Keurig Dr Pepper Inc.

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Keurig Dr. Pepper's second quarter 2024 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero on your telephone keypad. This conference 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, 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, which we will discuss during this conference call. A slide presentation will accompany our remarks and can be viewed in real time on the live webcast. Before we get started, I'd like to remind you that our remarks will include forward-looking statements which reflect KDP's judgment, assumptions, and analysis only as of today. Our actual results may differ materially from current expectations based on a number of factors affecting KDP's business. Except as required by law, we do not undertake any obligation to update any forward-looking statements discussed today. For more information, please refer to our earnings release and the risk factors discussed in our most recent Forms 10-K and 10-Q filed with the SEC. Consistent with previous quarters, we will be discussing our Q2 performance on a non-GAAP adjusted basis, which reflects constant currency growth rates and excludes items affecting comparability. Definitions and reconciliations to the most directly comparable GAAP metrics are included in our earnings material. Here with us today to discuss our results are Keurig Dr. Pepper's Chief Executive Officer, Tim Cofer, and Chief Financial Officer and President International, Sudhanshu Priyadarshi. I'll now turn it over to Tim.

Thanks, Jane, and good morning, everyone. It's been eight months since I joined this great, young, and dynamic company. I continue to be impressed with the caliber of the organization, the quality of our execution, and the challenger mindset our people embody each and every day. Together, we delivered healthy second quarter performance while making important progress to advance our strategic agenda. With our first half now in the books, we're on track to deliver full year results consistent with our on algorithm outlook. The operating environment remains uneven with resilient demand from higher-income consumers and value-seeking behavior among low- and middle-income consumers. We are highly attuned to these dynamics, and despite them, we still expect a top-line acceleration over the balance of the year, thanks to several elements largely within our control, including new partnership growth and traction from innovation. At the same time, our first half-weighted EPS delivery helps to pave the way for on-plan performance as we also seed our multi-year growth agenda. In Q2, constant currency net sales growth sequentially improved to 3.4% and reflected a re-weighting of our top-line drivers with pricing moderating and volume mix accelerating to positive territories. We entered 2024 anticipating net price realization for KDP and the industry would normalize from the unusually high levels over the past few years, and it has. It's encouraging to now see a more balanced top-line growth profile begin to emerge. At the same time, we remain focused on generating leverage throughout our P&L to fund reinvestment and drive earnings growth. In Q2, continuous productivity savings and cost discipline drove strong operating margin expansion, helping to translate our top-line momentum to a solid bottom-line result with 7% EPS growth versus prior year. As we execute against our evolved strategic framework, we registered a number of wins in Q2. Let me highlight a few that will continue to pay off throughout the year, along with focus areas for the long term. As you know, one of our key strategies is consumer-obsessed brand building. Our innovation ramped significantly in the second quarter, and as expected, these new products are seeing good marketplace traction. In U.S. refreshment beverages, Dr. Pepper Creamy Coconut is now our most successful limited-time offering. Canada Dry Fruit Splash is also proving highly incremental to the brand. Together, these innovations are driving improved share trends across the CSD portfolio. Outside of CSDs, we're pleased with the initial response to our Buy Wonder Water restage, which is reengaging consumers in its early days. In U.S. coffee, our new refreshers from the original donut shop are on track to be the largest Keurig platform launch of the last several years. These coffee shop-inspired cold beverages are bringing new occasions and younger consumers into the single-serve K-cup category. and are supporting market share gains for our owned and licensed portfolio. Outside the U.S., our Peña Fial AIDS and Twist products are extending the powerful Peña Fial brand into new white space segments and contributing to market share gains for our Mexico portfolio. In total, these innovations will continue to develop over the coming months with additional news and activation upcoming across the portfolio, including in powerhouse brands like Mott's and Green Mountain. We also made progress with new partnerships as we focus on shaping our now and next beverage portfolio. With Electrolite and La Cologne now part of that portfolio, our