Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Keurig Dr Pepper’s Earnings Call for the Fourth Quarter and Full-Year of 2022. 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 Chief Corporate Affairs Officer, Maria Sceppaguercio. Ms. Sceppaguercio, please go ahead..

Thank you. And hello everyone. Earlier this morning we issued a press release for the fourth quarter. Consistent with previous quarters, we’ll 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 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. Today, we will also speak to the concept of underlying performance, which removes the impact of previously disclosed non-operational items.

In ’22, these items included gains on asset sale leasebacks, reimbursement of litigation expenses related to BodyArmor, a business interruption insurance recovery and a change in accounting policy for stock compensation.

Here with us today to discuss our results are KDP Chairman and CEO, Bob Gamgort, and our Chief Financial Officer, Sudhanshu Priyadarshi. Also with us this morning is the IR team, including Jane Gelfand, who we are excited to welcome this week as our new Vice President of Investor Relations and Strategic Initiatives.

I'm confident that many of you know Jane from her time on the street, as well as her most recent role at Wayfair, where she led a number of finance functions including Investor Relations and Treasury.

Jane is replacing Steve Alexander, who after more than 16 successful years in finance, commercial and IR with KDP and predecessor companies has decided to take some time off for family and travel. We are pleased that Steve has agreed to stay on to April to support the transition.

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.

With that, I'll hand it over to Bob..

Thanks, Maria, and good morning, everyone. In 2022, we continue to advance our vision of a modern beverage company by expanding our portfolio to reach more beverage consumers, needs and occasions and by enhancing our unique selling and after-market capabilities to make our brands available at every point of sale.

Our full-year financial results were in line with or above our guidance with revenue growing by 11% and adjusted diluted EPS expanding by 5%. Since our Q3 earnings call, we had the opportunity to engage with many of you twice.

First, at our early December in- person event, where you met the KDP Management Team and Board of Directors, and again, on our mid -December fireside chat, during which we discussed our investment in Nutrabolt, including the distribution agreement for C4 and answer questions regarding recent trends in the categories in which we compete.

Those conversations provided us with a good sense of what's top of mind with our investors, which we will build upon during today's call.

I'll start by providing perspective on the macro and category environments we faced in 2022, discuss how we created shareholder value over the past year and offer thoughts on how we see 2023 shaping up both in terms of the macro environment and our strategy to continue winning.

Sudhanshu will follow me with specifics on our Q4 and full-year 2022 results, provide more detailed guidance on key metrics for 2023, and discuss the evolution of our capital allocation policy.

While it seems like a long time ago, we started 2022 with the lingering effects of supply chain disruption, primarily driven by a final COVID wave that reduced labor availability in late 2021 and early 2022.

We felt that impact most acutely in our coffee business where strong 2021 consumer demand had depleted our inventories and in our still beverage portfolio where we faced a range of supply shortages. We implemented supply recovery programs that yielded strong customer service improvements with replenished inventory levels.

By Q2, our concerns around COVID and supply chain disruptions were quickly supplanted by industry inflation in ingredients and materials, labor, and transportation. That was outpacing significant pricing.

Velocity held up well in the categories in which we compete, which enabled strong revenue growth, driven by both the higher pricing and increased volume, but came at lower margins. Store perspective, we faced total cost inflation in 2022 of 16% far above our expectations going into the year.

And we implemented pricing actions across our portfolio that averaged in the low double-digits. Pricing realization was strong and accelerated throughout the year. Yet it consistently lagged the timing of the escalating inflationary impact on our P&L.

As we approach the end of the year and enter 2023, we became more focused on the potential impact a recession on our consumers, despite seeing minimal evidence of changing behavior to-date. We are monitoring consumer behavior closely and are taking proactive steps to ensure our brand strength continues into 2023 and beyond.

Of course, the wide range of challenges of 2022 is a continuation of the rolling set of obstacles we have navigated since the onset of COVID in 2020. In this context, we have discussed the benefits of our all-weather business model.

This is more than a punchy sound bite; it reflects our ability to manage our broad portfolio in unique routes to market to deliver strong and consistent shareholder returns in an unpredictable and changing environment as we did in 2022 and every year since forming KDP in 2018.

