Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Keurig Dr Pepper’s Earnings Call for the Second Quarter of 2020. 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, Ms. Maria Sceppaguercio. Ms. Sceppaguercio, please go ahead.

Thank you, and good morning, everyone. Thanks for joining us. Here with me today to discuss our second quarter 2020 results are KDP Chairman and CEO, Bob Gamgort; our CFO, Ozan Dokmecioglu; and Senior Director of Investor Relations, Steve Alexander. Steve is sitting in today for Tyson Seely our Vice President of Investor Relations, who is home on baby duty as he and his wife just welcomed a second daughter into the family earlier this week. Our best wishes go out to all of them. I will now hand it over to Steve to cover a few comments.

Thanks, Maria and hello everyone. Earlier this afternoon, we issued two press releases, the first announced that we have entered into a long-term franchise agreement with Polar Seltzer and the second was our Q2 press release. If you need a copy of either release, you can get one on our website at keurigdrpepper.com in the Investor section. Consistent with previous quarters, today we will be discussing our performance on an adjusted basis, excluding 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 is 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 included in the reconciliation tables included in our press release and our 10-Q, which will be filed later this week. 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. 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 on 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, Steve and good morning everyone. Let me start by expressing my sincere hope that everyone dialed in continues to be safe and healthy, and that your families are well. At KDP we have worked extraordinarily hard since the onset of the COVID-19 crisis to protect the health and safety of our employees, particularly those front line employees in our supply chain and out in the trade who play an essential role in ensuring our products are available for our consumers, customers and communities that rely on them. The results we've reported this morning are a testament to the dedication and commitment of our team, and I can't thank KDP employees enough for all that they are doing day in and day out. As you know, the environment in which we are operating continues to be extremely volatile with covert cases spiking again forcing some regions into a second phase of shutdown, all of which impacts consumer mobility and beverage consumption behavior. TDP was performing exceptionally well before the crisis. We delivered well for all stakeholders during the crisis as evidenced by the results we're discussing today, and we fully expect to emerge as an even stronger company when we get to the other side. Until there is a widely available vaccine or treatment, we believe the macro environment will be bumpy and uncertain, requiring us to continue to be focused, flexible and responsive. Two years ago this month we completed the merger that created Keurig Dr Pepper, which at that time we described as the new challenger in the beverage industry. With the integration complete, we believe we have created a modern beverage company, with a broad reaching portfolio of hot and cold beverages delivered by a diversified route to market network that provides unmatched reach and efficiency, and…

Thanks Bob, and good morning everyone. I will briefly review our performance for the second quarter, which our press release provides in significant detail. The second quarter was another good one for us. On a constant currency basis, net sales increased 2.9%. This growth in three of our four segments. Packaged beverages and coffee systems were particularly strong in the quarter. On a constant currency basis, adjusted operating income increased 11.1% in the quarter, driven by revenue growth, productivity and merger synergies, as well as a significant reduction in discretionary spending. As Bob noted, we believe that we have struck the right balance of continuing to invest in areas such as innovation, technology, and sustainability that provide competitive advantage, funded in part by reduced marketing, giving the low return on investments in the quarter, and dramatically lower travel and entertaining expenses, given the limitations in travel. These drivers were partially offset by negative segment mix, inflation, higher operating costs associated with increased consumer demands, and certain costs related to COVID-19 that were not treated as items affecting comparability. Let me pause here for a moment to discuss these COVID-19 costs. In the second quarter pre-tax operating expenses directly related to COVID-19 totaled $75 million. Of these, $63 million were recognized as items affecting comparability and consistent of temporary and unusual compensation increases, and incentives for frontline employees, as well as incremental safety and sanitation expenses across our business. The balance of the COVID-19 related costs in the quarter, which totaled $12 million consisted of inventory write-downs, and bad debt expense, and have not been treated as items affecting comparability. Therefore, they are included in our adjusted results. Adjusted diluted EPS advanced 10% in the quarter, sealed by the growth in adjusted operating income and an increase in non-operating income in…

[Operator Instructions] Our first question will come from the lineup, Bonnie Herzog with Goldman Sachs. Please go ahead.

