Keurig Dr Pepper Inc.

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Keurig Dr. Pepper's earnings call for the third quarter of 2022. 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 Vice President of Investor Relations, Mr. Steve Alexander. Mr. Alexander, please go ahead.

Thank you, and hello everyone. Thanks for joining us. Earlier this morning, we issued our press release for the third quarter of 2022. 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 which excludes items affecting comparability and presents growth rates on a constant currency basis. 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-Q, which will be filed later today. Due to the inability to predict the amount and timing of certain impacts outside of the company's control, we do not reconcile our guidance. Here with us today to discuss our results are KDP CEO Ozan Daltmesio-Gluck, and our interim CFO, George Lagodakis. Also joining us for Q&A, our KDP Executive Chairman, Bob Gambork, and our Chief Corporate Affairs Officer, Maria Scappagurcio. And finally, our discussion this morning may include forward-looking statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially and the company undertakes no obligation to update these statements based 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 Ozan.

Thanks, Steve, and good morning, everyone. Given that this is my first earnings call as CEO, I would like to start today's discussion with my thoughts on the KDP operating model and its strategic approach. that makes us unique in the CPG space. Our focus continues to be on managing our business for a range of potential macro outcomes and leveraging the all-weather business model we have created to drive success, regardless of the environment we may face. Our results this quarter and the consistency of our performance since merger are a testament to the strength of this model, which has continued to perform well in the highly volatile macro environment our industry has faced since the onset of COVID. And, most recently, our portfolio has performed well with significant levels of inflation and pricing, along with a challenged consumer landscape demonstrating its recession resistance. with elasticity impacts remaining modest and our market share positions remaining strong. Our business model starts with an attractive and competitive organic total shareholder return algorithm, which is driven by a flexible and scalable strategy. In cold beverages, our strategy is focused on driving growth. In core brands, through marketing, brand renovation, and in market execution, by filling white space in our portfolio through innovation and partnerships, such as our Polar Seltzers partnership and the recently announced Red Bull selling and distribution agreement in Mexico, which we will touch on a bit later, and by enhancing the breadth, depth, and effectiveness of our omni-channel selling and distribution system. including our company-owned direct store distribution system. The investments we have made in selling and distribution over the past several years have built a stronger go-to-market capability that has driven consistently strong market share performance across all the brands and beverage segments. In coffee systems, we are focused on driving household penetration growth for the Keurig system at the rate of approximately 2 million new households every year. Given the number of remaining addressable new households for the Keurig system, which we estimate at more than 50 million, we have line of sight to household growth well beyond the next 10 years. We are also focused on increasing revenue and profit growth from our existing 36 million Keurig households through new platforms such as connected brewers and the new beverage formats and occasions. In addition to our core algorithm, KDP's extraordinary free cash flow enables the potential for incremental shareholder returns through strategic capital allocation. We believe that M&A is the most attractive and value-accurative option for the deployment of our capital, given our disciplined approach and proven ability to create value for KDP and our shareholders. We also see opportunistic share buybacks and investment in our internal growth projects as attractive uses of our capital. We view our North America geographic focus as a distinct advantage, particularly in the current macro environment. as we can execute our organic and inorganic growth strategies in what is arguably one of the world's most stable and predictable operating environments. In addition, while most companies, including KDP, report profit and loss growth rates on a constant currency basis, a strong U.S. dollar reduces cash flow and profits, when foreign currencies are translated into U.S. dollars. This impact is minimal for KDP. The third quarter results we reported today provide a great example of our strategy and operating model at work, delivering for shareholders. Specifically, net sales advanced 12%, adjusted operating income increased 2%, and adjusted diluted income earnings per share grew 4.5%. Our cash flow was again strong in the quarter, bringing our year-to-date free cash flow to almost $2 billion, driving a free cash flow conversion ratio of 114%. This performance continues to demonstrate the strength of our brands and in market execution. In an environment with broad-based inflation, and reduce consumer purchasing power, as our elasticities continued to be modest. These consolidated results were in line with our guidance, with outperformance in our cold beverage segments, offsetting some pressures in coffee. With just one quarter left in the year, we continue to expect consolidated results to be on track with our guidance, as cold beverages is expected to continue performing well and coffee shrinks considerably as it moves past supply chain issues earlier in the year and the significant green coffee pressure experienced in the third quarter. This is what we mean by the benefits our all-weather business model provides, reinforcing the advantages of our uniquely diversified beverage portfolio. We continue to expect the fourth quarter to represent a step change in total KDP performance. As the anniversary, the spike in inflation across the business in the fourth quarter of last year and our coffee business performance accelerates. As has been the case throughout 2022, broad-based inflation continued to impact margins in quarter three. As the significant pricing actions we have taken to date have not yet fully caught up to inflation. We experienced total cost inflation in quarter 1 of 15%, which escalated further to more than 17% in quarter 2. And in quarter 3, it remained at the 17% level. In the fourth quarter, we will begin comping the significant inflation spike in the year-ago period. which reduces the rate of inflation on this year's profit and loss. As a result, we expect the contribution from previously taken pricing actions to catch up to inflation in the quarter, which will enable us to deliver margins above last year. Our cold beverages business continues to perform exceptionally well and posted significant sequential improvement in margins. Our packaged beverages and average concentrate segments combined, grew both net sales and operating income by 14% in the quarter, maintaining a combined operating margin even with a year ago. In coffee, net sales advanced 5%, led by pricing that was partially offset by lower volume mix, while the impact