Keurig Dr Pepper Inc (KDP) — Q4 2019 Earnings Call Transcript

Thank you and hello, everyone. Thanks for joining us. Earlier this morning, we issued two press releases: one announcing that we entered into a long-term strategic agreement with Nestlé USA to continue manufacturing Starbucks-branded packaged coffee and K-Cup pods in the U.S. and Canada. The second press release we issued was for the fourth quarter and full year 2019 results. If you need copies, the releases are available on our website at keurigdrpepper.com. Consistent with previous quarters, today we will be discussing our performance on an adjusted basis excluding items affecting comparability and with regard to the year-ago period for the full fiscal year. Our financial performance also takes into account pro forma adjustments due to the merger. The company believes that the adjusted and adjusted pro forma basis provides investors with additional insight into our business and operating performance trends. While these pro forma adjustments and the exclusion of items affecting comparability are not in accordance with GAAP, we believe that adjusted and adjusted pro forma basis provide meaningful comparisons and an appropriate basis for discussion of our performance. Details of the excluded items are included in the reconciliation tables in our press release and our 10-K, 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. Here with me today to discuss our fourth quarter and full year 2019 results and our outlook for 2020 are KDP Chairman and CEO, Bob Gamgort; our CFO, Ozan Dokmecioglu; and our Chief Corporate Affairs Officer, Maria Sceppaguercio. 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. Before turning it over to Bob, I'd like to share that KDP is hosting a sell-side analyst event on March 19, 2020 which will be webcasted live. As we get closer to the event, we will issue a press release providing more details. But for now please mark your calendars for a 2:00 to 4:00 p.m. Eastern live webcast. With that, I'll hand it over to Bob.

