Jane Gelfand; Head of Investor Relations; Keurig Dr Pepper Inc

Tim Cofer; Chief Executive Officer; Keurig Dr Pepper Inc

Sudhanshu Priyadarshi; Chief Financial Officer and President, International; Keurig Dr Pepper Inc

Brett Cooper; Managing Partner; Consumer Edge

Dara Mohsenian; Managing Director; Morgan Stanley

Chris Carey; Analyst; Wells Fargo Securities

Robert Ottenstein; Senior Managing Director; EvercoreISI

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Keurig Dr. Pepper's earnings call for the third quarter of 2024. 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, Head of Investor Relations, Jane Gelfand and you may please begin.

Jane Gelfand

Thank you, and hello, everyone. Earlier this morning, we issued two separate press releases announcing third quarter results and our pending transaction with ghost. We will discuss both topics during this conference call and in the accompanying slide presentation, which can be tracked 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 10 Q filed with the SEC. Consistent with previous quarters, we will be discussing our Q3 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 materials. Here with us today to discuss our results, our Keurig Dr. Pepper's, Chief Executive Officer, Tim co-founder, and Chief Financial Officer and President, International Sudhanshu, pre-Darcy. I'll now turn it over to Tim.

Tim Cofer

Thanks, Jane Gelfand, and good morning, everyone. Our solid 2024 year to date performance demonstrates KDP.s, resiliency and flexibility. This morning, we reaffirmed our full year outlook despite an uneven operating environment, and we're targeting a strong finish to the year in Q4. Simultaneously, we are making good progress against our long-term strategy, laying the groundwork for multiyear success. Now before covering our quarterly results, I want to highlight the just announced goes deal as yet another example of how we are enhancing our portfolio while exercising capital discipline. We've reached an agreement to purchase a majority stake in ghost this year to be followed by the acquisition of the remainder of the business in the first half of 2028. This transaction strengthens our position in the attractive energy drink category and accelerates our portfolio evolution towards consumer-preferred and growth accretive spaces. Ghost is young, versatile and founder-led with approximately a half a billion $ portfolio anchored by its leading energy drink while also spanning supplements and an emerging presence in other LRB categories. The brand more than quadrupled in size over the last three years and remains one of the fastest growing in the energy category, thanks to its unique brand identity, distinctive flavors and packaging, cross occasion appeal and strong consumer engagement, including on-premises. Ghost will complement KDP.s, existing energy portfolio and substantially enhance our presence in the category. We have significant potential to further scale Ghost in collaboration with its founders, Dan Lorenzo and Bryan Hughes, who will continue to lead the brand as part of KDP.s U.S. refreshment beverages unit. I've been very impressed with Dan and Ryan, and there are tremendous this success to date, more importantly, by share their vision for strong growth in the years to come to ghost to new heights as we build out KDP.s platform-based approach to the energy category. Now at $ 23 billion in size, energy remains one of the fastest growing scaled categories in beverages and enjoys multiple structural growth characteristics. These beverages satisfy a near universal consumer need for energy and alertness, which is income increasingly relevant in a world with significant demands on our time and attention they appeal to consumers across all ages and demographics, including over-indexing to Jens any deals. There's significant headroom for household penetration to grow versus other leading beverage categories, and the category is still in the development stage of price, pack architecture and channel diversity. All of these elements translate to a large total addressable market that we believe the category will grow into and on which KDP. is well positioned and to capitalize as the energy drink consumption becomes more prevalent, the category is evolving to serve distinct consumer need states and occasions. This landscape lends itself nicely to a portfolio approach, which we have successfully employed in premium water to become the number two share player. We're now using a similar playbook in energy, having accelerated our push into the category over the last 24 months with C- four Ghost and black rifle energy. In addition to today's ghost announcement, we do we just signed a distribution agreement with neutral bolt for Bloom ready to drink energy. Bloom is a highly promising emerging and distinctive beverage brand with a female oriented skew together. Each of these brands can work and complementary ways to address consumer needs while driving greater scale in the category and across our DSD infrastructure beyond its strategic merits. The ghost transaction is another good example of how we approach efficient capital deployment through an elegant deal structure. We are capturing the growth opportunity and paving the way for compelling financial returns while retaining manageable balance sheet leverage and aligning long-term incentives. Our chosen structure retains ghost leadership team, reinforcing a unique element of KDP.s, white space expansion strategy, our founder network. We work to keep visionary entrepreneurs at the helm of the brands they created while adding substantial scale and resources from KDP in energy drinks. We've seen the value of this arrangement firsthand through our close relationship with neutral bolts, innovative leader, DOS Cunningham with alignment and support from energy leaders, DOS, Dan Ryan of Ghost and others. We are building of formidable energy platform that will drive win-win outcomes for all involved. Let's now move to our third quarter results. Constant currency net sales grew 3.1%. We made