demand over the balance of the year, considering all the cross-channel volatility that you referenced. Maybe you can just talk through how an earlier or conversely later return to social mobility, for lack of a better term, might impact your planning on that coffee business over the balance of the year versus the slow recovery base case that you've referenced. I'm just trying to figure out how you toggle those plans going forward based on a lot of different outcomes channel by channel. Steve, just to clarify, are you saying what happens if the recovery is faster? It's faster or conversely slower,

longer duration. Yeah. As we talked about before, when I use a term that we pressure tested, our P&L, is we put a base case out there. Anybody in this environment who is managing to a single number forecast would be fooling themselves because the ranges are significant. Nobody's double-digit movements up and down across different segments. Everything that we've done internally is within a range. We look at scenarios in which, to Bonnie's question, the recovery is slower. We look at other scenarios in what comes in faster. How you have to toggle all of these things are, as we said before, the at-home consumption is benefiting from work from home, but we're getting hit very hard on our office coffee business. As we get a recovery and people go back to work, our office coffee business improves nicely. One of the things that we're fascinated with is how much of that at-home business will stick. We believe that a good portion of that will stick. We've got a number of reasons to believe that. I quoted a couple earlier in the call, so I won't repeat those. We think that that's a win. If it extends longer, again, we've pressure tested ourselves. Otherwise, we wouldn't have the confidence that we put out there around the EPS or the cash. We would love a return to business as usual. We're not a company who's got a one-time gain from this crisis who then is going to have to worry about what we do once things recover. We would like everything to recover, but we're able to toggle the mixed elements of our portfolio very uniquely given the broad portfolio that we manage, as well as the cost elements of our portfolio that Ozon talked about, to be able to manage ourselves to success in almost any one of the scenarios that we described. It occurs to me that I didn't answer part of Bonnie's question, which was about what do we think about down trading or a recession on the carry business? We think we're set up really nicely for that. First of all, people trade from premium price away from home products, food and beverage, going to the coffee shop to in-home during a recession. We're a great value compared to that. Also, think about all the work that we've done to strategically lower our price, both on brewers and pods. You can get a high-quality pod now for around 30 cents. We are not concerned about a recession and its impact on the carry business. We think it's actually a net positive on that business if that were to occur.

Thanks. That helps a lot. Can I just ask one quick question, different topic? Your smaller third-party independent bottling partners, I'm just curious any comments you have on how they're faring with a mix shift away from immediate consumption channels, which are obviously very profitable for them? Your confidence in their ability to weather the toughest part of this downturn through 2Q. We stay

very close with them. The share growth numbers that I talked about earlier, our independent operator performance is embedded in those share numbers. They're executing very well right now. It's a challenge for them to manage like it is for all of us, but we don't have any concern in their ability to weather the storm.

Great. Thank you so much.

Okay. Your next question is from Kevin Grundy.

Hey, good evening, guys. Sorry about that. Hey, Bob, I wanted to pick up on the coffee business and the working from home dynamic longer term. So clearly it's a positive here. It was in March, seems to be into April. I guess it's still a little bit murky, I think, for some of us with the pantry load and going beyond coffee into other beverage categories as well. We'll see where the dust settles. But where I'd like to sort of drill down here is how positive this could be the working from home dynamic, which will be with us for a long period of time, I think, even beyond the recovery here with the virus and what sort of positive that could be for your business. So the increased coffee usage is there with the 10,000 brewers that you have. I guess that's unsurprising because people are spending more time at home, but then you're down to a trickle probably in the office space. So how should we think about that longer term? And then to sort of like frame that context, you talked about the 20% of the business and beverage concentrate that's on premise. What percentage of the business in coffee is going to be levered to off-premise channels as well? I think that would kind of help us think about it and you're sharing that channel as well. Thanks for all that,

Bob. Yeah, we would love for the economy to go back to normal, people to go back to work. Net-net, we'd go back to delivering our long-term trends, where we talked about accelerated growth this year. 13% to 15% EPS, we like that world. So again, I would reiterate that this is not one that we view as more desirable for a number of reasons. Having said that, we're in a unique situation now where we're able to satisfy consumers' needs in a unique way in the moment in which they really need it. And that is we're able to take care of all of their beverages or their coffee needs in home. They're using our machines more frequently, and we know that as that continues to happen and new people come into the system, which they are right now, that that's going to be sticky. And so there's a scenario as people go back to work where they're more attached to their Keurig machine at home than ever before. There are more people using Keurig machine at home than ever before, and yet we're able to pick up the office coffee business as well. So we're very bullish, as you can tell, on the long-term prospects of the entire Keurig system. And that's why when you think about all these different scenarios that the questions are centering around today, what if the current crisis lasts longer? What if the any of the scenarios come out in a good place on the Keurig business? And when you look at the impact on our total company, that's why we're in a unique position. We've got a portfolio that covers almost every beverage need. We have routes to market. We've talked about now for two years where we can cover anything from a C-store all the way through to e-commerce. Those seemed interesting at the theoretical level. You're seeing that all play out live right now in this environment. And as it recovers, whichever path recovery takes, it's not going to be a straight line. We're very comfortable that we can navigate through that as well.