All right, thank you. Good morning, everyone.

Hi, Bonnie.

Hi, I kind of want to just ask overall, your business has done quite well in the at-home economy, that we're all experiencing right now. So, just hoping you could talk a little bit more about how you expect your business will perform maybe in a more normalized environment. Yes, I guess I'm wondering if you see any risk at all in possible pullback in demand for your products, maybe as consumers return to some of their pre-COVID routines, just really how do you think about this and how sticky do you expect your business to be as maybe things return to normal? Thanks.

Yes, sure, Bonnie it is a great question, something we think about a lot. I think if we step back at 100,000 feet, and then I'll drill down deeper into your points. We look at - there are companies that fall into roughly three buckets. There were those that may not have been done doing well prior to the pandemic and they're doing really well during the pandemic because suddenly something was off trend became on trend. And it would cause you to say, well what's going to happen when things turn to normal, which is where you're going. There's another set of companies that were doing really well prior to and are struggling in this environment. And in that case, you kind of have to hope for a return to a future that looks a lot like the past. We're in a very unique situation here, and I think there are very few companies in this situation. That is, we were performing very, very well prior to the crisis. So we said a number of times, we don't see this at all as a windfall for us. We've been able to perform very well since the crisis, but we've had to work really hard to do that. And I think you'll see from the comments that we made earlier, that it is quite a mixed management exercise, we've had to push some areas of our business really hard. But I'll remind you, there are areas of our business that are large and profitable, that have taken a significant hit in this crisis that we've had to offset. And if things were to return more to normal, we'll get the bounce back on those immediately. But we don't expect into the future, we don't expect it to continue the way it is indefinitely, but we also don't think that the future is going to look exactly like the past. And so, we have the tools and the levers to pull, to be able to create a company that does even better in the future. And that's reflective of all of the innovation that we're continuing to invest in, and we're continuing to launch. And we're getting great retailer receptivity on all of that as well, because they're bullish about that future as well. So we're confident where we are and we continue to be confident in how we will deliver to the end of the year, as we talked about in our guidance and our commentary, but we're not planning on a future that returns back to normal. If it did, it would actually be good for us. We're planning on a future that's going to look quite different and we're navigating the company to be even stronger and stay ahead of the game.

Okay, that makes sense. Thank you very much.

Okay, thank you.

Your next question comes from the line of Bill Chappell with SunTrust.

Thanks. Good morning.

Hi Bill.

Good morning.

Just looking at the kind of the brewer household penetration and is there any way to kind of gauge how much this sticks? And then I know we don't talk about attachment rate anymore, but certainly the attachment rate is going to a new higher level, any kind of idea where that is and where that's a sustainable level? I mean, I imagine a lot of us are dusting off our Keurig machines and using them all the time, but a certain amount of people have never used them before and will start using them on a regular basis. So just kind of any sense on how the whole platform has changed over the past three, four months?

Yes, and remember, we have really good insight into this internally, because we have this household panel of 10,000 homes. We can see minute-by-minute consumption. And so we've been able to track the attachment rate change from the very beginning of the crisis. And we don't, we haven't talked about attachment rate in the past because as we said, when you guys have tried to model that, it's really steady. So the whole game is really about household penetration. And we've also said that volume growth in the category is a good proxy for household penetration because attachment rate is even. We're getting two benefits right now. We're getting new people coming into the system and to answer your question that sticks. And we've seen that for years now that when somebody decides to move from brewing coffee by the pot to brewing coffee by the cup, or in the case that we have right now, people who weren't making coffee at home, making it at home now using a Keurig machine, that's incredibly sticky with a dropout rate from the system is very, very low. The attachment rate, as we look forward, our belief is we'll capture some of that increased attachment rate going forward because people who weren't making coffee at home or were making it at a lower frequency, recognize that A, it's easy to do, that the quality has improved dramatically over the past couple of years. So for those that had a perception of quality, they're now getting a firsthand experience that the quality is better. And you heard from our innovation pipeline that will continue to go up. And I think the third part is, significant cost benefit to making coffee at home. And I think a lot of people, if you look at the research that we do, but also social media and articles that are written there are lot of people saying, I really like this, this is easier than I thought and I'm saving a lot of money on top of it. So we don't model going forward that we're going to keep all of that attachment rate, but we know we'll keep some of it. But the household penetration gains, we're very confident we keep the great, great majority of that.

