Keurig Dr Pepper Inc.

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Keurig Dr. Pepper's earnings call for the fourth quarter and full year 2021. 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 Keurig Dr. Pepper's Senior Director of Investor Relations, Mr. Steve Alexander. Mr. Alexander, please go ahead.

Thank you. Hello, everyone. Thanks for joining us. Earlier this morning, we issued our press release for the fourth quarter of 2021. If you need a copy, you can get one on our website 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 trends. 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 provided 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 us today to discuss our fourth quarter 2021 results are KDP Chairman and CEO Bob Gangor, our CFO, Ozon Doc Messioglou, and our Chief Corporate Affairs Officer, Maria Scappa-Gurcio. And finally, our discussion this morning may include board-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 on subsequent events. A detailed discussion of these risks and uncertainties is contained in the company's filings with the SEC. And with that, I'll hand it over to Bob.

Thanks, Steve, and good morning, everyone. As you'll recall, this past quarter represents the completion of our three-year merger plan and the beginning of the next chapter of our transformation and growth, as we detailed for you during our Investor Day in October. With the merger plan now in the record books, I am pleased to report that we met or exceeded all of our key commitments, and we have demonstrated the power of our new company with a significantly faster growing business than at the time of the merger. The volatile macro environment we have faced since the merger has tested the industry and our business. It has also provided the opportunity for KDP to demonstrate the strength and resilience of our business model and our ability to withstand unforeseen events and deliver on our long-term commitments. In terms of a few specifics, Our top-line strength over the past three years is a standout, growing approximately 5% on a compound annual basis over the period, almost double the merger target of 2% to 3% growth. More importantly, our sales growth accelerated significantly over the three years, with 2021 net sales advancing nearly 8.5%. Our strength since merger extends well beyond our financial commitments, as we delivered high-quality in-market performance, including broad-based market share growth across our portfolio and meaningful expansion of new households using the Keurig system. Importantly, we maintained top-line growth each year since the onset of COVID, as we've been able to pivot to grow certain segments of our business faster to offset those that were, and in some cases continue to be, negatively impacted. Market share expansion in cold beverages was driven by exceptional strength in CSDs, which have grown 1.5 share points since 2019. In coffee, the Keurig ecosystem continues to expand, with 8 million new U.S. households added to the system since 2018. Since 2019, we've driven growth in KDP consolidated net sales of nearly 14%, and an adjusted EPS of 31%. These results were fueled by strong execution, successful innovation, and high-impact marketing. On a three-year basis, key financial metrics, including adjusted EPS, management leverage ratio, and synergy capture were delivered well within our merger target range. with adjusted EPS up more than 15% on a compound annual basis over the post-merger period. We delivered this performance while building a solid foundation for the future, including the advancement of our corporate responsibility agenda, achieving the goals set before the merger, and expanding into new areas such as diversity and inclusion, positive hydration, and regenerative agriculture. All of this is underpinned by a talented team and a culture that rewards bold thinking, speed, and a mindset of ownership and accountability. Investors who have been with us since the merger have been rewarded by a total shareholder return of 109%, which is more than 2x the Consumer Staple Sector Index and 2x the return of the S&P 500 Index. Important to the delivery of these strong results is how we manage KDP. Our playbook includes a range of strategies and tactics that enable us to navigate through volatile conditions in the short term to stay true to our long-term vision. A good example is our strategic asset investment program, which we initially launched in 2019 and have used each year since, including in Q4 of 2021, to maintain or increase marketing investment in our brand portfolio. Ozan will discuss more in his remarks. Let's talk about the current environment we're facing. At this point in the earnings season, you are fully up to speed on the range of issues negatively impacting the CPG industry. Supply chain disruption, driven by labor shortages, lack of material availability, and broad transportation issues have reduced industry customer service levels and pressured gross margins. In addition, unprecedented levels of inflation across nearly all components of cost of goods and cost to serve necessitated multiple pricing actions across the industry, most of which lagged inflation in terms of timing in the market. These challenges intensified in the fourth quarter with the onset of Omicron. causing significantly higher absenteeism across manufacturing and commercial frontline workforces. It has been reported that 6% of the U.S. workforce was absent