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 first quarter of 2023. 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 the company's vice president of investor relations and strategic initiatives, Jane Gelfand. Ms. Gelfand, please go ahead.

Thank you, and hello, everyone. Earlier this morning, we issued a press release detailing our first quarter results. 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 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. Beginning this quarter, we will discuss our performance in accordance with our recently redefined business segments, which were described in an 8K file last Thursday, April 20th. This new segment structure is more consistent with how we evaluate the business internally and provides more visibility to our segment performance in the U.S., which is our largest market. We will also speak about the concept of underlying performance, which removes the impact of non-operational items in the current and prior years. These items include gains on asset sale leaseback transactions, reimbursement of litigation expenses related to the successful resolution of our body armor lawsuit, a business interruption insurance recovery, and a change in accounting policy for stock compensation. 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. Here with us today to discuss our results are KDP Chairman and CEO, Bob Gambort, our Chief Financial Officer, Sudhanshu Priyadarshi, and our Chief Corporate Affairs Officer, Maria Scafandarsio. I'll now turn it over to Bob.

Thanks, Jane, and good morning, everyone. We started 2023 with good momentum. Our overall Q1 performance came in largely as expected and demonstrated the resilience of the modern beverage company we have built. We continue to manage well against a dynamic macro environment with the diversification benefits of KDP's model evident in our results. This morning, we reaffirmed our 2023 outlook and we are confident in our ability to continue to deliver on our commitments as a company. For the quarter, consolidated net sales advanced a strong 9% versus the prior year, and adjusted EPS grew 3%. Consumer demand remained healthy, driven by successful renovation and innovation, increased investment in marketing, and modest elasticities across much of our portfolio. A narrowing gap between inflation and pricing, coupled with increased productivity and favorable mix, contributed to good flow-through to gross profit, though we continue to work through significant ongoing inflation in transportation, warehousing, and labor costs. We expect the balance between these operating income drivers to turn more favorable in the back half of the year. In U.S. refreshment beverages, which represents nearly 60% of KDP consolidated revenue, Our strong performance in Q1 demonstrated the depth of our capabilities across multiple dimensions, including brand renovation, marketing, distribution, and in-market execution, as well as our partnership philosophy and successful track record. As discussed previously, we create value in U.S. refreshment beverages in three ways. By driving growth in core brands through marketing and brand renovation, by filling portfolio white spaces via innovation and external partnerships, and by enhancing the effectiveness of our omnichannel selling and distribution system, including our company-owned direct store delivery system. The multiplier effect of all three of these elements working in unison was evident in Q1. We gained share in categories representing almost 90% of retail sales, with strong momentum in core brands such particularly Dr. Pepper, Crush, and Moss. On the back of the very successful launch of Dr. Pepper, Strawberries, and Cream, brand Dr. Pepper recorded the largest market share gain in the CSD category this quarter. In fact, the brand has become the number one flavored CSD in syndicated data over the past 13 weeks. For perspective, Strawberries and Cream reached 70% ACD distribution within five weeks of launch, quickly gained a full share point in the CSD category, and continues to experience strong momentum. Driving the early success of Strawberries and Cream is KDP's direct store delivery engine and robust consumer insights and marketing support. In Q1, we also began to activate our strategic partnership with Nutribull, transitioning C4 energy distribution to our network. Our execution thus far has been smooth and is progressing in line with our plans. As we begin to invest behind the brand, we are securing incremental distribution points and display, as well as upgrading placements. Though it is still very early days, our partnership with Nutribolt is strong and collaborative. We are excited by its potential and look forward to unlocking more value for both KDP and Nutribull in the quarters and years ahead. In-market execution underpins the gains we are making across our U.S. refreshment beverages portfolio. The results speak for themselves, but they are even more notable given we, and the industry at large, continue to work through significant inflation. We have supplemented 2022 carryover pricing with some additional pricing actions to start the year, as we protect our profitability and our ability to reinvest for the long term. The limited elasticities this business has experienced so far are a telling reminder of the resilience of the category in general, and the KDP portfolio in particular. Our brands remain important and affordable components of our consumers' everyday lives. Still, as recessionary risks persist, we continue to closely monitor consumer health and sentiment. Turning now to U.S. coffee, which represents roughly 30% of our consolidated revenue. This segment experienced a slower start to the year. The performance in pods, which as you know is our primary focus and profit driver, was as expected, with brewers softer than expected. Because this segment's performance in the first half of the year will be difficult to analyze for longer-term