Thanks, Tyson, and thanks to everyone for dialing in. Two years ago, we laid out a bold vision and ambitious financial targets for our new company. We saw significant opportunity to create an organization focused exclusively on beverages of all formats by being the first to combine hot and cold beverages at scale and by harnessing an unrivaled distribution system that can reach nearly all selling outlets using seven different routes to market ranging from direct store delivery to e-commerce. Since the announcement, we successfully combined our two legacy companies uniting nearly 26,000 employees into one forward-looking organization with a common platform and culture. We also delivered financial results that have exceeded our three-year targets, invested in the foundation for long-term sustainable growth, and have elevated our game on corporate responsibility and sustainability. In 2019, we delivered very strong financial performance with underlying net sales growth of 3.2%, adjusted operating income growth of 10%, and adjusted diluted EPS growth of 17%. Importantly, the sales performance reflected growth from all four segments and in-market performance that remains strong as we grew dollar consumption and gained market share in nearly all of our key categories. Our free cash flow in 2019 was exceptionally strong at $2.4 billion, enabling us to reduce debt by $1.3 billion. As a result, we reduced our management leverage ratio to 4.5 times at year-end compared to 6 times at the July 2018 merger close. The strong free cash flow also enabled us to pay down structured payables by $531 million. In addition to delivering strong and balanced results in 2019, we built a foundation for growth upon which we can drive the business faster and more effectively and prioritized investment opportunities during that year that we are now beginning to activate. Therefore, in 2020, we are investing to drive the top-line and expect net sales growth to accelerate to 3% to 4% while still delivering adjusted diluted EPS growth in the range of 13% to 15%. Taking the midpoint of that range would place us directly in the middle of our EPS merger target of 15% to 17% through the first two years with robust innovation, marketing, and in-store execution driving top-line growth in excess of our merger targets. We will deliver these targets while remaining focused on the key drivers that can create value for our company. We create value in cold beverages by renovating and innovating our brand portfolio to leverage our selling and distribution powerhouse and by partnering with emerging growth brands that offer us access to new segments and clear paths to ownership. Productivity provides funding for continued brand marketing and innovation. In Coffee Systems, we create value by expanding Keurig system household adoption by converting drip consumers to single-serve. Keurig brewer and coffee innovation, combined with effective system marketing, drives that conversion. Unique to Coffee Systems, we share some of the productivity we generate with our partners to lower the price of K-Cup pods at retail, further driving consumer growth while still continuing to expand our margins. Across the enterprise, we drive exceptional free cash flow that enables us to delever and offer shareholder value optionality in the future. As we've said previously, while these concepts are fairly straightforward and simple to understand, when implemented effectively, they are incredibly powerful drivers of value. With that as a backdrop, let me take a few moments to emphasize some of the most important aspects of our 2019 results and highlight the areas of investment in 2020 that will drive the accelerated growth we expect. In 2019, our CSD portfolio expanded retail consumption by more than 3% and grew market share by 60 basis points, with the majority of the portfolio contributing to this growth. In particular, Dr Pepper and Canada Dry posted dollar consumption growth in 2019 of 5% and 6% respectively, fueled by innovation and effective marketing. These results are particularly impressive, given the context of the strong growth these two brands posted in recent years. We continue to invest in innovation and marketing behind our key brands, including the successful Dr Pepper limited time offer of Dark Berry and the second year of the Dr Pepper Fansville campaign, the latter of which drove outsized dollar and volume performance for Dr Pepper during the college football season. New partnerships are also an important element of our growth strategy. For example, we tested A-Shoc in 2019 with beverage entrepreneur Lance Collins, expanding our presence in the energy drink category. A-Shoc was introduced regionally in mid-2019 and is now beginning its national rollout. A-Shoc joined Xyience Energy Drinks which we acquired as part of the Big Red acquisition in 2018. Xyience, while small, continues to post impressive growth. In late 2018, you'll recall that we signed a long-term partnership with Danone to distribute evian water. The launch of this partnership combined with CORE and Bai has made KDP the number two premium water company in the United States, and we continue to see areas to build out our presence and drive future growth. In coffee, K-Cup pods manufactured by KDP were up approximately 4% for the year in IRi U.S. track channels, which, as we have indicated previously, don't capture the accelerated growth we are driving in untracked channels. In 2019, the untracked channels represented about half of the pods we manufacture, and we expect that number to continue to grow. Our pod shipment growth of 9% in 2019 is consistent with the actual growth we are seeing across all channels. The strong performance of our K-Cup pods was driven by new households that we brought onto the Keurig platform. Specifically, in 2019, we expanded the number of U.S. households regularly using a Keurig brewer by approximately 7%, bringing the total number of U.S. households in the Keurig system to around 30 million at year-end, with an additional 3 million households using the Keurig system in Canada. This growth was driven by robust brewer innovation and the Brew The Love marketing campaign featuring James Corden for the third consecutive year. Our most recent brewer innovation, the K-Duo, fills an important need for households that want a single machine that can brew both a single cup and a carafe. K-Duo has been extremely well received by consumers both in terms of units sold and star ratings. Additionally, the long-term agreement with Nestlé announced this morning recognizes the strong partnership we've had with