at the start of the new year due to being infected with COVID or caring for someone who had been infected. As significant as that number is, it actually understates the real impact on supply chain. We, for example, experienced absenteeism at key plants in the double digits, which magnified an already challenged labor situation, causing the workforce to drop below critical threshold levels. We're certainly not alone. Our suppliers of inputs, transportation services, and plant equipment are also experiencing these challenges, which has a compounding effect on our operations. Of course, we don't get paid to report to news, but rather to deliver our commitments regardless of the macro situation. That's exactly what we've done. By implementing an unprecedented set of actions to increase labor availability and prioritize our portfolio to ensure availability of the fastest-turning, highest-profit items. A tangible example of the challenges we've faced and the solutions we've implemented is in coffee systems. Record consumer demand for K-cup pods bumped up against lower manufacturing output and a delayed new capacity availability, both directly related to COVID. This caused us to tap into our finished goods inventory in Q4, falling below safety stock levels, which impacted service to our partners and retailers. We have successfully rebuilt production output since the height of Omicron absenteeism, but we are now servicing the continued high consumer demand while working to rebuild inventory, which is a process that will continue well into the next quarter. Ozan will talk more about the impact of these supply challenges in his comments. While we're seeing light at the end of the supply chain tunnel as the wave of Omicron runs its course, inflationary pressure continues to be persistent. To address continued inflation, we implemented several pricing actions over the past six months and announced more pricing in early 2022. To date, our elasticities have held up nicely. Most of the challenges discussed today were reflected in the 2022 outlook we provided at our October investor day. At that time, we expected the impact of supply chain disruption, and escalating inflation to be significant headwinds for the year, resulting in our projection for net sales and EPS growth to be in the mid-single-digit range for the full year. Nearly five months since Investor Day, we continue to believe this guidance for the full year is realistic, yet it's important to highlight the expected pacing of results throughout the year. Specifically, we expect Q1 to represent our most challenging comparison to last year, as we manage through the peak levels of supply chain disruption and significant ongoing inflationary pressures. EPS performance is projected to improve starting in Q2, reaching high single-digit growth in the second half of 2022, which would put us back on our long-term algorithms. Let me take a few minutes to shift back to 2021 to highlight our full year results. Our top line performance continued to accelerate with full year net sales growth of more than 8% and all four business segments up strongly. Our packaged beverage segments was a standout, posting double digit net sales growth for the year fueled by an impressive 17% increase in the fourth quarter. Our beverage concentrates and Latin America beverage segments also delivered strong double-digit net sales growth in 2021. While our coffee business posted net sales growth of 6% due to an almost 6% increase in pot shipments and a double-digit increase in brewer shipments. In 2021, we added nearly 3 million new U.S. households to the Keurig system on top of approximately 3 million new households added in 2020. which means total US Keurig households are now approaching 36 million. Adjusted EPS for the year advanced more than 10%, which translated to 31% EPS growth on a two-year basis, as previously mentioned. Strong in-market performance for our brands underpins the delivery of our financials. Our LRB portfolio grew market share across nearly 75% of the portfolio in 2021, and almost 80% when looking at results on a two-year basis. Most notable was continued strength in CSDs, which drew consumption by 26% and market share by 1.5 share points since 2019. In fact, KDP took over the number two share position in CSDs in the grocery channel in 2021. The drivers of our CSD performance are widespread and sustainable. While nearly all of our CSD brands continued to perform well, Dr. Pepper was again one of the fastest growing major CSD brands in the U.S. last year, and it was the single fastest growing since 2019. When Fortune recently unveiled its Halo 100 ranking for how well brands serve their consumers, Dr. Pepper was the only beverage brand in the top 100 and the only FMCG brand in the top 20. Sunkist took over leadership of the fruit CSD segment in 2021, fueled by innovation. Since 2019, Sunkist has grown dollar consumption by 35%. With the success of our zero sugar innovation in 2021, we gained over three share points in zero sugar CSDs, capturing a third of the zero sugar category. And later this year, we will be launching Snapple zero sugar. Looking at other key segments of our cold beverage portfolio, our Core, Snapple, and Buy brands, whose growth was capped in 2021 by supply chain disruptions, demonstrated positive in-market performance as product availability improved in Q3 and Q4. Retail consumption was up double digits for both Core and Buy in the quarter, while