That's great and just one follow-up on that. Have you seen any real change to, or trading on the private label or lower price brands as we've been in a call that recession or is it just kind of too early to tell or see?

Yes, I'll talk about both of them. The cold side of business no, we're seeing actually pricing on average up as promotion is less and we're seeing no move away from brands to private label. In fact, in many cases, you're seeing that the larger brands benefit. And clearly, we've benefited significantly from a share of total liquid refreshment beverage and then we gained as I said, in the prepared remarks, 1.2 share points in CSD. So the brands and our brands in particular are doing very well in this environment. On the coffee side of the business, you're actually seeing a skew towards more premium brands in this environment. And I believe that's because as people trade off from making or purchasing coffee outside of the home to making it at home, they want to take their brands with them and the coffee shop brands that they can get now in our system, are skewed towards the premium end, so that's very bullish. And the other point that is worth emphasizing is that the cost of pods today in general, whether it's at the premium mid price or the value or entry level price point, are all down significantly versus where they were three, four or five years ago and that's intentional. That was part of our strategy that we talked about. We set off with the ambition of lowering the price of pods to increase household penetration and attachment rate and that's exactly what we're seeing. So I would have thought actually that given the some of the financial strain, you might see some trade down, which I would emphasize, we're okay with because we produce the great majority of private label as well, but we're actually seeing the reverse right now. And although I can't predict anything in the future, it makes sense to me with the change in behavior from out of home to in-home.

Right, thank you so much for the color.

Okay, thanks Bill.

Your next question comes from the line of Bryan Spillane with Bank of America.

Hey, guys, good morning. It's actually Pete Galbo on for Bryan. Thanks very much for taking the question.

Hi, Pete.

Good morning.

Bob and Ozan, I just wanted to dig in a little bit on beverage concentrate. Obviously, Bob you kind of mentioned seems like you're through the worst of it or through the trough and in July, trends improving, but also just wanted to touch on, your concentrate volumes were pretty significantly behind bottle or cases in the first half. I think it's something like 350 basis points. Just how should we think about catch up there in the second half of the year? And I have a followup as well.

Yes, let me start it and then Ozan feel free to jump in at the end if you have something you want to add to this. The BC areas where you see the fountain and food service business, that's servicing restaurants, and clearly that's been impaired, but it's improved throughout the quarter. And so, I think that the gap that you're talking about between shipments sometimes and concentrate shipments and bottle or case sales, that happens from quarter-to-quarter. So there's always a catch up. But we are seeing great improvement in the FFF business throughout the quarter due to rebound in restaurants. And I'd emphasize that we're particularly strong in QSRs. And in fact, we are the - Dr Pepper brand is the number one most available CSD in QSRs. And so, as the drive-thru business seems to be improving, in particular, that's very bullish for us going forward. But you're seeing in the BC segment, the hit that came from restaurants shutting down, especially in the early part of the quarter. Ozan, anything to add to BC?

No, I mean, actually, you covered all the points. I mean, there is always a gap and lag between our shipments to our distributors and the bottlers and their shipments to the retailers and as Bob said, always and always within a timeframe catches up.

Got it. Now that's helpful, and maybe Ozan just a quick one. You detailed some of the COVID costs for 2Q, anything we should be expecting kind of in the back half of the year that you call out at this point?