trends, let me take a step back and explain what we're seeing in the category and in our own business. Growth rates in the at-home coffee category, including the single-serve segment, are being temporarily impacted by changes in mobility relative to the prior year. In Q1, the category lacked the surge of the Omnicron variant, and lingering pandemic precautions in the year-ago period are expected to continue to affect comparisons through the first half. At the same time, the category is digesting significant cumulative pricing to offset inflation. Importantly, single-serve continues to gain volume share in the at-home coffee category in the U.S., underpinning the strength and resilience of the segment in our long-term growth strategy. We also see the environment for small appliances being impacted by the combination of lower consumer discretionary spending and a challenged specialty retailer environment. Janosha will cover the detailed quarterly performance drivers, but let me say up front, we expect the second half to reveal a more normalized picture of the health of the single serve category and our ongoing momentum. We're still planning to add approximately 2 million new households to the Keurig ecosystem in 2023. And we also continue to expect the back half to show strong improvement in segment operating margins. Short term noise aside, the category, the coffee category is vast and growing in the US and globally. Moving out the volatility of the pandemic period, we are projecting double-digit volume growth for our at-home pods in the U.S. from 2019 to 2023, which translates to mid-single-digit compound annual growth rate. This is consistent with our previous discussions that eliminating the significant noise over the past three years reveals consistent and healthy long-term trends for at-home single-serve coffee. As the leader in U.S. single-serve, our overarching growth strategy is to continue converting consumers from brewing coffee by the pot to brewing it by the pod, which we pursue through two primary means. First, by driving household penetration for the curing system. U.S. single-serve adoption remains significantly below that in more developed single-serve markets in Western Europe and even Canada. And we expect household growth to continue for many years to come. as we target adding approximately 2 million new households annually. Second, by increasing revenue and profit growth from our existing 38 million U.S. Keurig households. Ongoing brewer innovation to address new and changing consumer needs and a focus on expanding brand and variety offerings within the Keurig ecosystem underpin our coffee growth strategy. We have news on both fronts in 2023. When it comes to meeting consumer needs, after an initial successful launch with a single customer last year, in 2023 we are expanding our K-Ice brewer platform, as well as dedicated iced pods specifically designed for cold beverages. Cold coffee beverages are growing quickly at coffee shops and over indexed to younger consumers. Given our ability to deliver a high-quality cold coffee experience at home for a fraction of the price, we see iced coffee as a growth opportunity for the Keurig ecosystem in 2023 and beyond. We also continue to add new and exciting brands to the Keurig ecosystem. Today, we are pleased to announce that Philz Coffee, a super premium brand based in San Francisco, will be available on KCUP pods beginning this fall. Through the new partnership with Bills, as well as the additions of Intelligentsia and Black and Bold announced last year, we are building a new super premium segment for KCUP pods. Our international segment, which represents just above 10% of our consolidated revenue, encompasses both our Canadian coffee and beverages business, as well as our LRB businesses in Mexico and Puerto Rico. Our growth strategy for international leverages enterprise-wide insights and capabilities to grow household penetration in coffee and to drive share gains in LRBs through brand innovation and renovation, white space expansion, and strengthening our routes to market. We tailor our approach to local taste and market structures while exporting products best practices, and ideas across the whole of North America. In Q1, we were pleased to see broad-based momentum across our brands and categories, including in mineral waters, CSDs, and single-serve coffee. Our partnership with Red Bull in Mexico continues to build, and we also remain focused on expanding within the low or no alcohol category. including through our acquisition of 8TPIC in Canada. Both opportunities leverage our existing portfolio and distribution assets, including our DSD system in Mexico and our alcohol portfolio and expertise in Canada. Wrapping up, we expect the operating environment to remain fluid, and we see KDP as well-positioned to continue to deliver strong consolidated performance in 2023. We are reaffirming our 2023 outlook for constant currency net sales growth of 5% and adjusted EPS growth of 6% to 7%. On an underlying basis, this implies adjusted EPS growth that is closer to 9% at the top end of our long-term algorithm. In addition, KDP has a track record of strong free cash flow generation, and we expect to continue to unlock the potential for incremental shareholder returns through strategic capital allocation. We have evolved our capital allocation approach to better fit our development stage as a company and to respond to a higher interest rate environment. We are prioritizing internal investments, partnerships, and M&As. balance against returning cash to shareholders through our dividend and opportunistic share repurchases, which we undertook this quarter and last quarter. A recent upgrade by Moody's to a stronger investment-grade credit rating recognizes the inherent portfolio balance of our modern beverage company, along with our capital allocation philosophy and free cash flow profile. All aspects that Sudhanshu will talk more about next.