solid progress on volume mix with 3.5% growth in Q-3. As anticipated, U.S. refreshment beverages momentum strengthened considerably. U's coffee volume mix grew nicely, and international trends remained healthy. Total KDP Net price was a source of modest pressure in Q-3. We expect sequential improvement in Q4 and a further step-up into 2025. As recently announced, pricing actions across meaningful parts of our portfolio includes CSDs and single-serve coffee take effect early next year. Our focus on productivity and cost discipline continue to ratchet up in Q-3. These elements help to support gross and operating margin expansion. As a result, consolidated operating income grew in the high single digits and EPS grew 6% consistent with our plan, we are focused on near-term delivery while also truly orienting our business towards the long term. Our strategy provides a roadmap for achieving strong and consistent results over a multi-year timeframe, and we aim to incrementally advance our strategic pillars each and every quarter. Let me discuss our latest progress. I'll start with consumer obsessed brand building. Our consumer centric scorecards include awareness, household penetration, loyalty and other classic brand-led metrics and yet how we ultimately measure success comes down to market share growth. In Q-3, we gained share across each of our major product verticals, liquid refreshment, beverages, K-Cup pods and brewers. And in each of our major markets, the United States, Mexico and Canada. We achieved this performance through a combination of exciting innovation and brand activity as well as strong commercial delivery. While our Q-3 top line also reflected the impact of the softer consumer environment, uncertain category growth rates. Our market share results are a good indicator that we are effectively stewarding our brands and controlling the controllables. Our second pillar reshaping our now and next portfolio has been a major 2024 priority, primarily through our new Electra lead and lag Colombian partnerships. Both brands continued to transition to our DSD network during the third quarter with a growing financial contribution, we are now able to more directly influence their marketplace performance. And accordingly, our trends are accelerating with significant opportunity still ahead. Our just announced transaction with ghost furthers our commitment to evolving towards high growth areas. We will continuously shape our portfolio in the future, which will likely entail both brand additions and targeted pruning. Moving now to route to market. During the third quarter, we closed on and integrated our recently acquired assets in Arizona. The transition of coverage to our network went smoothly and was achieved in record time. We've now shifted our focus to ensuring the Arizona operations run as efficiently as possible and leverage the network benefits of being part of KDP. We also continue to opportunistically expand our distribution presence in other regions, including the recent tack-on of incremental territories in Tennessee. Our Company owned DSD network in Mexico is another focus area, given the vital competitive advantage it provides in a market with a sizable traditional trade. During the third quarter, we invested in expanding the systems coverage, selling routes and cooler penetration, all of which contributed to our strong relative trends. Turning now to our productivity and overhead, disciplined work to generate fuel for growth. This is a priority in all environments, but it's particularly critical in the current moment. As such, we delivered strong savings during the third quarter with healthy productivity and the reemergence of SG&A overhead leverage for the first time in many quarters. We are now on track to exceed our cost savings goals for the year, while also carrying a healthy pipeline of productivity and efficiency projects forward into 2025. Finally, our cash generation has strengthened as expected in 2024, and we are dynamically allocating this capital to support multiple parallel priorities for capital deployment this year has thus far included capital and product lives, a sizable share buyback near our stocks 52 week low 7% dividend increase announced in Q-3, which marked our fourth consecutive annual raise and now our pending acquisition of a 60% interest in ghost. In other words, we are staying disciplined being opportunistic on compelling options, become available and managing across our capital allocation objectives, including our commitment to a resilient balance sheet. Let me now share some observations on our third quarter segment performance. Starting with U.S. refreshment beverages, we saw a nice sequential acceleration in revenue growth, which increased at a mid-single digit rate in the quarter. Our volume mix momentum builds as we completed the distribution transition and significantly ramped display activity for Electra lead. We also delivered solid base business trends across our core brands. The consumer environment remains dynamic, which is having varying impacts across our portfolio. For instance, the carbonated soft drinks category is outperforming our expectations. CSDs have accessible price points and are supported by Sophia indicated revenue growth management capabilities, which make them well positioned to provide options for value-seeking consumers. At the same time, we are also winning in the category with a strong innovation and commercial programming slate that is driving healthy share trends. Our CSD performance was led by brand Dr Pepper, thanks in part to a very successful summertime LTO with creamy coconut as well as the continued build-out of our zero Sugar line. We expect the brand's momentum and share gains to sustain supported by our recent launch of the seventh season of are incredibly popular. Fans will college football marketing campaign elsewhere in CSDs, Canada, dry fruit Splash, the brand's most significant launch in years remains highly incremental to the franchise and is demonstrating the potential of this great brand. We're also stepping