Well, I mean, maybe I can use this opportunity to expand a little bit on the FX as well. And as you have heard in our prepared remarks, first of all the costs were excluded from adjusted results are unique and temporary impacts resulting from the crisis. So they are not normal, ongoing cost of business. And this is consistent with our long-term standing treatment of extraordinary and one-time costs. So I mean, these costs are clearly are not only defined as the significant expenses to provide temporary financial incentives to frontline employees, which represented more than 70% of the cost and the balance for the extraordinary measures that we undertook to protect employee health and safety, including obvious enhanced benefits for them and their families. And we also said there were a portion, approximately $12 million of COVID related expenses that we did not add back and we kept in our adjusted results. Therefore, first and foremost, the health and well being safety of our employees come as number one. Therefore, depending on the crisis, and depending on how the pandemic is going to evolve, we will adjust our programs accordingly. Having said that, we also believe quarter two was the highest, in terms of us incurring the COVID expenses. Obviously, time is going to show us what will be the reality, but that's our expectations at this point in time.

Great, thanks very much.

The next question will come from the line of Robert Ottenstein with Evercore ISI.

Hi, this is actually [indiscernible] on for Robert. Thanks for taking my question.

Good morning.

Good Morning. So you mentioned the new product called Don’t Quit!, could you just talk about what gets you excited about that and how does retailer interest look? And how are you thinking about sales and potential?

Yes, so we have just given you a teaser on that today and there will be appropriate press release from them, because we're investing in this business in the next couple of weeks, because it's already teed up to go for sale in August. It's going to be available on - right now it's about 2,500 retail outlets and growing traditional retailers, as you might imagine, as well as ecommerce. What's exciting for us? Big whitespace in our portfolio, protein drinks. We don't want to launch a me too protein drink out there and so this one we think is highly unique. It's targeted to a baby boomer population, which is growing and underserved in this space and we think that all the new entries are going for a much younger population. We saw this as very unique with a very unique person behind it who speaks to that group. Uniquely, the structure is unique in the marketplace, but not for us. It's very similar to the deal that we did with A-Shoc where we put a relatively modest seed investment upfront. We help them with this business, although this business won’t initially go through our DSD network. It will go through warehouse direct and as it proves itself out, we will put it in our DSD network where it's appropriate. And it's got a pre-negotiated path to ownership. So we have the option to buy it at a point in time in the future if we choose at a multiple that makes sense. And so, it's the combination of all of those things that has us excited. And as we said, when we did the A-Shoc deal, we would like to do more of these. We see this as again, part of this ecosystem that we've created. We can create these win-win structures, help entrepreneurs and startup companies get up and running, and buy an option on them for the future and get rewarded for the help that we’re able to provide to make them successful, so more to come on that.

Okay, perfect thank you.

Your next question comes from the line of Kevin Grundy with Jefferies.

Hey, good morning, everyone.

Hey Kevin.

Hey, good morning Bob, and congrats on a great first half year so far.

Thank you.

Yes, so Bob question on M&A, which is going to become an increasingly, I think for investors a bigger part of the story, particularly as we sort of look at to next year. Can you talk a little bit about the M&A philosophy, maybe share some of the governors around areas of interest fully understanding you don't want to front run anything that you're potentially looking at or looking out, we totally get that. But maybe put some governors around where the Board and where you're going to be looking? And maybe even just comment, there's some increasing discussion about another company in the beverage space looking in non-alcohol that is looking in the hard seltzer category. Maybe you can comment on the company's openness to moving outside of non-alcohol as well and that will do it from me? Thanks.