the Starbucks brand for almost a decade. With this agreement in place, along with the long-term master licensing and distribution agreements recently signed with McCafé in the U.S., we have every major branded player within the Keurig system committed for at least the next five years. In 2019, we launched our Drink Well. Do Good. corporate responsibility platform, along with multi-year goals for our supply chain, the environment, health and wellbeing, and communities. A significant area of environmental focus for both the industry and KDP is plastics. In late 2019, in partnership with the ABA and industry peers, we've launched the Every Bottle Back initiative. We are also on track to make every K-Cup pod recyclable this year after reaching this important milestone in Canada last year. Finally, in 2019, we rolled out our KDP values and competencies to the entire organization, uniting all of our employees under one common culture, fostering an environment in which everyone at KDP operates with shared purpose and common goals. As I mentioned upfront, we have good line of sight to delivering sales growth in 2020 above our long-term target range by investing in a number of platforms across the business. Starting with innovation, which we expect to be a meaningful growth driver for this year. In CSD, we plan to support our flagship Dr Pepper brand with the first quarter launch of regular and diet Dr Pepper cream soda, which should drive continued growth for Dr Pepper and increase frequency and volume to the category. Also launching in the first quarter is Canada Dry Bold, which takes the extremely popular and on-trend Canada Dry Ginger Ale and enhances the flavor impact. We are also rolling out our new lineup of 10-pack mini cans behind many of our CSD brands, including Dr Pepper, Canada Dry, Sunkist, A&W, and 7-Up. These mini cans are consistent with the consumer trend to enjoy carbonated beverages while controlling portion size and caloric intake. While this format has been a significant driver of category growth, until now, KDP has not had full representation across its brands. For Bai, we are introducing our first flavor innovation behind the brand since it was acquired in 2016, with the introduction of Bing Cherry, rolling out nationwide as we speak. This is just one of many actions we are taking to support the brand this year, and we look forward to sharing additional details during our March 19 webcast. As mentioned previously, A-Shoc energy drinks will roll out nationally in 2020. Also, as you’ve likely seen, we purchased Limitless, a lineup of lightly caffeinated sparkling waters early this year. Not only do we plan to build out distribution of Limitless as the year progresses, but we also have developed flavor innovations that we plan to introduce as well. While starting from a small scale, both A-Shoc and Limitless should be solid contributors to growth in 2020. In coffee, we are in the process of launching our next wave of updated brewers, starting with the K-Slim brewer, which is currently available on keurig.com and will be expanded more broadly over the next few months. The K-Slim brewer features an impressive 46-ounce reservoir, a simple user interface, and is the first reservoir brewer to feature our next-generation Keurig branding and design. We look forward to sharing more brewer innovation with you as the year progresses. All brewer and beverage innovation will be supported by significant marketing investment throughout the year, behind both existing and new campaigns. In 2020, we also have plans for increased investment in our networks. This includes CapEx spend and expense behind new manufacturing facilities we plan to bring online in 2020, including our Spartanburg, South Carolina facility, which once operational will be the largest and lowest-cost K-Cup manufacturing facility anywhere. Also coming online in 2020 is our manufacturing and warehouse facility in Allentown, Pennsylvania, which will produce primarily non-carbonated beverages. Both of these facilities will be significant sources of productivity once they ramp up and will support the future growth of our brands. Investment in our networks also includes improvements in our routes to market, including our company-owned DSD network. We'll elaborate more on this during our webcast in a few weeks, but at a high level, this means investments in sales technology and training for our field teams and the acquisition of select independent distribution territories for incorporation into our company-owned DSD. All of this is to ensure that our retail coverage is as efficient and effective as possible, allowing us to drive maximum value from this important asset. In 2020, we will also continue to geo-diversify our brewer supply footprint across Asia. Additionally, we have established a center of excellence for brewer R&D and supply chain management based in Singapore. This center, which started up in late 2019, locates our teams closer to where our appliances are manufactured, allowing us to move faster and more efficiently. Finally, in 2020, we plan to make investments behind our sustainability initiatives. As you are already aware, all of our K-Cup pods we manufacture will be recyclable by the end of this year. Recyclability has been a large barrier to adoption for many consumers, and we plan to promote this news with stepped-up marketing and in-store support. In 2020, we will also launch our first 100% post-consumer rPET bottle. We look forward to sharing more information about this later in the year. During 2019, we received many questions from you about what a future KDP looks like once we move beyond 2021. You're beginning to see a robust pipeline of growth platforms across multiple segments, combined with a contemporary route to market and supply chain infrastructure, all of which points to a compelling future for our company. Our 2020 outlook represents a year of accelerating growth behind stepped-up investments in our brands, network, and people. Some of these investments will produce returns quickly. For example, the innovation and marketing that we are rolling out is expected to translate into accelerated top-line growth in the coming quarters, while other investments will take a little bit longer to show results. For example, Spartanburg and Allentown will be significant sources of productivity and capacity for our business, although benefits won't start to flow through until after this year. Most importantly, these are all critical investments to drive sustained future growth and value creation starting this year. With that, let me now hand it over to Ozan.