of broad-based inflation, including the highest year-over-year inflation, green coffee costs weighed on operating income. Pricing continued to advance but has not yet fully caught up to inflation. The good news is peak green coffee inflation is largely behind us, causing the impact of inflation on the coffee profit and loss to moderate significantly as we lap the inflation spike in Q4 last year. Along with these improving trends heading into the fourth quarter, our coffee segment top line is expected to shrink as the benefit of pricing and brand investments builds and the supply issues we have encountered in the first half are truly behind us. Taken together, we continue to expect meaningful sequential improvement in coffee segment net sales and operating income growth in the fourth quarter. Turning to in-market performance, let me provide some perspective on what we are seeing in terms of trends in our categories, including pricing, elasticity, and consumer mobility, starting with the cold beverages. In liquid refreshment beverages, the category continued to perform well, with dollar consumption in the quarter and year-to-date periods up 10% and volume down less than 2%. Elasticity in the category continues to be modest, even as pricing was up in the low double digits for both periods, and consumer mobility continued to increase. KDP's LRB dollar consumption increased more than 11% in the quarter, growing LRB share in both the quarter and year-to-date periods, reflecting the benefit of pricing that was only modestly offset by volume, which remained quite resilient, with elasticities below the category in both periods. We continued to benefit from healthy categories, a strong portfolio of leading brands, and very effective in-market execution. The strong performance in the quarter was broad-based and led by share gains in premium waters and seltzers, teas, apple juice, and fruit drinks. In carbonated soft drinks, our performance also continued to be strong, with dollar consumption up 20% in both the quarter and year-to-date periods, with our share up year-to-date. We are pleased that we continue to expand on the impressive share gains we generated over the past couple of years. Within carbonated soft drinks, our zero-sugar innovation continues to perform well, with modest elasticity impacts and stronger velocities than the overall zero sugar and diet category. In premium water, core hydration grew dollar consumption 35% in the quarter, driving almost two full points of share growth. Snapple, led by the success of our Snapple Brand Refresh and Snapple Elements, drove dollar consumption growth of 15%, and share growth of almost one full point in the quarter. And in Celsius, our partnership with Polar continues to drive growth for the brand, with ACV increasing six points and share gains of two points. Moving to coffee. Before discussing category dynamics, let me quickly share some context on our business and the performance improvements that are now beginning to materialize. You will recall that the combination of consistently strong consumer demand and supply constraints led to a pot shortage starting in late 2021. Consequently, we pulled back on our demand investment, as did most of our partners, and launched the Coffee Supply Chain Recovery Program to increase pot output and rebuild finished goods inventories for all parties in the Keurig ecosystem. We completed the program last quarter and have now restored inventories across the ecosystem, which enables us, along with our partners and customers, to resume investments in demand-generating programs to drive category growth. As a result, the single-serve pot category continues to recover from supply constraints, with dollar consumption up 6% in the quarter, advancing to 7% in September, and off to a good start in quarter 4. There has been considerable noise in the broader at-home coffee category numbers, well beyond single-serve coffee that is worth discussing further. A combination of increased consumer mobility, retail price actions, and the reduction in advertising and promotion spend, the latter related to the single-serve supply challenges, negatively impacted at-home coffee category demand over the summer. Our analysis suggests that consumer mobility had the outsized impact. With mobility returning to more normal patterns, once the school year started, we are seeing sequential improvement in at-home coffee demand. Importantly, single-serve coffee outperformed all other forms of at-home coffee during quarter three. Further, the away-from-home coffee category, while still down significantly versus pre-COVID levels, continues to improve, with further runway as return to office behavior builds. Looking specifically to KDP coffee performance, KDP manufactured port consumption was up 4% on a dollar basis in the third quarter, with owned and licensed brand consumption growing by 5%, as the McCafe, Donut Shop, and Green Mountain brands posted strong growth. Performance shrank during the quarter, with year-over-year dollar and volume share advancing sequentially in September versus July and August. and continuing to improve into the fourth quarter. KDP continues to maintain its strong leadership position in the category, with market share for KDP manufactured pots at approximately 82%. Moving forward, we expect MIX to shift for KDP manufactured pots from private label to branded as community coffee comes on board beginning late this year. Turning to brewers. Today, we are confirming that we are on track to add 2 million new households into the Keurig system in 2022, which is consistent with our long-term algorithm. As discussed many times, we expect the elevated rate of 3 million new households that we attracted in 2020 and 2021 to normalize post-COVID. And that's exactly what's happening in 2022. Of course, We don't need to sell as many brewers to support 2 million new households as we did to support 3 million, which explains the 15% decline in brewer shipments in the third quarter. Remember, we are in the household penetration business, not the brewer sales business, as we largely break even on brewer sales and generate nearly all of our profits from attracting new consumers into the Keurig ecosystem. Taking a longer-term perspective, quarter-free brewer sales were a healthy 16% above 2019 and on a year-to-date basis, brewer shipments are up more than 30% versus the first three quarters of 2019. In addition, single-serve brewers continue to hold the number one position in the at-home brewer segment, and KDP continues to grow share, driven by strong innovation across all consumer price points. Finally, our Latin America beverages segment continued to post exceptionally strong results in the first quarter. Net sales advancing 29% and operating income was up 14%. The latter on top of 48% growth in the first quarter of last year. Leading this to strong performance in the quarter were Pena Fiel, Clamado, Motz and Skr. Earlier this month, we announced a strategic partnership to sell and distribute Red Bull in Mexico starting in Q4. The majority of the revenue we generate in our Latin America beverage segment is from Mexico, and we are excited to enter into this win-win partnership with Red Bull, which will strengthen our position in the energy category, improve our go-to-market scale, and drive efficiencies over time. And now, I will hand it over to George to cover our third quarter performance in a bit more detail.