In addition to delivering our ambitious financial commitments over the past five years, we've also been immersed in an integration and transformation process that created a modern beverage company that today can consistently deliver attractive, high quality, dependable returns with a well-capitalized balance sheet.

Toward that end, we have evolved our capital allocation policy to reflect that of a more mature KDP and to be contemporary with a changing macro environment marked by rising interest rates. During the integration and transformation stage, we had a strong focus on rapid deleveraging.

Using all available levers available to us, while still investing in building our capabilities and brands. We took advantage of compelling opportunities to monetize non-strategic assets through sale leaseback transactions, which enabled us to simultaneously invest, delever and drive strong returns for our shareholders.

As we shift from integration and transformation to activation, we are planning for a step change reduction in the use of non-operational benefits starting this year. That means our underlying operational growth will exceed our adjusted growth in 2023.

Of course, our guidance will continue to be for adjusted metrics and we will report results on the same basis we've always done. But we will also highlight operational performance from time-to-time to provide you with a better sense of the underlying strength of our business. Strong cash flow remains a hallmark of KDP.

As we discussed in December, we plan to deploy our cash to improve our long-term targeted leverage ratio to 2.5 times or below. While still funding strategic growth projects, and attractive return of cash to shareholders. With the learnings from 2022 in mind, I'll shift to a discussion of our 2023 outlook.

Starting with the most pressing industry topic from last year, inflation. Our plan assumes the rate of inflation will moderate to the mid-single-digit range, that translates to a cumulative inflation rate of approximately 30% over the past three years clearly unprecedented in our lifetime.

Regarding the inflation outlook for 2023, recent spot price declines of key inputs might lead some to believe this could be industry deflation. The reality is we don't buy on a spot basis and the underlying commodity cost doesn't reflect the total delivered cost to us. Such is certainly the case in coffee where seed prices dropped in late 2022.

However, the differential, which includes everything in our fully landed coffee costs, such as broker fees, sea freight and premium coffee up charges was up meaningfully. Labor is another area in which we're continuing to see persistent inflation.

To offset the continued impact of inflation, we have upped our game in productivity, reduced our discretionary costs and increased pricing. The realization of 2022 pricing actions will continue to flow into our P&L during 2023. And in some areas, where continued inflation impacts are not yet fully covered by pricing.

We've implemented additional revenue growth management actions to address key margin gaps. The combination of moderating inflation and continued pricing realization means that we expect year-over-year improvement in gross margin in 2023, but not yet returning to 2019 levels.

With higher gross margins in view for 2023, the conversation shift the demand. A key focus point for us in 2023 is the financial health of American consumers and its impact on price elasticity for the categories in which we compete.

Therefore, we believe it's prudent to expect that lower, but still positive of year-over-year pricing realization combined with modest elasticities will yield KDP net revenue growth of approximately 5% in 2023. It's also important to be proactive in ensuring the continued strength of our brands by increasing our investment in growth in 2023.

As we are all aware, industry marketing budgets were reduced during COVID and many haven’t yet been fully restored. While we have learned to be significantly more efficient with our brand spending, 2023 is the right time to increase our absolute investment behind key segments and brands, as well as the support a strong lineup of innovation.

The improvement in our gross margin combined with 5% revenue growth will enable us to deliver year-over-year improvement in operating income growth. Even with our increased brand investments and the headwind of comping significant non-operational benefits in 2022.

Taking all of the macro and company specific factors discussed this morning into account, we expect adjusted EPS for 2023 to grow by 6% to 7%. Removing the impact of previously disclosed non-operational items from 2022 implies adjusted EPS growth that is toward the high end of our long-term algorithm.

Our expectation for continued strong value creation in 2023 is rooted in the success of our unique and flexible business strategy over the past five years. In cold beverage, our focus is on driving growth. First in core brands through marketing, brand renovation and continued strong end market execution.

In 2022, we continue to build upon or hold the significant share gains we achieved over the past few years in total liquid refreshment beverages and key segments such as CSDs and premium water.