Thanks, Bob, and good morning everyone. Since our press release provides significant details on our performance, I will touch on our fourth quarter results very quickly and then turn to the larger drivers of our 2019 performance along with our 2020 guidance. At a high level, the fourth quarter was another solid one for us. Excluding the prior year sales of BODYARMOR in October last year and foreign exchange impacts, net sales increased 4.6% in the quarter with contributions from all four segments. The sales growth, along with strong productivity, synergies, and network optimization, drove operating income growth in the quarter of 13% and operating margin expansion of 210 basis points. We delivered adjusted diluted EPS growth of 17% in the quarter, fueled by the growth in operating income and the lower effective tax rate, partially offset by higher interest expense due to comping last year's benefit of interest rate swaps in the fourth quarter last year. Turning to full-year results, free cash flow in 2019 was exceptionally strong at approximately $2.4 billion. This translated into an adjusted free cash flow conversion rate of nearly 140%. We also ended the year with $75 million of unrestricted cash on hand. In terms of leverage, we reduced our outstanding bank debt by approximately $1.3 billion in 2019. As a result, our bank debt-to-adjusted EBITDA ratio, which we refer to as our management leverage ratio, improved by nearly a full turn to 4.5 times versus 5.4 times at the end of 2018. Since the merger closed in July 2018, we have reduced our leverage ratio by 1.5 turns. In addition, we also paid down $531 million of structural payables during 2019, resulting in total payments between debt and structural payables of $1.8 billion. In terms of synergies, 2019 was the first year of our three-year program. As you will recall, when we announced the merger two years ago, we committed to $600 million of synergies with $200 million per year between 2019 and 2021. We delivered synergies of slightly more than $200 million, and we expect to deliver our commitments in each of the next two years. Before turning to 2020 guidance, let me provide some details on our synergy, productivity, and network optimization programs as they will continue to be important sources of growth and value creation in the coming years. As we shared at our Investor Day in March 2018, a key part of our strategy is to execute untapped opportunities to drive profitability and cash flow, which enables us to reduce debt and provide optionality for the business. Our value creation program, which includes synergies, productivity, and network optimization, is an important aspect of this. Examples of progress we have already made include the consolidation of warehouses between our two legacy companies, the integration into one sales organization, the organizational alignment of the two legacy companies, including the consolidation of certain corporate functions and elimination of duplicative roles, simultaneously reducing the cost and improving the quality of our brewers through engineering redesign and the harmonization of brewer parts and platforms, optimizing procurement practices, utilizing economies of scale and driving manufacturing efficiencies across the combined network, utilizing asset sale leasebacks on certain facilities, which we will continue to pursue opportunistically, and optimizing our DSD system and processes to reduce the cost to serve our accounts across the country. All of these actions have enabled us to unlock significant efficiencies and value in our network with many opportunities yet to come. We have a long runway of value creation in this area and we look forward to sharing these with you in the coming quarters. Let me now move on to our outlook for 2020. As you saw in our press release, we expect net sales growth to be between 3% and 4% in 2020, nicely above our three-year target range. We have confidence in our expectations given the high-quality areas in which we are making investments. As I will discuss in a minute, there is a timing component of these investments. Given these investments, we expect adjusted diluted EPS growth to be in the range of 13% to 15% in 2020, representing $1.38 to $1.40 per diluted share. Importantly, over the two-year period ending 2020, we expect to remain in line with our merger target for average annual growth of 15% to 17%, and we continue to have confidence in achieving our target EPS growth over the three-year merger target period ending 2021. Adjusted interest expense is expected to be in the range of $530 million to $545 million, with respect to the expectation of continued deleveraging in 2020, given the significant cash flow we expect to generate in the year, as well as the expectation of a modest benefit from the opportunistic unwinding of our remaining interest rate swaps. Our management leverage ratio is expected to be in the range of 3.5 to 3.8 times at the end of 2020. Cash outlay for capital projects is expected to step up as previously communicated to approximately $550 million to $600 million in 2020, given the ongoing projects we have underway to support future growth in our business. Importantly, 2020 represents the key cash-out year, in the three years following the merger. We currently expect CapEx over the three-year period to be in the range of $1.4 billion to $1.5 billion. While we are not providing guidance by color, we do expect net sales growth and adjusted EPS growth versus 2019 to be tempered in the first half of 2020, due to several factors. Specifically, the investments we are making this year that Bob mentioned previously will be weighted to the first half versus the second half. Productivity and synergies are expected to be lower in the first half versus the second half, as programs build throughout the year. Based on our current input cost coverage, we expect inflation to be the highest in the first half of the year, specifically in the first quarter, and then moderate over the balance of the year. Partially offsetting these timing factors is a gain of $39 million we realized in January of 2020, related to additional asset sale leasebacks of four properties. Consistent with the value creation framework I laid out earlier, this gain primarily affects Packaged Beverages, with the remaining benefit in Coffee Systems. Additionally, in Coffee Systems, we are anticipating the highest tariffs in the first quarter and marketing investment is also expected to be elevated. Coffee will also be lapping the full launch of the highly successful K-Mini brewer in the first quarter of 2019. In Beverage Concentrates, the timing of synergy capture and volume initiatives are weighted toward the back half of the year. Given these discrete segment impacts, while we do expect solid performance from Coffee Systems and Beverage Concentrates in 2020, they will start slowly and ramp up as the year progresses, particularly Coffee Systems. With that, I will hand it back over to Bob for some closing remarks before we open it up for your questions.