Yes, we look at whitespace in our portfolio, and we could define whitespace very broadly. And again, I don't want to tip our hand in any way on that front. But just like you heard us talk about energy in the past with A-Shoc we just talked about, Don't Quit! in protein, I'm just using those examples, although they're relatively small at this point, that we're very clear as to where we have whitespace in our portfolio. And I think we're very creative in thinking through, how do we access that whitespace in a way, that's a win-win, meaning we don't want to just be a distributor, we've said that multiple times. And so, when you look at the arrangement that we have with Evian, which was a space that we couldn't access on our own, and then you look at the deal that we announced today on Polar which is very significant because it's big category, rapid growth, whitespace, we could try to invent it ourselves. We could try to acquire somebody in that space. But look Polar is a family-owned business. It’s a great brand and it's not for sale. And to be able to sit down with them who we've had a long and successful relationship with and come up with this win-win scenario, says that we can move forward in these spaces without having to necessarily buy something outright and we get all the benefits from it. And then if you take a look at Polar they get the benefits of maintaining ownership of the brand and experiencing now what will be a national brand for them. And with regard to specifically M&A, just a couple more things that we've talked about before that I would emphasize. We are very wary of acquisitions of highly developed businesses or rapidly growing businesses that have reached thresholds that are at very high multiples. We've said this before. We've studied every one of these. We cannot find one that has created value in the industry. It's happened within our own house right? We've talked about it and our Bai, it's good learning for the future. We love the brand, but the multiples don't make sense. And so, we are not going to fall into that trap. And so, we look at the possibility of filling our whitespace through the arrangements that we talked about earlier, which are seed investments, long-term partnerships, franchise agreements. We also look at M&A, but I will tell you what's off the table is going out there and making a very large acquisition a huge multiple because those values always get written down in the future.

Got it, thanks for the color, good luck.

Okay. Thank you.

Your next question comes from the line of Peter Grom with JPMorgan.

Hey, good morning, everyone.

Hi Peter.

Good morning.

So just a couple questions on that sales guidance. So first maybe a bit more of housekeeping, but could you maybe break out what we should expect in terms of the benefits from McAfee, but also burn in the back half? And then second, I know the environment continues to evolve, but as you mentioned Q2 is hopefully going to be the most difficult, but so to the extent that you are willing to share kind of what are the underlying assumptions embedded in the guidance for the back half from an operating standpoint? Do you expect a continued reopening sequentially, is it kind of based on where we are now, just anything around that topic would be helpful? Thanks.

Yes, with regard to McAfee, that was announced in the beginning of the year. So that was always part of our 2020 guidance. And I would say that everything is on track there so no new news. So that's embedded in the guidance. Polar is something that will be up and going, but it's really a benefit towards 2021 rather than 2020. Both McAfee as well as Polar, there are investments that are required in the first six months to a year. So there's almost no profit impact on either of those, and again, we've said that before on McAfee. So I look at those as much more of 2021 impact. And the story that that comes out of that is, we are managing our way through the COVID crisis really well, and holding on the guidance. And we're doing that with what we have in hand, but we're continuing to invest in innovation and new partnerships. And we talked about a lot of innovation today, as well as these new partnerships, which really set us up for continued growth. This is not a short-term phenomena, this is something that we will invest in over the long-term. Your question about back half the year is a really important one, because we're one of the few companies that has provided guidance. And we do not think for a second that we can predict the future better than anyone else. And if you look at the Fed’s comments yesterday and they have better access to the economy than we do in terms of the data, they put a lot of caution out there on the second half. So I think, the important thing for you to take away from this is that we're not operating off of a single point forecast. We tested our second half plans against a number of macro scenarios and despite the fact that we think it's going to be bumpy and volatile, we feel like with that, that testing that we've been able to put out there that we have confidence in our ability to continue to deliver really strong revenue and EPS growth. So it's not just a matter of holding on to guidance, I'd like to point out to people, its guidance for 13% to 15% EPS growth and 3% to 4% revenue growth for the year, in a year that is unprecedented in terms of its challenges. It's because we're working against a range and not a single point.

That's very helpful. Thank you, best of luck.

All right, thank you.

Your next question will come from the line of Vivien Azer with Cowen.

Hi, thank you, good morning.

Good morning.

Good morning.

Good morning. I was hoping if you could expand a little bit on your outlook for Polar in the sparkling water category more broadly? It's certainly been outperforming Stillwater pretty considerably for a couple of years, more than a couple of years now. So, where do you see the share today, where do you see it going forward and are there any international benchmarks that you're using to inform that thinking? Thank you.

