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 second quarter of 2025. 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 Jane Gelfand, Senior Vice President, Finance at Keurig Dr. Pepper. 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. An accompanying slide presentation 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 Form 10-K and the latest 10-Q, which will be filed with the SEC later today. 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. We delivered strong second quarter results, closing out a very good first half of the year. Our resilient performance is testament to our advantage business model, execution, and agility while operating in a dynamic environment. Looking ahead, the balance of 2025 will present challenges in the form of rising cost pressures, including from tariffs that remain highly fluid, as well as continued consumer caution. Despite this, we remain on track to achieve our full-year outlook thanks to strong first-half delivery and well-calibrated back-half plans. While driving hard to deliver on our 2025 commitments, we continue to advance KDP's long-term value creation strategy. As a reminder, our strategic roadmap is focused in five areas. Our entire organization is galvanized around these goals with forward progress being made each quarter. Let me share some examples from Q2. Starting with consumer-obsessed brand building, in June we published KDP's inaugural State of Beverages Trend Report, reinforcing our thought leadership in the beverage industry. Drawn from national surveys and our own proprietary data, this insight-rich report underscores the important role beverages play in consumers' lives and and how evolving preferences are shaping demand. With consumers' ever-changing needs at the heart of everything we do, it's no surprise that this report captures many of the trends we have been actioning against. For instance, we know that nearly half of all Americans and almost three-quarters of Gen Z consumers try a new beverage every month. This year, we are satisfying their thirst and curiosity through a robust flavor-oriented innovation slate in carbonated soft drinks, which has been highly successful to date. In fact, Dr. Pepper Blackberry ranks as the number one new product in the category this year, while iconic 7-Up is enjoying renewed momentum on the back of winning flavors like tropical, as well as a refreshing endless summer limited time offering. Our second pillar is reshaping our now and next portfolio, and we continue to increase our exposure to attractive white spaces. Energy is a major focus for us. and I'll speak more about our early success in that category in a moment. But we have also made exciting progress in other adjacencies. In sports hydration, Electrolyte is the fastest-growing scaled brand in the category, benefiting from strong velocities, DSD-enabled distribution expansion, and product and packaging innovation. The brand registered over 30% retail sales growth and gained more than a point and a half of share in Q2, yet has still only scratched the surface of its potential. We're also beginning to build a presence in new categories and segments. During the second quarter, we took 100% ownership of Dyla Brands. a key player in powdered drink mixes and liquid water enhancers. This small tuck-in builds on our productive multi-year partnership as a minority investor. Now with full ownership, we will leverage Dyla's know-how and capabilities to expand our presence in an attractive and growing category, including by extending more KDP brands into the space. Prebiotics, CSDs, are another fast-growing area of interest, having quickly captured nearly 3% market share of the $46 billion carbonated soft drink category. In Q3, we're entering this subsegment with the launch of Bloom Pop, a great-tasting soda combining bold, bubbly flavor with gut health benefits. This launch builds on our successful energy partnership with Bloom, which has rapidly scaled to nearly a sharepoint in energy drinks and has strong crossover potential into prebiotic CSDs. Consistent with our third strategic pillar, we are amplifying our route-to-market advantage, particularly in DSD. This starts with investing in our existing systems. including through enhanced digital tools, and continues with selected network expansion opportunities. Last year, we acquired bottling and distribution operations in Arizona, and I'm pleased with the high standard of execution that our teams have brought to this important geography. And later this year, we are capitalizing on a unique opportunity to add Dr. Pepper to our DSD portfolio in critical parts of California and Nevada, as well as certain areas in the Midwest. Our teams are actively preparing for this transition, which will enable us to directly influence point of sale trends, drive greater efficiencies across our DSD network, and generate halo effects that benefit our other DSD brands. Our focus on generating fuel for growth is ongoing and has taken on even more importance in the current inflationary environment. We have a robust productivity program that delivered strong efficiencies in Q2, and we remain on track to achieve the high end of our 3% to 4% savings target this year. We also continue to manage overhead costs with discipline, as was evident in our quarterly results. And finally, our capital allocation approach remains balanced and dynamic. During the second quarter, we generated strong free cash flow and fortified our balance sheet by refinancing a portion of our debt. Moving to Q2 results, we delivered strong enterprise growth with net sales increasing 7%. Growth included contributions from both price and volume mix, reflected continued momentum in our U.S. refreshment beverages and international segments, and illustrated encouraging sequential progress in coffee. We managed operating expenses with discipline, protecting our margins and helping to translate our top line gains into double digit EPS growth. Let's dive deeper into the segments and begin with U.S. refreshment beverages. Net sales grew almost 11% in the quarter, driven by a combination of core strength and rapid expansion in recently entered white spaces. Starting with the core, our CSD performance was strong, and we again gained market share in a growing category, led by Dr. Pepper, as well as 7Up and Canada Dry. When it comes to Dr. Pepper, our multi-year momentum is underpinned by many sustainable growth drivers, some of which were apparent in Q2. These include innovation and renovation, with Dr. Pepper Blackberry proving highly incremental to the franchise, and a recent graphics refresh for Dr. Pepper Cherry, driving a meaningful acceleration in sales growth, velocity, and buyers. Distribution and merchandising, particularly in Dr. Pepper Zero, where we drove a double-digit increase in total distribution points and enhanced display activity, contributing to 35% retail sales growth in the quarter. And consumer engagement, including a successful marketing tie-in with the summer blockbuster Jurassic World Rebirth, which we amplified through media and in-store