Thanks, Ozan. We've covered quite a bit of territory in our remarks today and look forward to providing more details during our March 19 webcast. We're excited about the progress we've made in the past 18 months to build a foundation for our company that we can now leverage to drive accelerated growth beginning this year. The strong results we have delivered since the merger closed demonstrate the strength of our strategy and team, and we are confident in our 2020 guidance. We remain committed to delivering the three-year merger targets we established more than two years ago. I will now hand it back over to the operator to open it up for your questions.

Hey guys. Good morning. It's actually Pete Galbo on for Bryan. Thank you for taking my question.

Good morning.

Good morning.

Bob, I just wanted to get your thoughts around supply chain, particularly coming out of China with a lot of the disruption we've seen at ports. And how you're thinking about that in terms of brewer growth, particularly maybe in the first half of the year?

Yeah. So, I mean, first of all, you're talking about the supply chain. I think it's important to say that there is no demand impact on our business because the great majority of our business, nearly all of our business is in the U.S., Canada, and Mexico. So, we focus on the supply chain side instead. We've done a couple of things that have served us well. The first thing we did was geo-diversified our supply chain for our brewers outside of China. Our original catalyst for doing so was tariffs, but that has served us well in this current situation. We just came out of our peak selling season during the holiday with exceptional selling results, and as we go into this year, we're in a lower seasonality period, which allows us to build some inventory. So, at this point in time, we're really shaped from a supply standpoint. We'll watch it very carefully, but we don't anticipate any disruption at all.

Got it. Got it. That's helpful. And then maybe just on free cash flow, obviously very impressive in 2019 at $2.4 billion. Just want to get some thoughts around sustainability of that in 2020 and 2021?

Sure. I mean I believe we have demonstrated considerable ability to drive outsized cash flow from a variety of sources. For example, our core free cash flow conversion ratio to net income was 140%. We will continue our programs to generate strong cash flow. Our business is quite highly cash generative. We also have strong working capital management programs in place and if we see opportunities to unlock cash generation using our asset base, we will pursue them. For example, asset sale leasebacks are one of those initiatives. We expect to generate outsized cash flow and achieve free cash flow conversion in excess of 100% in the upcoming years.

Great. Thank you.

Hey, good morning everyone. So I just wanted to ask a couple of questions on the revenue outlook. So first, I guess would it be possible to break out your expectation for what is organic in the 3% to 4% target for 2020 as I know you guys get a benefit from McCafé in the back half of the year? And then just more broadly, you reiterated your long-term EPS guide this morning, but didn't mention anything around long-term net sales growth. And maybe I'm reading too much into this, but should we expect faster growth beyond 2020 as a result of this increased investment?

Yes. I mean, let's start with 2019 for a second, right? There was a lot of noise in 2019, as we talked about numerous times, about the ins-and-outs of Allied Brands. I’m happy to say that's all behind us as we go into 2020. So there is no concept of underlying net sales as we enter 2020. But if you go back and look at 2019, our underlying net sales were 3.2%. In the fourth quarter, it was 4.6%. If you wanted to discount underlying, our reported was 4.3%. So you saw an acceleration throughout the year in 2019, and that continuation into 2020 is why we are confident in our revenue targets for 2020. With regard to organic versus additional, the only thing that wouldn't be organic by your definition would be McCafé. I mean, we participate in the revenue of McCafé now because we produce the pods, so we're picking up some incremental differences, particularly on the premium bag business, but we already participate in the revenue on pods. So there's not much change there. It's a partial year impact and the reports out there quote numbers I've seen are really looking at retail numbers, not manufactured sale numbers. To answer your question, the majority of what we're talking about on the increased revenue in 2020 is by your definition organic. In terms of the sustainability of that beyond 2020, while we won't guide beyond 2020, the investments we are making are long-term in nature. This includes the renovation of existing brands and launching new businesses, whether independently or in partnership with others. That combined suggests that we have a lot of room to grow going forward as we talked about from the very beginning.

Thanks. That’s very helpful. Pass it on.

Okay.

Hi, good morning.

Good morning.

I just wanted to talk a little bit about maybe opportunities that you have uncovered since closing the deal, sort of almost two years in but vis-à-vis the network optimization program and some of the things that you started to hint out and promise us we'll hear more in a few weeks. But I was just curious about the incremental discovery you’ve experienced as you’ve gotten closer and deeper into the business versus things that you may have contemplated when the merger first came together? Thanks.