excitement about each brand's future and the win-win collaboration models behind them continues to build. As anticipated, revenue contributions from these brands increased during the second quarter and should further scale over the balance of the year. The transition of electrolyte volume to our DSD network is ongoing, with the handover expected to be complete in the back half. As we take on this distribution, we're beginning to unlock the brand's untapped potential with outsized market share gains in KDP-served regions and channels. This performance underscores our go-to-market capabilities and spotlights the growth opportunity for Electrolyte within the sports hydration category. Similarly, we continue to cultivate our La Cologne partnership across both K-cup pods and shelf-stable ready-to-drink coffee. Focusing on the latter, the La Cologne's reformulated draft lattes are truly differentiated in this category and show strong promise. As we speak, our DSD organization is focused on expanding this unique products availability and display to drive initial consumer trial, contributing to strengthening marketplace trends. In May, we also announced a planned transaction with Khalil Bottling Company, another concrete step to amplify a route to market advantage, which is a key component of our strategic agenda. With one of only three nationwide direct store delivery systems for LRBs, we understand innately the competitive advantage of controlling last mile distribution in our industry. This particular transaction will grant us full control of our brand's distribution in Arizona, a strategic and fast-growing state, and with it, the ability to optimize and extract even more leverage from our local DSD assets. We are moving quickly towards completing the acquisition of Khalil's production, sales, and distribution operations in Q3, And we are honored that the Khalil family has entrusted us to carry on the legacy of their multi-generational business. Perhaps less externally visible in any single quarter is the significant work we're doing to dial up our productivity and fuel for growth engine. With consumer health mixed, pockets of inflation returning, like in the case of green coffee, and currency volatility increasing, we are reinforcing our attention on driving productivity, network optimization, and structural cost discipline. These focus areas are essential to securing additional near-term flexibility and room for reinvestment, and they are enablers of consistent delivery over the long term. We have an active agenda to support each element in 2024 and are laying the groundwork for meaningful further actions that will benefit us well beyond this year. Also woven throughout our strategic agenda is a commitment to corporate responsibility and being a force for positive change. I'm proud of how our people incorporate this focus into everyday activities and decision-making while also pursuing a set of ambitious multi-year targets. We highlighted this important work once again in our 2023 Corporate Responsibility Report, published just last month. I encourage you to give it a read to track our progress and to witness how we live up to our Drink Well, Do Good purpose. Now, let's turn to our Q2 segment, Topline Performance. Sudanshu will then discuss segment performance in more detail, including the strong margin expansion we deliver across the board. Starting with U.S. refreshment beverages, revenue grew at a low single-digit rate in the quarter. Our performance was led by CSDs, which remain an outperformer in the liquid refreshment beverage space by offering compelling everyday value and varieties. Within the CSD category, and as expected, a relative market share trend improved as Q2 progressed and as our 2024 innovation slate and brand activations layered into the market, resonating with consumers. Brand Dr. Pepper maintained its long-term track record of market share growth on the back of this year's Dirty Soda-inspired Creamy Coconut LTO, and the marketing excellence behind our new It's a Pepper Thing campaign. Our ability to steadily grow Dr. Pepper by staying on top of trends and continually tapping into the cultural zeitgeist is a defining characteristic of the brand. It's on track for its eighth consecutive year of market share outperformance, and yet there is still substantial untapped opportunity to further expand its preferred status. Beyond CSDs, we also delivered another strong quarter of growth for C4 energy. Despite the energy category's recent moderation, it remains a highly attractive space with consistently faster volume growth than all major beverage categories, including on a year-to-date basis. With C4, we also have a uniquely positioned brand that is gaining share with meaningful growth runway still available for us to realize. In some parts of the still beverages portfolio, we continue to see a more pronounced macro impact, leading to softer category growth rates. As a result, we're taking steps to ensure our brand's value propositions are clearly resonating This includes targeted channel-specific promotions, price pack work like smaller bottles and multi-packs, and a focus