The operator introduces Keurig Dr Pepper's earnings call for the third quarter of 2023, led by Vice President of Investor Relations and Strategic Initiatives, Jane Gelfand. The company will discuss their Q3 performance on an adjusted basis, which excludes items affecting comparability. They will also speak about the concept of underlying performance and may make forward-looking statements.

The company's statements about their results are subject to risks and uncertainties and they will not update them based on subsequent events. The company's Chairman and CEO, Bob Gamgort, and Chief Financial Officer, Sudhanshu Priyadarshi, will discuss the results. The company is pleased with their Q3 results, which were driven by organic sales growth and gross margin progress. Their full year outlook remains unchanged. Net sales grew 4.1%, with net price realization being the primary driver. The company saw share gains in U.S. Refreshment Beverages, a recovery in the U.S. coffee segment, and strong momentum in their International business. Gross profit margin expanded significantly, allowing for reinvestment in the business and driving bottom line growth.

In the upcoming quarter and next year, the company expects revenue growth to continue as pricing stabilizes and volume mix improves. The consumer market remains strong, but their shopping habits have shifted towards value-oriented channels and e-commerce. The company's diverse portfolio and ability to meet consumer needs across all channels puts them in a strong position for growth.

KDP has a strong distribution network in both retail and online channels, with a robust innovation pipeline for 2024. They are able to offer a variety of products at different price points and are agile in their pricing strategies. Their exclusive focus on North American beverages, combined with their distribution and R&D capabilities, allows them to grow their categories and gain market share. Partnerships and M&A opportunities also contribute to their growth and strengthen their capabilities. This cycle of growth, investment, and returns has been proven over multiple years.

In the Refreshment Beverages category, the company has consistently outperformed its competitors, growing its dollar share in most of its businesses. They have also entered new markets such as ready-to-drink coffee, energy drinks, and sports hydration in a cost-effective manner. The company's growth strategy includes expanding into new forms of coffee, such as iced and ready-to-drink, and leveraging local teams to build a strong presence in Canada and Mexico. In the third quarter, 82% of the company's U.S. Refreshment Beverages business outpaced category growth, with successful campaigns for brands like Dr Pepper and Polar's sparkling water.

The partnership between CORE and U.S. gymnastics has been successful and the company is working on restaging and reformulating their other still water brands. The partnership with Nutrabolt on C4 is also going well and there is room for growth in the energy market. The company is expanding their portfolio with the addition of Electrolit, a popular sports hydration brand with potential for growth in the U.S. market. KDP will use their commercial expertise to increase distribution and enhance the brand's position at retail. With the addition of C4, Lock alone, and Electrolit, the company has increased their growth potential and created a positive impact on their overall business.

The incorporation of new brands has led to a 50% increase in volume in chain convenience stores, resulting in scale and efficiency benefits for the entire portfolio. The company is focused on improving segment margins and expects continued margin improvements due to strengthened pricing protocols and moderating commodity costs. While the at-home coffee category is gradually recovering, there has been a 100 basis point increase in volume in measured channels compared to the previous quarter.

In the third quarter, Keurig's single-serve coffee consumption volume remained flat compared to last year, despite a 3% decline in the previous quarter. Competitors have been offering more aggressive price promotions, resulting in some share shifts in the single-serve market. KDP will respond to this by managing price gaps and focusing on innovation and expansion to drive category growth. With only 40 million households actively using Keurig brewers out of 90 million households that drink coffee at home, there is a significant opportunity for growth in the coming years through new products like cold brew and refreshers.

In the third quarter, new brands like La Colombe, along with innovation in brewers and strong marketing efforts, contributed to revenue growth and margin expansion for Keurig Dr Pepper's international business. In Canada, the ready-to-drink alcohol and non-alcohol segment is growing, and in Mexico, the company's powerhouse brands are also performing well. KDP's strong balance sheet and cash flow allow for a flexible and dynamic approach to financial policy, including reducing supplier financing and increasing the annual dividend for shareholders. The recent announcement of acquiring Electrolit is another example of the company's growth strategy.

In the third quarter, KDP saw strong and consistent growth, with a 5.1% increase in revenue and 4.1% growth in constant currency sales. Pricing was the main driver of this growth, with a 5.5% contribution. Despite a slight decline in volume mix, gross profit margin improved by 100 basis points, thanks to pricing and efficiency gains offsetting input cost inflation. KDP remains on track to meet their 2023 outlook and is confident in their future earnings potential.

In the third quarter, SG&A deleveraged by 130 basis points due to increased marketing spending and inflation. Adjusted operating income grew by 3.1%, resulting in mid-single-digit EPS growth. U.S. Refreshment Beverages saw a 5.9% increase in net sales, driven by pricing. U.S. Coffee saw a decrease in net sales, but pricing improved and contributed to growth. Overall, segment operating income and margins remained relatively flat due to a combination of factors such as pricing, productivity, and increased marketing investment.

In the future, the company expects to have a smoother process for adjusting prices to offset inflation. In the third quarter, volume mix declined due to destocking and a shift in the holiday period, but brewers grew 8%. For the rest of the year, brewer shipments are expected to track point-of-sale strength, which is still declining compared to last year. Keurig brewers continue to gain share within the coffee maker category and are expected to reach 40 million households by the end of the year. Overall shipments declined 8%, but category consumption volume in single serve remained flat. Office segment operating income and margins increased due to pricing, productivity, and moderating inflation. However, the revenue recovery may be slightly altered due to competitive pricing arrangements.