up support behind our iconic seven up with a first in a decade brand design refresh that debuted in Q-3 and a limited time offering surely Temple flavor that is just now rolling out and has been a hit on social media. Meanwhile, still beverage categories remain under pressure, which we see as a reflection of the current consumer softness. This is particularly true for categories with a greater exposure to convenience stores and with higher average price per ounce products like ready to drink teas in these categories, we must continue engaging consumers with compelling brand activity while also appropriately emphasizing value at key price points. In other still beverages, we're seeing stronger trends. one example is our billion$ warehouse delivered Matson brand, which has been an investment priority during 2024. During Q-3, our back-to-school campaign, which highlighted for minimally processed apples as a point of differentiation for much performed well sorting top-line growth and share gains for the brand. In total, we're pleased with the performance of the U.S. refreshment beverages segment in Q-3, with notable progress made in scaling the electrolyte partnership and supporting our core portfolio. In U.S. coffee, we experienced a soft overall quarter market share momentum drove solid volume mix. Pricing realization was challenged due to persistent category promotions, which weighed on segment revenue and profitability. We're not satisfied with this outcome and are actively working to improve these trends even in the context of escalating inflation. At the same time, we're planning prudently regarding U.S. coffee's role in our near-term overall enterprise performance. The reality is that at-home coffee category consumption remains muted. However, within that single serve is output forming. And within that, our brands are as well. But because the categories absolute growth rate is below the long-term trend, we are choosing to be judicious and we're focusing on the elements within our control. Let me dive deeper into three such areas that together should result in improving revenue trends for the coffee segment over time. First, we have good pod market share momentum. Our three-prong strategy focused on affordability, premiumization and cold coffee translated into further meaningful owned and licensed share momentum in the quarter. We saw strength across both Green Mountain and the original Donut Shop, including particular traction and incrementality from our new line of refreshers, which we are building into a distinct single-serve platform. At the same time, we are attracting new brands into the Keurig ecosystem, including the recent addition of black rifle K-Cup pods, which began to scale in our network during Q-3. Taken together, our favorable owned and licensed market share trends and new partnerships position us for a stronger set of financial outcomes as the category recovers. Second, brewer trends continued to move in the right direction. In Q. three, we drove strong double-digit growth in brewer shipments. While quarterly trends are inherently lumpy, the coffee maker category has returned to more stable footing, and Keurig and cured compatible brewers are gaining significant share. This speaks to our ongoing appeal among coffee consuming households and should be supportive of future pod consumption. Looking out to the important holiday season. We're well positioned with excellent retailer and consumer feedback for K-Bro and show in the early days of our launch and good momentum behind our entry price models. Third, while not yet evident in the category trends or our results, we are encouraged by recent category pricing in response to escalating inflation. The competitive environment in the third quarter was notably promotional as in the first half, and we do not expect any immediate easing in Q4. However, industry pricing should build over the coming quarters, given recently announced competitor price increases as well as our early 2025 single-serve increase. Even with an anticipated elasticity impact and some related volume trade-off, we'd expect this to result in a healthier overall revenue trend, all in the path ahead will likely come with some quarter-to-quarter variability. We continue to see traction across our U.S. coffee segment as long as the at-home coffee category remains soft. We will continue to plan with restraint all while positioning Keurig and our assortment of brands to win longer-term. In other words, we are playing the long game by driving high quality innovation and marketing and attracting new brands into the carrier ecosystem. Turning now to international, we delivered another quarter of good performance with constant currency net sales growth nearing the high single digits. We drove gains across multiple retail market share grew and almost every category in which we operate, reflecting productive brand building activity and DSD investments bearing fruit. We often talk about the success of our powerhouse pinion Fiat brand, which maintained its trajectory in Q-3, but sports performance was also notable. The brand recently achieved a significant milestone, becoming the number two flavored CSD in Mexico. And it is a great example of another iconic KDP. brand with local traction and momentum. Our cold beverages performance in Canada was also robust, led by growth in Canada, dry and Dr Pepper, as well as continued strength in our low and no-alcohol portfolio in international coffee. As in the U.S., our three-prong strategy helped to drive market share gains across both brewers and parts. Overall, we feel great about our international momentum and with ongoing investment, expect the segment to remain an outsized growth driver for KDP. In closing, we're pleased with our team's strong execution in what remains a dynamic operating environment. We are on track and focused on closing out the year strong while pushing ahead on key strategic initiatives and setting the stage for healthy, consistent financial performance beyond 2024. And with that, I'll turn the call to Sudhanshu.