Keurig Dr Pepper Inc.

Good morning ladies and gentlemen and thank you for standing by. Welcome to Keurig Dr. Pepper's earning call for the second 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 Keurig Dr. Pepper'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 second 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 tables included in our press release and our TEN-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. 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. 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 Gamgort, Chief Financial Officer Sudhanshu Priyadarshi, and our Chief Corporate Affairs Officer Maria Scappagurcio. I'll now turn it over to Bob.

Thanks, Jane, and good morning, everyone. KDP second quarter once again demonstrated our portfolio's resilience and ability to consistently deliver on our total company commitments. Our solid performance was driven by strength in U.S. refreshment beverages, encouraging developments in U.S. coffee, and continued momentum in international. Consolidated Q2 results were healthy. with strong revenue momentum and sequentially accelerating operating income and EPS growth. Net sales advanced more than 6%, supported by net price realization, modest category elasticities, and good share performance across much of our portfolio. For the first time since Q3 2021, reported gross margins expanded. as an improving balance between pricing, inflation, and productivity began to emerge. Gross profit dollar growth funded marketing increases across all segments and helped to offset continued cost pressures in transportation, warehousing, and labor. As we forecasted, we are in the early stages of a margin recovery that we expect to become more visible in the back half. Looking ahead to the balance of the year, we are raising our 2023 net sales growth outlook to 5% to 6%. While our full year EPS outlook is optically unchanged, it in fact represents greater than originally anticipated underlying growth with an enhanced composition to our earnings profile. As Sudhanshu will discuss in more detail, we now expect minimal non-operational items in 2023. setting KDP up for strong and sustainable earnings base from which to grow in 2024 and beyond. U.S. refreshment beverages performance in Q2 was outstanding, double-digit revenue growth and strong operating margin expansion. Similar to last quarter, category growth and our own momentum remained pricing-led. Limited volume elasticities across the portfolio. Though demand is resilient, we are mindful of the various pressures facing our consumers and are proactively meeting their needs through product and package innovation along with strong in-market execution. When these elements come together, we see market share gains. Due to, these were most notable across our CSDs, sparkling water, coconut water, and juice portfolios. Even as price realization begins to moderate in the back half, we remain confident in our ability to drive attractive organic growth by creating value among three key dimensions. First, by driving growth in core brands through marketing and brand renovation. Second, by filling portfolio white spaces via innovation and external partnerships. And third, by enhancing the effectiveness of our omni-channel selling and distribution system. We delivered on each of these dimensions in Q2, focusing first on our core brands. For the second consecutive quarter, Dr. Pepper was the largest share gainer in the CSD category, bolstered by the success of Strawberries and Cream and the continued strong momentum of Dr. Pepper Zero Sugar, which was once again named a top two food and beverage product in IRI Cercana's New Product Pacesetter Innovation Rankings. Squirt also continued to outperform, driven by its multicultural appeal. In unsweetened sparkling waters, our partnership with Polar has now boosted the brand to the number two volume share position nationally. We also brought significant excitement to our juice categories, where Mott's and Hawaiian Punch are driving innovation and gaining share. When it comes to partnerships, our C4 distribution transition is proceeding well. 2023 is a year of transition and investment, and though it is still early days in our distribution rollout, we are driving gains across multiple metrics and remain confident in the growth potential of C4. In KDP distributed geographies, total points of distribution increased nearly 60% versus prior year, and weighted weeks on display across large format food outlets are up nearly 15% relative to the beginning of 2023. These gains translated into continued velocity and share momentum for C4 and accelerated the brand's already strong revenue growth even further. Clearly, our partnership approach continues to create win-win outcomes, making this model increasingly attractive to other high-potential companies, including La Cologne, which I'll speak more about shortly. The effectiveness of our selling and distribution engine underpins our success across all the examples I cited. I want to acknowledge the hard work our teams have done to drive improvement across the system, where it showed signs of strain during the pandemic. Customer service levels are now significantly improved relative to where we were during the COVID period, and in some cases exceed pre-pandemic comparisons. Though our work here is never complete, These strides are leading to even tighter in-store and on-shelf execution as our market share momentum demonstrates. Turning now to U.S. coffee, we're exiting Q2. We saw several encouraging developments that are expected to benefit segment performance over the coming quarters. On our last earnings call, I identified three key tenants underpinning our expectations in this segment. First, that at-home coffee category momentum would begin to recover in the back half as mobility comparisons ease. Second, that we would add approximately 2 million new households to the Keurig ecosystem in 2023, aided by brewer and pot innovation and the addition of new brands. And third, that segment operating margins would improve meaningfully, the back half, supported by a better balance between pricing, inflation, and productivity. We have even more visibility to these elements playing out today, with Q2 marking an expected trough in both top-line growth and margins. Let's address each point in turn. First, as anticipated, at-home coffee category momentum began to improve towards the end of the second quarter and has continued to do so in July. The amount of time our consumers are spending at home this year versus last is continuing to normalize. Since we believe time spent at home is the single largest variable driving