Thanks. Just to make sure I'm clear, though, and maybe I missed this, what percentage of the business in coffee is away from home? So it's 20% on the legacy Dr. Pepper side, all of that in BevCon. How much on the coffee side of the business? And what's your share relative to the 80% plus that you speak to in the food channel?

Yeah, you didn't miss it because we never have disclosed that and we're not planning to. We've talked about 50% of our business on the coffee side being in unmeasured channels, and that includes e-commerce specialty, but also includes away from home coffee. And our share in that channel is significantly lower than our share in the in-home channel. Office Coffee is a very fragmented business. And all the exposure to these different channels that you guys are asking about, that's embedded in the guidance that we've given you for the year and also for Q2, which is more granular guidance than we've ever given before.

Okay, thanks for all that, Bob. Good luck.

All right, thanks.

Your next question is from Bill Chappell.

Hi, thanks. Good afternoon. Just a couple quick follow-ups. One, I think I'm right in saying that away from home and at home split before Green Mountain or Akira Gwent was taken private was around $75.25. Is there any reason to think that that's changed over the past few years? And then secondly, just on the promotional kind of cost environment, I mean, can you get us an update of what you're doing over the next four or five months? We're hearing from a lot of promotions, which presumably falls to the bottom line. So just try to understand if that's the case and that's kind of factored into your guidance as well.

Yeah, if you take a look at the latest IRI and Nielsen numbers, I would not say that beverage demand in general is strong. I would say it is elevated in pockets and it's weak in other pockets. This is a tremendous mix management challenge for everybody in the industry, including us. And that's how you see that playing out in the Q2 numbers that we've talked about before. Fortunately, CSDs are remaining elevated and we're gaining share in that segment. We're also gaining share in a number of other segments, some of which are strong like juices and juice drinks, and then there are other categories that are not as strong. So it's not a situation where beverage is so strong everywhere that people are pulling promotions. And so we're targeting our promotions to the right areas where we think it's appropriate and there are other areas where it doesn't make sense. So there's not a big macro conclusion you can take out of that. On the coffee side of the business, there is certainly elevated consumption and it is not a stock up, it's an ongoing piece. We're continuing with somewhat of our normal promotion schedule, but what you're seeing is the consumers also buying product at full price day in and day out, which is part of the reason along with the mix towards more premium brands that you're seeing pricing going up there. So I wouldn't take away any big conclusions on the promotional environment for us at least in general. And I think in a lot of these categories where you're seeing weak demand from consumers, you're actually going to see more promotion going forward. Take a look at the Nielsen and IRI trends right now. There are segments that are running negative for a consistent period of time. There's a lot of incentive for players to promote in that environment. We've got good exposure and we're managing it really tightly.

Got it. And on the breakout, any reason to think that it's changed from when it was last disclosed five years ago?

I don't know those numbers from five years ago. I haven't been there for five years, but I don't really have a comment on that one to be honest.

Okay, thank you.

Your next question is from Sean King.

Great, thanks for the question. You touched on a pod pricing strategy, but in the context of recession and consumers being more value sensitive, what can you say about the risk that consumers specifically return to pot and coffee, especially after they've been spending a long period of time at home? I guess is household penetration at a point where that risk is no longer relevant?

Well, yeah. First of all, we have got a really established household penetration base that continues to grow at a steady rate year in and year out. I think the second part of it is when you look at consumer behavior during a recession, the first trade-off they make is out of home food and beverage to in-home food and beverage. If you look at a price comparison of Keurig versus purchasing coffee from outside of the home, it's a tremendous bargain. Again, the last time there was a recession, the price of pods were significantly higher than they are today. All of the work that we've done to get the price of pods down serves us day in and day out, and it prepares us really nicely to be recession resistant. Similarly, we've gotten the price of machines down in some cases. In other cases, we've gone to more premiums, so we're able to fill a wide range of consumer needs there. We have machines that are below $100. We have machines that sell for around $50. So the thought of a recession and a trade-down, I think, is a net benefit to us, not a net risk as people move from consuming coffee out of home to in-home. We see right now in a situation where people are moving their consumption in-home, not only are they drinking more coffee, they're actually drinking more premium coffee right now because they're filling that need for the coffee shop occasion that they're not able to get.

Great. Thanks for the call, Earl. I'll pass it on.

There are no further questions in queue at this time. I'll turn the call back over to Tyson.

Thanks, everyone. This is Tyson. Thank you for joining us tonight. The IR team is around and available throughout the week. This evening, if you would like to follow up, just reach out to myself or Steve, and we'll get back to you. Thanks, everyone. Stay safe.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.