Keurig Dr Pepper Inc. (KDP) Earnings Call Transcript & Summary

Good afternoon, and good evening, everyone. I'm Steve Powers, Deutsche Bank's Lead U.S. Consumer Packaged Goods Analyst. And to close this year's conference, I'm thrilled to introduce and welcome Keurig Dr Pepper to the event. Still a young company in its current form, but one with well-established roots that has already proven itself to be able to deliver consistently to ambitious objectives, and as I think the current moment demonstrates a company that has built a broad portfolio that's well suited to a diverse array of operating environments. Joining us today from Keurig Dr Pepper are Chairman and CEO, Bob Gamgort; CFO, Ozan Dokmecioglu; and Vice President of Investor Relations, Tyson Seely. Welcome to the conference guys. Many thanks for being here. In terms of format, we're going to run today's session entirely as Q&A. So if you're listening via the conference portal, please feel free to submit questions of your own at the bottom left of your screen, and I'll do my best to work them in as we go. But before we begin, let me just turn it over to Bob to set the stage with some opening comments.

Steve, thank you. Thank you for hosting us today, and welcome to everyone who is joining. I'll pick up on your comments saying, we are a young company. I agree. We're just about 2 years old coming up in July, but we have a very experienced management team in the industry, both directly in beverage as well as consumer products. And in the past 2 years, it has been quite eventful. So we have been tested, and I feel like we have passed the test nicely. So I know we're going to talk about what's happened in the current crisis over the past 3 months, and we have certainly learned a lot over the past 12 weeks. But I also want to step back and talk about KDP over the longer-term because a focus just on the short term is a disservice to the broader story because the reality is we performed well before the crisis, we're performing well during the crisis, and we believe we will continue to perform well in whatever this new future looks like. So in the past 2 years, we integrated 2 companies. We've been very much aligned on all of our financial targets that we communicated way back in January of '18. Our EPS growth on an annual basis has been about 20%. Our underlying net sales over that same time period has been about 3% per year. Cash flow is a big part of our story. We've generated $3.8 billion from cash flow that we've been able to take our leverage down from 6x to 4.2x. We paid down $2.3 billion of bank debt in doing so. And we've done really well in the marketplace, backed up by really solid execution at retail, good marketing, great innovation. And we've gained share in the majority of our categories in which we compete. And on the coffee side, we've taken household penetration up very significantly. So that happened before COVID hit and it continues. And let me just take a moment before I open up to your questions as how do we think about what's happened in the past 12 weeks. We've said all along, and we've had a number of points of contact with investors that we don't view this as a windfall. We are not a pandemic stock. We would have preferred the status quo that we saw in January to continue. But we've seized the moment to execute really well and leverage the portfolio that we have to perform well. And we took a number of steps to do that. But most importantly, the management team formed the crisis team chaired by me, and we began moving very, very quickly to pivot across what we call a big mix management exercise, leveraging our portfolio and our channels to be able to drive good performance. So I'm sure you'll have more questions to come on that very point, but let me turn it back over to you.

That's great. I think it's probably safe to say we've got some investors on the call today or listening in via webcast that may be relatively new to the KDP story or vice versa. Maybe just building on what you just said, maybe you can just rewind the clock back those 2 years, and talk a little bit about the industrial logic behind the merger strategy. And then Ozan, maybe you could remind us of some of the financial objectives that you set for yourself at the outset, those 3-year objectives and where we stand today. But maybe we'll start with Bob on just on the industrial logic.

Okay. If you go back to 2018, we announced the merger in January of 2018. We brought together Keurig Green Mountain, which was the leading single-serve coffee system in North America with the Dr Pepper Snapple Group, which is the #3 nonalcoholic beverage company. And we brought that together as a unified company that we called the new challenger in the beverage industry. And one of many of our unique elements is that we were the first company to combine hot and cold beverages at scale. When you peel it back to the next level, where it gets very interesting is a combination of a very broad portfolio of brands, the majority of them leading in their segments, to satisfy a wide range of consumer needs in beverages. And you match that up with this complementary distribution system when you put Keurig Green Mountain and DPS together, that's very unique. And we always talk about there are 7 different ways that we go to market. And it's a combination of those 2 that enabled us to perform well, as I said before. And we're leveraging now to do well under the crisis. And that's because I think we have a couple of elements. One is we have diversification because diversification is good in a changing environment. We're playing that out right now. But I think we have really smart and targeted diversification because we have a wide range of channel and portfolio representation, but it's all within the world of beverages. We have 7 different ways in which we go to market. I won't go through all of them, but it ranges from direct store delivery, to warehouse delivery, all the way to e-commerce, which was a Keurig heritage. And obviously, the direct store delivery and the e-commerce elements right now are serving us really well. As I said before, it's more than just having a wide range of brands, you have to have strong brands that can be supported by marketing, and we have that. And then what's really building right now and proving itself is the strength of the team and the culture that we're building, where we have said from the beginning that speed is our competitive advantage, and that is playing out right now. And then it's backed with a really strong financial strategy and discipline. And Ozan, I'll let you pick up the story from there.