on value-oriented channels like club and dollar. Simultaneously, we are investing to drive demand through innovation and brand activations, such as this year's rollout of reformulated by Wonderwater and the Summer Olympics gymnastics tie-in for core hydration. Moving to U.S. coffee, we made further progress against key priorities during the quarter. While overall at-home coffee category trends remain subdued, our relative performance is strengthening, with pod shipments improving to flat year over year in Q2. This outcome reflected market share gains across our owned and licensed brands, including initial traction across our three focus areas, affordability, premiumization, and cold coffee. Together, these initiatives reflect a barbell strategy intended to highlight value for those consumers who are feeling stretched and provide premium options for those with more spending power. When it comes to affordability, during Q2, we began rolling out smaller pack sizes intended to optimize the cost per package of K-Cup Pots. Because of its multi-serve nature, coffee is one of the highest dollar ring food and beverage categories. And these price pack adjustments enable us to hit more attractive everyday and promoted price points across grocery and club channels. At the same time, we launched digital campaigns that emphasize the affordability of consuming coffee at home instead of at coffee shops, which we see as particularly resonant messaging in the current environment. Our Q2 affordability strategy also extended to brewers, where we drove sizable Keurig share gains led by entry-priced machines and supported by some targeted value investments. Shifting to premiumization, the combination of brewer innovation and an increasingly well-developed set of super premium pods is strengthening Keurig system credibility with coffee connoisseurs and tapping into more affluent consumers. This includes our work with Lavazza, now a licensed brand within our portfolio as of Q2. With greater commercial influence, we have already secured expanded distribution for the brand and are just getting started on the activation agenda. Moving to cold coffee, we are actively pursuing the significant number of iced occasions currently occurring away from home. Cold coffee represents less than 20% of at-home occasions, While at certain coffee shops, cold beverages account for upwards of 70%. One way we are pursuing this white space is through K-Cup innovation, with significant activity during Q2, including refreshers and cold brew pods. These items performed well in the quarter, with wider distribution and support slated for the back half. We're excited to further address the cold opportunity through brewers, including the upcoming launch of our new K Brew and Chill Brewer in Q3, as well as through the continued expansion of La Cologne Ready to Drink Coffee. All in, we're encouraged by the progress we are seeing from our multiple coffee initiatives, which is visible in improving market share for both take-up pods and brewers. Even so, and as with many food and beverage categories today, demand trends across the larger at-home coffee category are soft. In single-serve, a promotional environment that is at odds with significant green coffee inflation also persists. This softer demand backdrop supports why we constructed our 2024 outlook, assuming a muted revenue growth contribution from U.S. coffee, which remains an appropriate planning stance. Turning now to international, impressive segment performance continued in the second quarter, with double-digit constant currency growth on the top and bottom line, and broad-based momentum across the portfolio. In cold beverages, strong in-market execution in both Mexico and Canada powered our results. Compelling Peña Fial line extensions, momentum behind Clamato and Canada Dry, and Atipique share gains in the low and no alcohol category led the growth. Our Canadian coffee results were also robust in the quarter, driven by our owned and licensed brands and supported by nuanced portfolio management. With exceptional strength in the international business in Q2, we also seized the opportunity to reinvest in our brands and capabilities to seed future growth, adding to our confidence in sustained segment momentum. In closing, we're pleased with our overall second quarter performance and remain on track to our full-year outlook. At the same time, we are activating our strategic agenda. Our consumer-centric approach to brand building is resonating in market. Successful portfolio expansion into higher growth categories like energy, sports hydration, and ready-to-drink coffee continues. And multiple initiatives to strengthen an already potent route to market are underway, including our pending transaction with Khalil Bottling. We also remain highly focused on furthering our enterprise-wide efficiency and cost agenda, which will underpin our visibility for the balance of the year and our ability to invest in the future. And throughout, our capital discipline is unwavering, and with a strong balance sheet and improving free cash flow, our ability to strategically deploy our cash is robust.