Sure. Let me break them into three buckets of areas that we've learned. I’ll discuss portfolio expansion into white space, our selling and distribution capabilities, and then I'll ask Ozan to talk about the cost side of the business and also some cash, which I think are important, right? As you point out, you go into mergers with a hypothesis and a merger thesis but the reality is how can you deliver against that once you’re up and running? Now 18 months into running this business, what have we learned? I think our ability to fill in white space in our portfolio and expand into higher-growth segments is intact and evidenced by the fact that we’re taking our growth target up. You see where we’re targeting to fill in our white space. Premium water is an attractive segment; we’re now the number two premium water company. Through a combination of the Bai business that was there, the partnership with Danone on evian, the acquisition of CORE at the end of 2018—which we were able to accelerate in 2019—and the recent acquisition of Limitless, we see significant growth coming out of that segment. Another opportunity is energy. You have to be thoughtful about how to approach that segment due to some of the big players, but a combination of businesses that we acquired alongside Big Red and Xyience now growing rapidly and the partnership we’re scaling up with Lance Collins on A Shoc are good examples of how we’re able to access large and attractive segments in unique ways. I want to stress that none of this would matter if your core business didn't grow as well, and that has been 100% intact. KDP outpaced the CSD market; we were up 3.2% for the year, while the market was up 2.5%, and Dr Pepper just had its 15th straight year of growth, outpacing the CSD category with nearly 5% growth and Canada Dry at 6%. The ability to add these new segments on top of a strong core is key to our success. On the route-to-market side, we are doing several things. It is challenging to cover it all in a call, so we'll preview that for discussion in March. It's a combination of investing in technology, investing in our people, and being very targeted in going after independent distributor markets where we can do a better job through our own company-owned DSD. We’ve already begun to do that, and we have plans to do more of that. Part of the strength in our core is coming from marketing and renovation, as well as strength in our selling and distribution capabilities. Both sides of that are intact, and we feel even stronger about them than we did going into the merger, which is why we’re raising our growth outlook. Ozan, why don’t you discuss the cost side?

Sure. On the cost side, let me start with the value capture. As defined, we see value capture in two pieces, which we call base productivity programs and synergies. We had previously targeted delivering $600 million of deal synergies over three years starting in 2019 through 2021. We have announced some positive results on these two metrics. In fact, we had a bit of a positive surprise in delivering both, allowing us to continue to invest behind our business from the brand investment side or the distribution routes, or our manufacturing capability which will further fuel and satisfy our growth as well as help base productivity as well as synergies. Therefore, we have an outlook for both; we are confident about what we have been achieving in those two buckets. Regarding cash flow, we laid out a deleveraging program, and we are 18 months into it and have delivered exactly what we said we would. We generated outsized cash flow in 2019 and have very solid programs intact for 2020 and 2021 that will assist us in meeting our deleverage targets.

So, I think the end of all of that is, we were really confident going into this merger. 18 months later, we’re even more confident with what we know. The one thing we didn't mention in any of that was, we did everything we just talked about while simultaneously delivering exceptional performance from Coffee Systems, and our outlook on that is as robust as ever. So we are feeling great as you can tell.

That's great. Thank you so much.

Hey, great. Good morning. Two questions, if I could. I guess the first one just building on what Ozan mentioned. It looks like outside of a couple of hundred million dollars in asset sales in the fourth quarter, your free cash flow would have actually come in a little light of the full year target. And I guess that was probably planned on your part. But can you just give us a little more insight into what was sold? And as we think about the path to future free cash flow, is that a driver there? Is there a line of sight to similar sales in the future?

Well, first of all, I mean, we delivered $2.4 billion of free cash flow. That equates to 140% of the cash conversion rate, which is best-in-class in our industry. Therefore, we planned potential asset sales in the fourth quarter and aimed to achieve those numbers, as we always look to our opportunities in a holistic manner. Thus, we delivered within the mid range of our guidance. It would be a bit unfair to say that we are short of cash flows without the asset sale leasebacks that we executed. Once we release our 10-K today, you will find further details. The asset sale leaseback operation took place in December which involved three manufacturing units. Those operations have a long-term lease contract in place, and we will renew the terms after the first expiry. We will seek opportunities to unlock untapped potential on either the profit or cash side. What matters is to take a holistic view of our cash flow generation. We have solid programs in place to continue expanding working capital. The nature of our business and EBITDA generation is highly cash generative, and there are several other opportunities that will enable us to deliver outsized cash flow.