Exactly. Thanks, Bob, and hello, Steve and everyone. As you would remember, at the onset of our merger announcement, which goes back to early 2018. So we have announced publicly 3 very important metrics on the financial delivery. We said top line would be 2% to 3%, and earnings per share growth over 3 years starting from 2019 through 2021 would be also 15% to 17% as well as our deleveraging targets. We started more of it, as Bob said a couple of minutes ago, at 6x, which is the -- we call it as management multiple on the balance sheet leverage side. And we announced and said, we will be at 3x and lower following 3 years into our merger. And when you look to these, let's say, targets where we are at, I'm not going to go into all the granular details because we shared all the details during our past calls, Steve, previously. At the top line, we are doing pretty well. EPS, we are delivering exactly what we said we would. And on the deleveraging path, as Bob said, our quarter 1 2020 financials also came in at 4.2x, which is all the way down from 6x. That puts us very nicely to deliver our target being at 3x following the merger 3 years into it. So overall, financial targets are all intact, and we are delivering very nicely against that. Back to you, Steve?

Yes. No. I mean as you said, you were delivering very nicely into this and have continued to do so, as I think consumption data shows is that -- I think your first quarter shows. But Bob, you had mentioned at the opening about learning a lot these past 12 weeks. When you step back and just look at what you've seen in the marketplace, what you've seen your organization be able to deliver, how would you -- how do you summarize those learnings? And what does it tell you about where KDP can go? And does it open up new opportunities and make you challenge some of your own aspirations, either in a positive or maybe in a challenging way?

Let me take a minute just again, since you've got a broader global audience. Let me just give a really quick recap as to what's happened in the beverage market in the U.S. since COVID hit, and then I'll get into the specific question that you asked. Like many places, we saw initial pantry load in March. It was followed by destocking in April. We're now settling in at a consumption trend that is well elevated. And I'm talking about total liquid refreshment beverages running about plus 8% in the latest 4 weeks, covering all of May. So that's an elevated growth that seems to be continuing. When you peel that back, you see very different trends by segment and by channel. Carbonated soft drink, juices, juice drinks, mixers, for example, are all doing really well. You see weakness in areas like premium water, energy and sports drink, which tend to be more convenience store centric. Well, that's what's happening on the channel side. Growth in large outlets are doing well, e-commerce is exploding. But as I said before, convenience stores and anything that's away from home or on-premise has been really far down. On the coffee side of the business, we saw a very big growth increase since the very beginning. It's driven by 2 things: new people coming into the Keurig system. I think the work-from-home mindset caused people to outfit their homes, and we did well in that. And then also, we saw immediate consumption per machine increasing. And so in the latest 4 weeks, for example, in May, we're up -- the category's up about 16%. So there are lots of pluses and minuses in that. And I don't want to minimize the fact that when an away-from-home coffee business is down dramatically or a fountain and foodservice business, which services restaurants is down dramatically, it creates a big hole in revenue and profitability that need to be filled by really pushing the other segments that are growing even harder. And that's the key learning for us out of this is that we can't land on a single point forecast. We have to talk about ranges, and we have to be flexible because the knowledge -- with the knowledge that the consumer is going to change, and the trends in channels are going to change. And the minute you land on a forecast and begin to like it, you have to recognize it's going to change again. And so the ability to do that comes from 2 things that we've implemented. One is we realized the data sources that we were using were almost useless in this environment because they have a lag to -- a 3-week or 4-week lag to them. You can't run a business like that in a changing environment. So one of the first steps that we took was to figure out how to pull together all of the different data sources we had or could acquire to get almost real-time data on what was happening in the marketplace. And we matched that up in the early stages with literally daily management team meeting chaired by me and daily S&OP meetings. We now do it more frequently than we ever did in the past, but we're no longer doing it on a daily basis. And we were making real-time decisions to say demand is shifting, what's our available capacity, both in supply chain as well as delivery, and how do we pivot to win. And as I said right upfront, this is a giant mix management exercise. And the reason we're doing well is because we've executed that mix management exercise well. Not because we have an inherent portfolio but it's just winning because the trends have moved in our favor because those segments have had to offset trends in our favor that -- or trends that were going against us. So net, if you look at our portfolio, as you can hear about the conversation, interestingly, it has a number of natural hedges built into it. And it's just a matter of managing all of those that is the key to success.