Second, by filling white space in our portfolio through innovation and partnerships such as our strategic relationship with Nutrabolt for C4 Energy and our Red Bull agreement in Mexico, as well as our expansion into new platforms such as non0alcohol beer with our investment in athletic brewing and better for you drinks in foodservice through our partnership with Tractor Beverage.

Third, by enhancing the effectiveness of our omnichannel selling and distribution system, including e-commerce, where we are one of the food and beverage leaders, and our company owned direct store distribution system.

Over the past several years, we have built a stronger direct to market -- direct route to market capability through investment in capabilities and tools and acquiring key DSD distributor territories, all of which have driven consistently strong market share performance across our brands and segments. In coffee systems, we are focused on growth.

First, by driving household penetration growth for the Keurig system every year. Given the large number of remaining addressable households, we have line of sight to continued household growth well into the future. As we enter 2023, we have built the U.S.

installed base of 38 million households, which along with our installed base in Canada consumed more than 13 billion cups of coffee manufactured by KDP annually. Second, by expanding the roster of coffee partners in the Keurig system.

2022, we welcomed back community coffee and added new brands such as BLK & Bold, the first black-owned nationally distributed coffee brand and Intelligentsia, one of specialty coffee's most pioneering and innovative brands.

Third, by creating new platforms to drive incremental revenue and profit growth from existing Keurig households such as connected brewers and new beverage formats and occasions.

In 2022, we expanded our lineup of connected brewers with the introduction of K -Café Smart, which has received outstanding consumer and professional reviews, expanded the Keurig app, which works with both connected and non-connected brewers to help consumers make barista quality specialty coffee beverages at home and expanded availability of our Keurig’s Slim + ICED brewer and expanded our brew over iced pods.

In 2023, iced will be a significant focus area procuring with expanded K-Ice machines and pods supported by dedicated marketing and focused retailer support.

And finally, KDP's extraordinary free cash flow enables the potential for incremental shareholder returns through strategic capital allocation including M&A and partnerships, opportunistic share repurchases and growing our dividend within our stated payout ratio of 45% of free cash flow.

With that as important context, I'll hand it over to Sudhanshu to discuss 2022 results and our 2023 outlook in more depth..

interest expense in the range of $465 million to $470 million, reflecting the rising interest rate environment and including approximately $45 million related to financing the Nutrabolt transaction.

Regarding Nutrabolt, we expect some net sales benefit from our distribution agreement for C4 as previously discussed, 2023 is expected to be a transition and investment year for the partnership, and therefore, we are not expecting any material impact on earnings this year.

However, we do expect equity method income from our 30% stake in Nutrabolt to approximate $40 million to $45 million, which offsets the Nutrabolt-related interest expense. This equity method income will flow through non-operating other expense and income. The effective tax rate is estimated at approximately 22%.

Diluted weighted average shares outstanding are expected to be approximately $1.42 billion. From a timing standpoint, we expect EPS for the first quarter to be roughly even with a year ago, reflecting our belief that Q1 will have the highest rate of inflation, the largest marketing increase and the smallest productivity benefit of the year.

Q1 will also be comping significant non-operational benefits in the year ago period. We expect EPS growth to strengthen in the balance of the year as inflation moderates and productivity benefits ramp. I will now turn it over to Bob for closing comments..

We formed KDP in 2018 as a pure-play beverage company focused on the North American market. In the U.S. alone, there are 1.2 trillion beverage consumption occasions in play every year. Beyond population growth, that number doesn't change much, nor do the fundamental consumer needs for beverages.

What has and will continue to change is which beverage formats consumers choose to satisfy their needs and where consumers purchase their beverages. Compared to 2017, we served an additional 6 billion beverage occasions in 2022 through portfolio innovation, renovation and new partnerships.

By executing our concept of a modern beverage company, which reflects our holistic view of all beverage opportunities, we've been able to better satisfy consumer needs, leading to our accelerated growth rate. We remain excited about the significant growth opportunities ahead.