The company expects margin trends to continue to improve in the fourth quarter due to strong fundamental progress and operating income growth in the U.S. Coffee segment. International sales and operating income also saw significant growth, thanks to strong performance in Mexico and Canada. The company's free cash flow conversion improved in the third quarter and their capital allocation priorities remain unchanged, including investments for growth, strengthening the balance sheet, and returning cash to shareholders. The company has recently closed on strategic partnerships and announced another important partnership to expand into the sports hydration market with minimal capital commitments.

The company has made successful entries into new markets with relatively low costs, and plans to continue returning cash to shareholders. They reaffirm their outlook for 2023 and expect strong performance in the fourth quarter, despite challenging comparisons to last year's fourth quarter.

Robert Gamgort, CEO of KDP, thanks Sudhanshu for his contribution and announces Tim Cofer as the new Chief Operating Officer. Tim's immediate focus will be on immersing himself in the business and partnering with the leadership team to drive the annual operating planning process. KDP expects to deliver a strong finish to 2023 and Tim will join the forum in February. The first question is about the trends in the U.S. Coffee segment, and if the recovery is playing out as expected. The expectation was for pod volumes to see moderating declines, but they were flat. The drivers for improved coffee performance include margin improvement and a rebound in the at-home coffee category.

The company has experienced an inflection in margins due to their control over the category, but the growth is gradual. The volumes of single-serve coffee are flat, but KDP continues to gain market share. The trend of slower growth in the at-home coffee category is not unique to the U.S. and is seen in other developed markets as well. The company expects the category to continue recovering sequentially and potentially return to growth. The acceleration in untracked channels has contributed to this recovery. The company has an algo for the total company and may apply it to the coffee business for more normalized organic sales and profit growth by 2024.

The coffee category has shown steady improvement, with multiple factors contributing to this growth. While there may be some impact from pricing and inflation, there is nothing structurally affecting the category. Untracked channels, such as club and e-commerce, have seen stronger growth, with e-commerce being an ideal segment for single-serve coffee due to its lightweight and durable nature.

The speaker discusses KDP's subscription business and e-commerce growth, as well as the consumer shift towards these channels. They also mention the impact of changing coffee trends on the club channel and their expectations for 2024. The next question asks about KDP's plans for the consumer and how they are considering information about GLP-1.

The speaker thanks Brian for his questions and states that their business plans are based on a range of outcomes. They are watchful of consumer behavior and have the ability to shift across formats and channels to react to any changes. Currently, they have not seen any significant shifts in consumer behavior, but they are prepared to adapt if necessary. The speaker also mentions the potential for a shift from away from home to in-home occasions, which could benefit their portfolio. They have also been working to provide similar options for specialty coffee in-home. The speaker concludes that while there is no impact as of now, there is potential for it in the future, but they have flexibility to deal with it. On the topic of GLP-1, they have explored all consumer trends for opportunities and risks.

The available data on the impact of GLP-1 on beverage consumption is limited and potentially unreliable. There is no evidence that people are drinking less overall, and any potential shift in beverage consumption has not been significant. The company has a broad portfolio of products, with a majority classified as positive nutrition. The company is not seeing any impact on coffee consumption. The company is surprised by the reaction and the focus on food and beverage in relation to GLP-1.

The speaker discusses their involvement in the beverage industry and their current lack of concern about the food industry. They mention a recent deal with Electrolit and how it will positively impact their business. They also address past concerns about pack sizes and their current capabilities in meeting demand.

The addition of Electrolit to the company's portfolio is a great example of how they can help strong brands grow through expanded distribution and access to their capabilities. In the first year, the brand may not contribute much to profit growth due to initial investments, but in the second year it is expected to contribute profitability. This also allows for increased investment in the market system and improved coverage of convenience stores. The company also has good manufacturing flexibility for smaller pack sizes, which align with consumer trends and can drive growth and margin.

In the consumer packaged goods industry, flexibility in formats and pack sizes is crucial for success. The company has been investing in this capability and has exited certain private label contracts in order to focus on value-added partnerships. This may have a minor impact on revenue, but it is the right decision for the long-term success of the company. The company's pod volumes were affected by trade inventory builds in the previous year, but they are already seeing improvement in the current quarter.

The speaker discusses the factors that contributed to margin improvement in the quarter, but does not specify the exact details. They mention that pricing, productivity, easing commodity inflation, and a potential mix impact all played a role in the improvement. They also mention that the mix impact of their portfolio underperforming is not as significant as some may think.

The speaker is discussing the impact of pod volumes and margins on the company's performance in the previous quarter. They mention a gap between pricing to partners and private label and the inflation they were experiencing, but state that this is now being addressed and will not be a concern in the future. The speaker also mentions having visibility on margins going forward due to contractual agreements.

The company has learned from past mistakes and is now seeing the positive effects of partner and private label pricing, moderation in inflation, and increased productivity. They are confident in their future and expect a sequential improvement in pod shipment, margin expansion, and solid operating income growth in the fourth quarter. They also plan to gradually rebuild margin in the coffee category in 2024.

Jane Gelfand thanks Anthony and the audience for their time and attention during the presentation. The Investor Relations team is available for any further questions. The conference has ended and the operator thanks everyone for attending.

This summary was generated with AI and may contain some inaccuracies.