Yes I don't – unfortunately in this category, there's not an international benchmark that's very helpful. I think what you're seeing is that people love carbonated soft drinks, I'll put that in the broadest category, people like bubbles, and there are full calorie versions of them. There are low or no calorie versions of them using a variety of sweeteners and then there are unsweetened flavor varieties in there. And we're seeing growth right now across all of them. But the area that's really emerged in recent years and continues to be strong through the crisis has been this unflavored – I mean excuse me, unsweetened flavored sparkling water and I don't see any signs of that slowing down because it's representative of a shift in consumer preferences towards healthier, but also just less flavor, less sweetness in general and we see that in a number of categories. I don't know how high is high, but again, when you're looking at the growth rates, Polar in the past six months grew at like 25%. You're seeing explosive growth and we, as I said before, could have come at this just by an acquisition, we could have come at it by trying to develop our own brand and we thought this was the best way to go. This is the highest velocity brand in the category. They have one challenge, and that is they're only in about a third of the country. We can help them with that challenge. And so, we think taking that brand in partnership with them and making it national is the best way for us to leapfrog in this category and end up in a leadership position. And I would also point out that we've got some other smaller positions in this category, Canada Dry and Schweppes are in there. Canada Dry by the way in the Northeast quarter is a very strong brand in unsweetened flavored sparkling water. But we really are emphasizing Canada Dry in its Ginger Ale credentials. And you see that it has had 13 years of growth, with a lot of innovation behind it. And so, that's always going to be the focus on Canada Dry. We're not going to pivot that to a sparkling water brand. And we made an acquisition last year that we didn't talk a lot about of Limitless, which is more of a functional, sparkling water and I would just say more to come on that one. We haven't really put our game plan in play on that and we'll be happy to share that with you in the future. And we think that like many large and growing categories, the best way to access them is through multiple plays. But be clear, the Polar play is our lead one and we couldn't be more excited to partner with the fastest selling brand in that category.

Thank you.

Our final question will come from the line of Sean King with UBS.

Hi, good morning.

Hi Sean.

A question for you on the, it’s a strong brewer number, is there any kind of color you can provide on the cadence of that through the quarter, like by month? And could that number have actually been higher given the closure of a lot of the traditional retail channels in the quarter?

Yes, very good question. That has been strong and steady with no signs of slowing throughout the quarter. So it's not an issue like we saw in some of the other categories like fountain and foodservice where it was incredibly weak in April, and we saw a recovery by July. This has been strong from the start and persistently strong, we're happy to report. In terms of your point, which is very true, which is a lot of the traditional brick and mortar retailers were impaired. We saw a very significant shift to e-commerce during the quarter. And that's a combination of traditional e-commerce players. The brick and mortar retailers that you refer to some of them did a fantastic job of pivoting to e-com. And then of course, we have Keurig.com and in the case of our e-commerce capabilities, which I would point out again, e-commerce now represents more than 10% of our total company retail sales. We have such strong capabilities there that we were able to step in and actually fulfill shipments for e-commerce retailers who weren't able to catch up with demand. So think about the pressure they were under in the early parts of this crisis. Our brewer sales could have been higher in the early stages if they were able to fulfill. So we actually stepped in, and in a large number of cases fulfilled on their behalf and were able to satisfy the consumer demand that that was there and continues to be there. And the last point I'd make on this is, nobody knew what Mother's Day was going to be like, it's one of those classic holidays and where we think do we play in this one. We had a very strong Mother's Day. It was an e-commerce shift. People shifted towards things that they could get through e-com and also that were predictable, reliable, they knew that they were safe in terms of people would like them. And also there was a real shift towards more functional gifting. I think you're going to see the same thing at Christmas. Whenever there's a situation like this and people are also feeling financial stress, they tend to move away from gifting that's more extravagant to that which is more known and functional and the fact that we're going to be out there with a full lineup of brewer, our best lineup we ever had and some really good innovation on top of it, is the reason why I said in my comments that retail or receptivity around our innovation pipeline and total lineup for Q3, Q4 has been remarkably strong.

Great, thanks of the color. Best of luck.

All right, thank you.

I'll now turn the call back over to management.

Thank you very much. This is Steve. They are teams around all day. If you have any questions, please reach out to us and we'll follow up with you. Thanks so much for joining today.

Ladies and gentlemen, that will conclude today's call. Thank you all for joining in. You may now disconnect.