In 2023 and beyond, we'll continue to leverage our business model to capture even more of the trillion-plus beverage occasions each year in North America. I'll now turn the call over to the operator for questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Chris Carey at Wells Fargo Securities. Please go ahead..

Hi, good morning..

Hey, Chris..

So I just want to clarify one thing than a fundamental question. So clearly, the non-operating adjustments have been a sticking point with investors.

I gather from your comments on this earnings call that you're well aware of these dynamics and are making some changes going forward with specifically the guidance range, reflecting potentially the clean base. And so I just -- I kind of wanted to be crystal clear about this. The use of these non-operating contributor.

And I appreciate there's an investment offset, but these will be kind of a thing of the past. And we can look at somewhat clean results going forward. Obviously, it was going to be dynamics every quarter, but these sorts of programs will be sort of sunsetted. Is that what I'm hearing? Then I have a fundamental question..

Yes. Thanks, Chris. As we mentioned in the prepared remarks, we've been in really an integration and transformation today, since the integration period or since the merger in 2018. That is complete, and we've moved from the integration phase to an activation phase.

And so that causes us to think about how we build a company that is contemporary, as I said, with the current environment and also one that is reflective of a more mature KDP that can deliver consistent returns that are reliable by investors over time.

So that's why it made sense to use some of these non-operational benefits in the past when we're in a mode of transforming, integrating. We're also delevering and investing heavily in the business. But as we look forward on here, we're making a significant step change in the use of non-operational benefits in 2023 actually beginning in 2023.

And we're committed to continue moving in that direction in the future. So I think the most important thing from an investor perspective is that the $1.78 in EPS, which reflects the midpoint of our 2023 guidance is a good, reliable number that could be the focus of valuation..

Okay. Very clear. Just on the expectation for gross margin expansion. I guess, I'm trying to frame that in the context of -- you gave an outlook for inflation and also, you're saying that you're going to be investing into marketing. So something like a mid-single-digit inflation.

Is that sort of a COGS and SG&A is the right way to think about that inflation overall and then there'll be marketing on top of that? So that's quite a bit of increase. So I'm just trying to frame the gross margin expansion to need to offset that. So any context there would be helpful. Thanks..

Hi, Chris, this is Sudhanshu Priyadarshi. Yes, you're right, we expect a substantial improvement in our gross margin, but it will not go back to 2019 level. But we said before, we would like to invest in marketing. So we will be reinvesting in marketing. So you will not see the flow through from gross margin to OI all the way.

You will see some flow-through, but we expect that we should start investing money in our brands, and we talked during our December fire-side chat. So that's our plan. So yes, you're right, gross margins will improve. But we will reinvest in marketing, so you won't see the -- all of them flowing through to OI..

Thank you. And our next question today comes from Bryan Spillane with BoA. Please go ahead..

Thanks, operator. Good morning, everyone..

Good morning, Bryan..

Bob, I guess, hey, so my question was just around Coffee Systems, and I appreciate the perspective you gave on kind of the perspective for ‘23.

But can you give us a little bit of -- we're getting a lot of questions about holiday sell-through, both in terms of some of the retail disruption, but just whether consumers are making other choices about small appliances at the holidays? And maybe if you could talk a little bit about in the outlook for this year, how much of the brewer decline do you think has just been -- there's been a bit of a pull forward in the last couple of years.

How much of it do you think is disruption at retail? Or how much do you think is just a function of consumers being sensitive about how they're spending their discretionary dollars..

Yes. Good question. Let me start with something I said a number of times in the past, especially when we've had quarters where the brewer sales were up significantly, and that is -- we're not in the business of selling brewers. We're in the business of driving household penetration.

And while there is a correlation between brewer sales and household penetration, there's not this direct causation that we've talked about a number of times in the past. And what I mean by that is there are three reasons consumers buy brewers. It's a new household. It's a replacement of an existing brewer or it's an upgrade.

And so there's a number of factors that you can see brewers sales down, and it has no impact on household penetration, because it means that somebody has delayed an upgrade, for example. So two things to point out in 2022 versus 2021, obviously, in Q4 is we were delivering 3 million new households in 2020 and 2021.