Yeah. The one thing that I would add in all of that, this is Maria, is that if you look at our results for the year, there is a fair amount of noise in it. Any time you put two large companies together, you're going to have that. There are positives and negatives. If you review 2018 and 2019 and itemize them, you'll see we had more benefits in 2018 than in 2019. So, on a year-over-year basis, our growth, if you strip out the noise, would be actually higher than what we reported. It would be north of 17%. There is some work that has to be done to account for that, but the underlying performance was very solid.

Okay. Yeah, that's helpful. Thanks for the clarity. I guess the second question, if I could for Bob. As this builds on what you were just discussing in response to Lauren's question, your ability to leverage legacy DPS distribution platform assets to expand new brands has always been a key part of your longer-term strategy and the industrial logic of the merger to begin with. But are you removed from the merger 18 months? As strong as legacy Keurig and core DPS have been, it looks like that part of the value proposition may be lagging. I mean, clearly you're excited about 2020, but you've spoken in the past about some of Bai's challenges and the slower ramp of Allied Brands. I think Allied Brands' contributions were supposed to turn positive in the quarter. I'm not sure if that happened. So can you give us clarity or color on how you're thinking about it and the system's ability to develop smaller underpenetrated brands in the future? And as it relates to your comments about plans to acquire new territory, that too seems like an evolution from some of your past comments. So any further insight would be appreciated. Thanks.

Yeah. I think you're referring to our PB segment which is where our company-owned distribution resides. First of all, just to reiterate because I know there’s complexity around our routes to market. But we have the ability to reach 100% of the U.S. with direct store delivery. Approximately 75% of that is through company-owned DSD, and the remainder is through long-term partnerships with independent distributors. We can take any new brand and get it to every store in the U.S., which is incredibly powerful. There are few companies with this advantage. Within the PB segment, you have to remember to Maria's point, it's the noisiest segment regarding the movement in and out of Allied Brands. That was disruptive, but we managed through it well. If I look at the quarterly trends in the PB segment for the first half of the year, our underlying growth was around 1% to 1.5%. In Q3, it was plus 3%, and in Q4, it was plus 4%. You're seeing acceleration after cleaning up some of the noise about Allied Brands through our company-owned DSD system. The Allies brands were a little slower to ramp up and there are brands needing work, but every sizeable portfolio will have strong growth alongside challenges. The key is to get the balance right. Our overall company growth in the fourth quarter was 4.6% and our PB segment was plus 4%. We feel great about where we are. We just always have a few things to work on that one can pick out. But net-net, everything is moving in the right direction which reflects in the targets we’ve set for 2020.

Okay. Thank you.

Sure.

Great. Thank you very much and congratulations on a strong year. Two questions. First, you talked—and it went fast—but it sounds like you're going to be pushing mini cans much harder than the past. That does represent a change in strategy certainly from prior management. If I recall correctly, I believe it was a change in strategy from your initial views on the business due to supply chain costs and complexities. Is that correct? And how are you thinking about dealing with those changes to the supply chain to execute effectively on that? That's question number one. Question number two: you’re clearly gaining nice share in the cold drink segment. Can you say which channels you’re seeing those share gains in, or is that pretty broad? Thank you very much.

Sure. We keep talking about why we’re so bullish on our business going forward is the amount of opportunity we still have in front of us that we haven't yet accessed. Mini cans fall into that category. It's been a big growth driver for the industry. It's not only a driver of revenue growth, but it's good profit as well, and we haven't participated in it for various reasons. There is no change in our thesis on this. We've always wanted to do it; it’s just a matter of gearing up our supply chain and getting the can supply to do it. Now we’re able to do that broadly for 2020, which is another source of incremental growth and profitability. The industry has access to that; we’re underdeveloped there. We'll close that gap because we need to ensure our brands are available in a format consumers want. Regarding where we’re seeing share gains, it's really across the board. There’s no particular channel. That's the benefit of our business; we have access to every customer and channel. When we can drive growth and share gains through great marketing, innovation, renovation or new segments, we get that benefit across every single channel.

Terrific. Thank you very much.

Hey, good morning, everyone, and congratulations on a strong year.

Thanks.

