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 fourth quarter and full year 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 Chief Corporate Affairs Officer, Maria Scheper-Garcia. Ms. Scheper-Garcia, please go ahead.

Thank you, and hello, everyone. Earlier this morning, we issued our press release for the fourth quarter. Consistent with previous quarters, we will be discussing our performance on an adjusted basis, which reflects constant currency growth rates and excludes 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 and the use of constant currency growth rates are 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 table included in our press release in 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. Today we will also speak to the concept of underlying performance, which removes the impact of previously disclosed non-operational items. In 22, These items included gains on asset sale leaseback, reimbursement of litigation expenses related to body armor, a business interruption insurance recovery, and a change in accounting policy for stock compensation. Here with us today to discuss our results are KDP Chairman and CEO, Bob Gamgort, and our Chief Financial Officer, Siranchu Priyadarshi. Also with us this morning is the IR team, including Jane Gelfand. who we are excited to welcome this week as our new Vice President of Investor Relations and Strategic Initiatives. I'm confident that many of you know Jane from her time on the street, as well as her most recent role at Wayfair, where she led a number of finance functions, including investor relations and treasury. Jane is replacing Steve Alexander, who after more than 16 successful years in finance, commercial, and IR with KDP and predecessor companies, has decided to take some time off for family and travel. We are pleased that Steve has agreed to stay on through April to support the transition. 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 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, Maria, and good morning, everyone. In 2022, we continue to advance our vision of a modern beverage company by expanding our portfolio to reach more beverage consumers, needs, and occasions, and by enhancing our unique selling and route-to-market capabilities to make our brands available at every point of sale. Our full-year financial results were in line with or above our guidance, with revenue growing by 11%, and adjusted diluted EPS expanding by 5%. Since our Q3 earnings call, we had the opportunity to engage with many of you twice. First, at our early December in-person event, where you met the KDP management team and board of directors. And again, on our mid-December fireside chat, during which we discussed our investment in Nutribull, including the distribution agreement for C4, and answer questions regarding recent trends in the categories in which we compete. Those conversations provided us with a good sense of what's top of mind with our investors, which we will build upon during today's call. I'll start by providing perspective on the macro and category environments we faced in 2022, discuss how we created shareholder value over the past year, and offer thoughts on how we see 2023 shaping up, both in terms of the macro environment and our strategy to continue winning. Sudhanshu will follow me with specifics on our Q4 and full-year 2022 results, provide more detailed guidance on key metrics for 2023, and discuss the evolution of our capital allocation policy. While it seems like a long time ago, we started 2022 with the lingering effects of supply chain disruption, primarily driven by a final COVID wave that reduced labor availability in late 2021 and early 2022. We felt that impact most acutely in our coffee business, where strong 2021 consumer demand had depleted our inventories, and in our still beverage portfolio, where we faced a range of supply shortages. We implemented supply recovery programs that yielded strong customer service improvements with replenished inventory levels. By Q2, our concerns around COVID and supply chain disruptions were quickly supplanted by industry inflation in ingredients and materials, labor, and transportation. That was outpacing significant pricing. Elasticity held up well in the categories in which we compete, which enabled strong revenue growth. driven by both the higher pricing and increased volume, but came at lower margins. For perspective, we faced total cost inflation in 2022 of 16%, far above our expectations going into the year. And we implemented pricing actions across our portfolio that averaged in the low double digits. Pricing realization was strong and accelerated throughout the year. yet it consistently lagged the timing of the escalating inflationary impact on our P&L. As we approached the end of the year and entered 2023, we became more focused on the potential impact of recession on our consumers, despite seeing minimal evidence of changing behavior to date. We are monitoring consumer behavior closely and are taking proactive steps to ensure our brand strength continues into 2023 and beyond. Of course, the wide range of challenges of 2022 is a continuation of the rolling set of obstacles we have navigated since the onset of COVID in 2020. In this context, we have discussed the benefits of our all-weather business model. This is more than a punchy soundbite. It reflects our ability to manage our broad portfolio and unique routes to market to deliver strong and consistent shareholder returns in an unpredictable and changing environment. As we did in 2022, and every year since forming KDP in 2018. In addition to delivering our ambitious financial commitments over the past five years, we've also been immersed in an integration and transformation process that created a modern beverage company that today can consistently deliver attractive, high-quality, dependable returns with a well-capitalized balance sheet. Toward that end, we have evolved our capital allocation policy to reflect that of a more mature KDP and to be contemporary with a changing macro environment marked by rising interest rates. During the integration and transformation stage, we had a strong focus on rapid deleveraging, using all available levers available to us while still investing in building our capabilities and brands. We took advantage of compelling opportunities to monetize non-strategic assets through sale-leaseback transactions, which enabled us to simultaneously invest, deliver, and drive strong returns for our shareholders. As we shift from integration and transformation to activation, we are planning for a step-change reduction in the use of non-operational benefits starting this year. That means our underlying operational growth will exceed our adjusted growth in 2023. Of course, our guidance will continue to be for adjusted metrics, and we will report results on the same basis we've always done. But we will also highlight operational performance from time to time to provide you with a better sense of the underlying strength of our business.