So obviously, in 2022 with 2 million households, you would expect to sell fewer brewers. The other part is we have seen a challenged retail environment, and we referred to that in our script, particularly in specialty channels in some mass customers as well.

And while we're working with them to continue to drive growth of the whole category and our brewers specifically. We also think it's smart to continue to look for other opportunities to pick up that consumer demand elsewhere, where the consumer demand is moving. A lot of that, as you know, is moving towards e-commerce.

Having said all of that, I think your question on consumers making other choices. The reality of it is KDP brewers or cured brewers picked up share of all coffee makers and of small appliances. So it's not a decision to buy something in place as it, but there's clearly been some pressure on small appliances in general.

And some of that is the rebound effect post COVID, but some of it is also due to some retail pressure that we described in the prepared remarks..

Thank you. And our next question today comes from Kevin Grundy with Jefferies. Please go ahead..

Great. Thanks, good morning, everyone. Bob, just to follow-up on Bryan's question, but very succinctly, as you kind of pull this together, look at household penetration, your confidence in the business, is this -- your Coffee Systems business is the expectation that this grows mid-single-digits longer term.

I think that's really important, because it's a key debate for the stock. And then just my follow-up unrelatedly, just on the advertising and marketing increase. Bob, maybe just a little bit more color there on the magnitude of the increased key areas of spend, I think that would be helpful for folks as well. Thank you very much..

Sure. As we've talked about our long-term target for household penetration is 2 million households per year. We actually delivered slightly more than that in 2022. We did deliver significantly more than that in the previous two years.

All our indications this year is the $2 million is still the right number to assume for household penetration going forward. And your question about mid-single-digits going forward, absolutely where we are. That's what we talked about in the December fireside chat. We gave you the context of the long-term trends.

And also, we looked at the first half of the COVID period and then the COVID recovery period. And how there's been some shift between there. But 2 million households and mid-single-digits is still we have in view..

Bob, I can take the -- I can take the marketing question. So as we've said, our marketing spending will increase in 2023, but our learnings and marketing returns will decide which brand and how much we spend.

So we don't have a top term marketing target, we will watch our brand formal and elasticity during the year, and then we'll make the decision of which brands we invest in..

Thank you. And our next question today comes from Lauren Lieberman with Barclays. Please go ahead..

Great, thanks and good morning. So we want to -- I know we want to look forward and you've talked about plans on non-operating items for next year. But I did want to talk about the gross margin performance in the fourth quarter.

Because my understanding had been that the expectation was for gross margin expansion and that kind of went the other way and then we had another sale leaseback gain.

So I think it's important for people just to understand what went on with gross margins this quarter when that kind of changed versus an expectation for the things to be improving already. Thanks..

So Lauren, this is Sudhanshu. So for Q4 specifically, we saw the pricing -- it continued to build, but still lag inflation, especially in the coffee segment. So that's the other issue. But our full-year inflation for last year was 16% that was higher-than-expected. And as Bob mentioned, during our script.

So we've seen that relationship improving, but we did not see that in coffee what we were expecting in Q4. So -- but you're seeing that in relationship between pricing and inflation is improving. And that's the reason we are committed that in 2023, our gross margin will expand..

Okay.

And is that going to be a beginning in Q1 do you think? Or is it later in the year that, that starts to kick in?.

It will be later in the year. As we said, we don't buy on part. So it takes six to nine months to see the price included, but you will see that in the second half. And I talked about that in my prepared remarks.

So you will see that in the second half, you will see the improvement in gross margin more as we will see the benefit of commodity deflation -- not deflation, but moderating inflation on commodity..

Yes. And look, we have good visibility, obviously, for the early part of the year and what commodity pricing is in the first quarter for -- from a coffee perspective, is where we see the highest inflation and then it improves from there..

Thank you. And our next question today comes from Brett Cooper at Consumer Edge Research. Please go ahead..

Thanks. Good morning. You've talked about the underutilization of your bottling system. I was hoping to get a sense of how much of a step adding in brands like NutraBolt is to raising that utilization to your desired levels? Or is there more that needs to be done to get to where you want to be? Thanks..