at-home coffee consumption, It follows that volume trends are recovering too. We are observing this across broader at-home coffee, within which single serve continues to gain share. Category recovery is very clear when looking at publicly syndicated data. In Q1, curing compatible pod volumes, good proxy for the total single serve category, declined nearly 4% across measured channels. Due to these declines moderated to less than 2%, with improvement particularly notable towards the end of the quarter. For the last four weeks, category volumes are flat to up slightly. Notably, category and KDP volume performance has been even stronger in non-track channels, such as e-commerce and unmeasured clubs. Category trend is a positive leading indicator for our business, and we would expect sequential improvement in net sales growth in the back half. That said, we are prepared for our volume growth to lag the single-serve category in the shorter term as we focus on optimizing profitability. Pricing across all subsegments of our K-Cup portfolio is now more fully flowing through our financials, including from our partner brand. consistent with our previous expectation that pricing would catch up to inflation, but at a delay. We also exited some of our lowest margin private label contracts. Both of these elements are now filtering through our results and the syndicated data. Longer term, our growth in U.S. coffee will remain underpinned by driving incremental household penetration for the Keurig system and increasing revenues from our existing 38 million active households. which brings me to the second tenet of our coffee outlook, driving incremental household penetration. In Q2, we furthered this growth strategy by elevating our presence in cold coffee, which is an important trend among younger consumers. This spring, we nationally expanded the K-Ice Brewer platform and specially formulated Ice Cake Cup pods. Strong marketing and activation activities across all media and digital channels including a special limited edition Rolling Stones K-Ice Brewer that sold out in less than 24 hours. These innovations are off to a very strong start, with the K-Ice Brewer family performing extremely well and our ice pods proving highly incremental to our base business. Just last week, we announced a strategic partnership with La Cologne, super premium and award-winning coffee brand with wide appeal and untapped potential. A partnership which includes an equity investment, a sales and distribution agreement for RTD Coffee, and a K-Cup pod licensing agreement is a compelling example of our ability to add value to a single partner across both hot and cold beverages, which KDP is uniquely positioned to deliver. Our collaboration with La Colombe will encompass several exciting strategic avenues. We will leverage our sales and distribution capabilities to scale La Colombe across major retail classes of trade. Along with the Pete's brand, we are creating a ready-to-drink coffee platform, which will enable us to better serve the needs of our consumers and retail customers in this important category. We will also work closely with La Colombe to formulate and introduce the brand into the Keurig ecosystem in a K-cup format. Here, too, we are building a super premium platform as La Colombe joins several recently added brands like Intelligentsia, Black and Bold, and Philz. Additionally, La Colombe's vertically integrated model and specialized manufacturing knowledge are other differentiated elements that could enhance our collaboration over time. In short, this partnership has strong value creation potential that, when unlocked, will benefit both KDP and La Cologne through our joint ownership model. Now moving to the third element driving our coffee outlook. We continue to expect segment margins for the U.S. coffee segment to meaningfully improve both sequentially and year-over-year in Q3 and Q4. Multiple factors led to segment margin contraction over the last two years, and several elements, including sequential favorability in pricing, Commodity costs and productivity are now starting to come together to facilitate a margin rebuild. Pricing to offset cumulative inflation across our K-Cup portfolio, including for partner and private label brands, will now more fully flow through starting in Q3. Commodity cost pressures, including in green coffee and packaging, are also projected to ease. Efficiency benefits should ramp up throughout the year. as we have redoubled our productivity efforts following a period focus on mitigating supply chain disruptions. We will work to further enhance these elements going forward, with the expected back-half margin inflection an important marker for future profit growth. Our international segment continues to perform well, even as it begins to lap double-digit growth in the year-ago period. Q2 Canadian volume momentum was fueled by non-alcoholic and low-alcohol beverages, where we have multiple brands like 8 to Peak and Labatt gaining share. This is an exciting set of emerging categories where we plan to leverage our learnings across markets. Execution also remains strong in our Canadian coffee business, where KDP manufactured pods grew consumption dollars and gained market share during the period. In Mexico, our DSD network continues to strengthen, which is supporting broad-based share momentum across our LRB portfolio and the ongoing rollout of our partnership with Red Bull. Across the portfolio, Penufiel and its aid extensions into flavored sparkling waters, as well as our CSD brands, continue to perform very well. Wrapping up, Our consolidated Q2 results are yet another illustration of our modern beverage company working to deliver strong, consistent, and predictable company performance. We continue to develop our business for the long term through investments in innovation, partnerships, and capabilities, while demonstrating our ability to work through shorter-term normalization in coffee. We also continue to deploy our cash to create value for shareholders. We saw this via the equity investment in La Cologne and through the opportunistic repurchase of KDP shares, which continued through Q2 as our share price remained dislocated. We are raising our 2023 outlook for constant currency net sales growth to 5% to 6% and reaffirming our guidance for adjusted EPS growth of 6% to 7% with an improving composition of our earnings profile. We now expect only minimal non-operational benefits within the frameworks of this guidance, implying double-digit adjusted EPS growth on an underlying basis. I'll now turn it over to Sudhanshu to discuss Q2 results and our balance of your outlook in greater detail.