activations. Other core brands are also benefiting from the same playbook. For example, marketplace growth in Mott's, our powerhouse mom and kid focus brand, accelerated in the back half of 2024 behind product and packaging innovation and a new brand campaign. Mott's has sustained this momentum into 2025 with more exciting news on tap for the fall, including the introduction of Mott's fruit smoothie pouches in time for the back-to-school season. Beyond the core, recent portfolio evolution is beginning to more substantially move the needle at the segment level. This is most evident in energy, where we believe our multi-brand approach will be the key to winning in this attractive high-growth category. Our four complementary brands, Ghost, C4, Bloom, and Black Rifle now combine to represent over $1 billion in annual run rate net sales for KDP and are scaling rapidly. Each of these energy brands contributed to our Q2 results. The Ghost acquisition was a meaningful top-line driver, and brand momentum continues to build under our ownership. Ghost's point-of-sale trends markedly accelerated since we took over distribution in late Q1, as evidenced by our market share gains in Q2. C4's core performance platform also continues to outpace the category, propelled by innovative new flavors like Classic Lemonade and Healthy Base Velocities. Meanwhile, Bloom is scaling at an impressive rate. It has garnered nearly a full point of market share just a year after introduction and has quickly established its credentials in the female forward energy space. Together, our brands are well positioned to achieve our goal of a double-digit share position within the fast-growing $26 billion market. energy category. With 7% market share already, KDP's energy portfolio is making quick progress against this target. And for comparison, just a few years ago, our share was below 1%. A combination of strategic portfolio construction and excellent KDP execution has powered these gains including nearly one point of market share growth in 2025 year-to-date and 30% plus retail sales growth in Q2. Given the robust runway for further growth, we are allocating meaningful resources to support our category ambitions, led by a dedicated internal organization focused solely on energy. Simply put, we are confident we have the right brands, commercial playbook, and go-to-market prowess to continue to win in this important space. The Q2 results demonstrate how KDP is successfully building out a broad-based refreshment beverages portfolio beyond our core CSD stronghold. As we capitalize on On the expansion opportunity for our emerging brands in categories like energy and sports hydration, we expect these areas to become increasingly important growth drivers for our U.S. refreshment beverage business and for KDP as a whole. Moving to U.S. coffee, the second quarter demonstrated sequential progress for the category and KDP. Starting with the category, both at-home and single-serve sales growth accelerated from the first quarter as incremental pricing to offset inflation flowed through and volume remained resilient. The manageable category elasticity to date is encouraging, particularly as additional industry pricing actions have been announced, including our increase that will take effect during Q3. KDP's U.S. coffee business also exhibited sequentially improving trends in Q2. We made encouraging progress in pods, with a better relationship between pricing and volume mix. In brewers, though shipments remained pressured, point-of-sale consumption was stable. Looking to the back half, the U.S. coffee segment will need to manage through impacts from higher commodity inflation, increased tariffs, and consumer uncertainty in the face of additional pricing. As a result, we expect segment performance to remain subdued for the balance of the year. Even as we navigate some quarter-to-quarter volatility, we continue to advance multiple initiatives designed to return our coffee business to consistent long-term growth. To provide a few examples, we continue to expand our premium and cold offerings into consumer-preferred sub-segments. In the premium set in Q2, we began rolling out Lavazza, flavored K-cup varieties inspired by classic Italian desserts like tiramisu. Already a best-selling premium brand, Lavazza's entry into flavored coffee extends the brand into an attractive category subsegment that over-indexes to frequent consumers. We're also seeing strong results in ready-to-drink coffee, one of our key cold initiatives. The superior La Cologne brand continues to generate triple-digit retail sales growth as it attracts new and younger consumers to the category. In brewers, we are innovating at both opening and premium price points. During Q2, we launched K-Minimate, our smallest brewer ever, featuring a new consumer-preferred visual identity with a more modern and colorful aesthetic, all at an affordable entry-level price point. And next month, we will introduce K-Crema, a premium brewer with the ability to produce crema-topped coffees from traditional K-Cup pods. Both brewers address unmet consumer needs and will help attract incremental households and occasions to the Keurig ecosystem. Finally, we are making great progress advancing our next-generation vision with the Keurig Alta Brewer and K-Rounds plastic-free, aluminum-free pods. Ongoing in-home consumer beta testing is providing valuable user feedback while validating that the new system delivers a premium, best-in-class, at-home coffee experience. We're applying the learnings from our beta test to our commercial plans in support of of a targeted launch in late 2026. These initiatives across pods, brewers, and next-generation systems are all indicative of our sharp strategic focus in the U.S. coffee segment. Combined with encouraging category trends, we are confident they will help return our structurally attractive business to sustainable growth In our international segment, Q2 performance remained quite solid, particularly considering tough year-ago comparisons and the softer backdrop in Mexico. Net sales increased 6%, led by pricing and operating income return to gross. We continued to drive strong relative performance across our business, with market share gains in key categories, such as mineral water in Mexico and K-cup pods in Canada. Our CSD portfolio also remained healthy across markets, benefiting from new campaigns and zero franchise gains for brands like Dr. Pepper and Crush, as well as high-quality execution. As we look to the back half, we expect to maintain our relative momentum in international, thanks to strong base plans, our entry into the Canadian ready-to-drink tea category with Nestea, and additional pricing to help offset inflation and tariffs. Overall, I'm pleased with our enterprise performance during the second quarter. We're building a track record of delivery, by executing with excellence and agility, while remaining focused on the strategic framework that will position KDP for sustainable multi-year growth. I'll now turn the call to Sudhanshu, and I'll return at the end with some closing thoughts.