Yes. I think what we've talked about in the past is that we have a tremendous asset in our direct store -- company-owned direct store distribution system with significant opportunity to run more high-quality volume through that system.

When we do that, you get to then you get the cost benefit, right, because you're leveraging that fixed cost against a higher base. And the second part of it is you improve your effectiveness, because what that allows are higher drop sizes and more frequent store visit. So the area where we've had the biggest opportunity was in C-stores.

We're incredibly strong in large outlets, but our C-store business has been one where we have the most opportunity that's heavily driven by the fact that we had a gap in energy. And as you know, energy on a dollar basis is the largest segment within C-stores. So C4 is a significant step in that direction.

And it allows us to really increase our scale in the C-store area, which has the benefits I described earlier. And we feel like we're just getting started on that. That business has a tremendous trajectory for growth.

And as we talked about before, we feel like we're not done yet in that space or some of the other areas where we have white space in our portfolio. So much more to come there, much more opportunity in front of us..

Thank you. And our next question today comes from Bonnie Herzog with Goldman Sachs. Please go ahead..

Thank you. Good morning. I had a question on your pod volumes, which were a bit weaker than, I guess, expected in the quarter and did decelerate on a three-year stack basis for the full-year. So I guess I wanted to better understand how you're thinking about this? And then your attach rates which are also declining.

And I know you touched on this, but just more color there would be helpful. Just here -- I'd love to hear more about the changes you've seen in consumer behavior, sort of, within the home and then ultimately, why you have the confidence that essentially attach rates might actually improve or accelerate this year? Thank you..

Yes. Bonnie, what I think is most interesting is if we just take a step back and say, let's look at at-home coffee in total. So we're a leader within at-home coffee, but we participate in this bigger category.

I think what's most noteworthy in 2022, is there was a volume decline in all forms of at-home coffee globally, and single-serve actually grew its share of coffee consumption in the U.S. So from our perspective, on a relative basis, single-serve continues to outperform within at-home coffee. But at-home coffee volume decline was about 6% for the year.

That's pretty notable. Our biggest -- our belief is that the biggest driver of that is consumer mobility. If you look at the first part of COVID, as we talked about in December, you would see acceleration in attach rates. If you looked at it in the recovery period from COVID, you see a deceleration in attach rates.

And what happened, especially in the second half of 2022 is that there was this global slowdown in volume of coffee that's driven, we believe, primarily by mobility, but on a secondary basis, it'd be driven by some elasticity, because there was significant pricing in there.

Why do we have confidence in this is because the Keurig System continues to outperform year in and year out within at-home coffee. None of us believe that at-home coffee is a long-term problem. In fact, it has significant tailwinds. This is just an adjustment as people are spending less time at home, more time out of home.

We know that the number one driver of at-home coffee consumption is time spent at home. And it's as straightforward as that, and we expect to see the recovery in the category of at-home coffee to occur as mobility improves throughout the year..

Thank you..

Thank you. And ladies and gentlemen, our final question today comes from Filippo Falorni from Citi. Please go ahead..

Hey, good morning, guys. On the pricing front, can you talk about how much of your pricing plan for 2023 is carryover pricing from 2022? And how much is new pricing? And then in terms of the new pricing where it's concentrated is it mainly on the beverage side or on the cost side? Are you planning for price increases there as well? Thank you..

Yes. The great majority of the pricing that shows up in our 2023 P&L is carryover from 2022, and I'll remind you that we took extensive price actions in 2022, and they did not flow through to the P&L all the way through in ‘22. So that's happening.

We did take some additional pricing actions in the early part of ‘23 on our packaged beverage business to close some of the remaining margin gaps. So that will flow through as we move into the remainder of 2023, but that's all that we have planned right now..

Thank you. Ladies and gentlemen, this concludes today's question-and-answer session. I'd like to turn the conference back over to the management team for any closing remarks..

Hi, everyone. This is Maria. We are around today to take your questions. We'd love to connect with you afterwards if you have any. Feel free to call as usual. Have a good day..

Thank you, ma'am. This concludes today's conference call. And we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day..