Bob, can we pick up on Coffee Systems? The household penetration was up nicely this year, and it's also reflective of strong brewer volume growth of 8%, which is great. Can you put some context again on where you think household penetration can go? I think there's been some context around mid-60% household penetration in parts of Europe. Can you provide updates on your targets here and how quickly you think you can achieve them? What that potentially means as we think about growth in this segment?

Yeah. Let me share some key metrics for Coffee Systems. We see household penetration at 7%. Pod shipments increased by 9%. We've maintained that over time shipments and household penetration should equal each other. Brewer shipments were up 8%; NPD shows our brewer sales were up 9.5% for the year. In the fourth quarter, which benefited from the K-Duo launch, NPD was up 15.5%. On household penetration, we're around 23%. We believe that household penetration should be north of 50%. Evidence suggests that number remains a solid target over time. This speaks to our ability to continue to drive outsized growth in Coffee Systems for the foreseeable future.

Okay. That's helpful. And just a follow-up to Robert's question. Specifying on Beverage Concentrates, volume numbers there have been strong, and it’s been consistent for the past two quarters. Can you just talk about the disconnect between what we're seeing in the Nielsen data? You alluded to some stronger growth in tracked channels—in untracked channels, excuse me. I'm trying to understand the sustainability of the wide gap we’re seeing between the Nielsen data and what we see in volume growth in Beverage Concentrates. Is this just sort of the first half? You picked up distribution in the first half of 2020? Should we see that gap close? Or do you think this is sustainable and why?

I think there are a couple of things to consider. You don’t see everything in the Nielsen IRI data; a big piece of Beverage Concentrates is our fountain and foodservice sales. Dr Pepper is the most available soft drink across many restaurant formats. That’s where we’re seeing very strong growth behind demand for our brands. If you review demand, it's driven by robust marketing with a limited number of SKUs. You'll notice it in our core brands like Dr Pepper and Canada Dry. When taking a look at other reports, there will be a slowdown in the fourth quarter and a little bit into this year—that's driven by some pricing. However, our differential performance—KDP versus the category—has maintained a good lead in this aspect. So while the category has slowed when we’re lapping aggressive pricing, our volume growth has remained strong, and that hasn’t slowed down at all.

Okay. That's helpful. Thank you.

Sure.

Good morning. At the outset of the deal, you guys mentioned that you wanted to get pod pricing to about $0.50, and I think you ended 2019 at $0.49 in measured channels. You also stated consumers found $0.30 pod pricing to be a bargain, as private label pricing is in the mid-30s in measured channels. I'm wondering if you foresee any changes in volume pricing moving forward now that you've obtained those targets. Is it feasible with the South Carolina plant to get a partner to $0.30 pod pricing?

I think part of what we discussed earlier is that you are looking at IRI pricing which reflects partners or retailers who compress their margins willingly because it's still a significant growth segment from a profitability standpoint. Some choose to do different things, and we don't control that. With what we projected back during the deal launch, I see that being a good place to start. If you refer back to our March 2018 Investor Day, we indicated that pricing was declining while volume was growing but not sufficient to offset pricing. We also projected that volume would increase, pricing would moderate, and margins would expand, with revenue growing between 2% and 3%. That has completely come true. Our pricing reflects in our 10-K, and you’ll see it’s moderated. Our revenue was 2.8% up in 2019; right on our predictions from nearly two years ago. Most importantly, margin continues to expand, even with the investments. We’re watching the pricing behavior, collaborating with Spartanburg coming online, leading to potential pricing changes. However, we anticipate our growth will remain strong along with operating income margin, which is a key metric to track.

Hi, thanks for the question. Can you elaborate on any implications, if any, of the Starbucks agreement in terms of margins versus dollar revenue or dollar profit reporting? Or is the real value of this agreement just locking in a powerful brand for years to come?

It's really the latter for us. It is a key brand in the system. Starbucks is now the number one brand within the system. It brings a high-quality presence to our overall category and business. We are significant to them, as represented by the importance of the Starbucks K-Cup business and the profitability associated with it. Both sides benefit from the partnership. The long-term agreement reflects our ongoing growth together as they see household penetration expand with us in the system.

Great. Thanks a lot.

Okay.

Thanks everyone. This is Tyson. I know you all have busy days today, but the IR team is around to take your questions, so feel free to give myself or Steve a call, and we'll talk to you later. Thanks.