Snapple was up 5% in the quarter and ended with double-digit growth in December. The Snapple Refresh which was designed to bring younger consumers into the franchise with new graphics and sustainable packaging, is proving to be successful. Our premium water strength continues to be enhanced by strong partnerships. The success of Polar Seltzer demonstrates the power of the KDP distribution network as we continue to expand availability outside the Northeast region, achieving a 4.3% share for our first year in the markets for which KDP is responsible for the brand. Vitacoco, a long-term KDP partner in which we also made an equity investment in 2021, had an exceptional year, growing dollar consumption 33% and market share by almost 7 full percentage points to nearly 51% of the coconut water segment. Switching to coffee, where retail dollar consumption of single-serve pods manufactured by KDP in tract channels grew 2.7% for the year. with higher growth achieved in untracked channels due to continued strength in e-commerce and clubs and a limited return to offices. Growth would have been even higher if not for the Q4 supply chain disruptions, which led to reduced promotions and increased out-of-stocks. KDP manufactured share remained strong, increasing to 83.2% for the year. As mentioned previously, Keurig household penetration continued to be exceptional. adding 8 million new households to the Keurig system since 2018. Further demonstrating the power of the Keurig system, for the first time ever, unit market share of Keurig-compatible brewers surpassed traditional drip coffee makers in the fourth quarter. In 2021, we debuted a new platform for Keurig with the launch of the K-Supreme Smart Connected Brewer, which is the first of many new connected brewers to come. The consumer reception has been very strong. We have a line of sight to having more than a million connected households in the next few years. Finally, although we don't give our Latin America beverage segment much airtime on these calls, I'd like to point out that our team delivered 14% revenue growth and 19% operating income growth behind particular strength in Penafiel and Clamato. In addition to being a strong contributor to total company results, LAB represents an attractive expansion opportunity for KDP. Before I turn it over to Ozan to talk about our 2021 results and our 2022 outlook in more detail, I'd like to reflect on our long-term outlook as discussed at our Investor Day. The completion of our merger period provides an opportunity to reflect on our accomplishments over the past three years, as well as our potential over the next three years. While we will always manage our business through the challenges of the day, we measure ourselves on long-term value creation and therefore keep our focus on delivering in the present and investing for the future. As we look to the future, one of the most attractive aspects of the KDP investment story is our unique potential to drive outsized returns through a combination of an attractive organic growth algorithm coupled with the opportunity for significant inorganic value creation. You'll recall from our investor day, our outlook was to generate approximately $4 billion of discretionary free cash flow between 2022 and 2024. Since investor day, we have received proceeds from our Body Armor investment, as well as funds from the settlement of our litigation against Body Armor. Combined, this resulted in cash proceeds approaching $1 billion, increasing our discretionary free cash flow outlook over the three-year period to $5 billion. This cash flow is being prioritized to the highest ROI use of our capital, which we continue to believe is strategic M&A, where we have a differentiated and demonstrated management expertise and track record. Discretionary cash of $5 billion translates into more than $20 billion of M&A capacity, assuming the same reasonable expectations we discussed in October. Coming out of Investor Day, we saw a few headlines suggesting that we were looking for a singular large acquisition. Let me assure you that we remain intentional and disciplined in our allocation of capital and that the significance of our more than $20 billion in M&A firepower represents total capacity for M&A, not a singular or targeted deal size. In the absence of value generating M&A, we will use our new share buyback authorization to opportunistically repurchase shares. Our effective deployment of free cash flow over the previous three years is a good example of how we think about shareholder value creation through deployment of capital. During that time period, debt repayment was our top priority and a strong generator of shareholder value. However, also during that time, We acquired the Core, Big Red, and Limitless brands, made an equity investment in Vitacoco and several startup businesses, brought 22 independent distributor territories into KDP to strengthen our company-owned DSD system, and invested in expanded production capacity and high-return plant and warehouse automation projects. At the same time, we also passed on numerous M&A opportunities, including body armor. when we believed it was more prudent to be on the sidelines or a seller rather than a buyer. With our balance sheet in strong position and exceptional free cash flow in front of us, we're excited about our ability to continue to generate strong inorganic returns on top of our attractive organic TSR algorithm. Let me hand it over to Ozan.