Yes. And you guys have always -- also you've been very clear-eyed in your -- on your expenses and your line of sight, the synergies and savings in general. As you think about what you've been through, what you're going through now, I guess, either of you can weigh on this, has it opened your eyes to maybe new sources of savings and efficiencies that maybe you didn't see 6 months ago? And on the flip side, are there new costs that you also now see that might serve at least as a partial offset? How do you think about that?

Okay. Ozan, do you want to cover that one?

Absolutely. Steve, you are absolutely right. But also, as Bob was explaining because of the integration, putting the 2 legacy companies together, we developed an unbelievably detailed visibility to our cost structure, which we are seeing huge benefits as we speak. Obviously, knowing what we have in greater details provided us amending levels in terms of pooling and reacting in a very quick manner and seeing the impacts right away in terms of managing our cost base. So all the imaginable details were known to us. And the second point, as you said, we were nicely delivering against our earlier days productivity targets or the merger synergies, which was nothing new to us. And obviously, COVID-19 environment created a different working environment that requires to do some pull and push, which is pulling some of the initiatives that we were planning to execute in the earlier months or years, for example, and doing the vice versa of pushing some of the initiatives that we were planning to implement this year because of the working environment that made it impossible for us either to execute or new priorities popped up. But the name of the game, having a great handle by us in terms of all of our cost structure, and this includes all the cost of goods sold as well as the discretionary overheads that we had. And as you know, as a natural consequence of the COVID-19 working environment, some of the overhead expenses were already down. Example -- entertainment and travel, for example. But because of the visibility that we have developed in the past 2 years, in fact, if we want to lean on to reduce our cost profile further, we know how to do it, and we have the resources, which tells exactly what you said, we are very adaptive and flexible in terms of switch and continue on our journey, delivering against our synergy targets as well as base productivities. So we feel very good about it.

Yes. And I think some of what you just said leads me to another question about -- on the outside, we often talk about your business in terms of legacy Dr Pepper Snapple, legacy Keurig Green Mountain. And I guess the question to you is how much of that still pervades how you guys think about the business internally versus now this being -- as you flex this mix management exercise, Bob, a holistic company. I know you've integrated the selling organization. You've integrated the warehouse direct business. E-commerce, you talked about as a platform that you've spread from legacy Keurig Green Mountain more broadly. So is this now taking shape internally more as a holistic KDP? Or is there still an element that we're working through of the 2 legacy businesses?

I think there's 1 element of our business that is distinctive, which is our designing, sourcing and selling of brewers. Actually, I take selling back because we actually use the same sales organization to do that. Because that's a unique element as I talked about. We produce -- we have a huge consumables business, hot and cold. And then we're in this very unique position where we manage a system where we sell you the appliance to drive the consumables. With the exception of that entity, which is again part of the management team, it's part of the financial planning process, still driven by the procurement group, et cetera, everything else is much more integrated and harmonized than I think the external world appreciates. And it starts with a common set of consumer insights across beverage. As you point out, it's a combined selling organization that can speak now with cloud at the highest levels of retailers with a full category perspective, it's a fully integrated supply chain, procurement all the way through to delivery. Now there are elements of it that are different. We're not putting pods on DSD trucks, but that's only one part of the way we go to market. And every day, we talk less and less internally, in fact, very little about legacy KGM or legacy DPS. And I've had the benefit of working on more than a dozen mergers and integrations. And we have done this one really well so far, and we're staying very focused on making sure that it's not just a combination of companies to drive synergies, but to create a really unique business and a really special culture on top of it, and we're well on our way to doing that.

Great. And I want to get into some of the specific businesses. But I guess just to wrap up this concept of mix management. As you look at what's going on, think about the future, I mean, your best, I guess, sort of educated guess at this point, how are you anticipating that mix management exercise taking shape as we approach -- as we migrate towards some kind of new normal? What are the variables you're most focused on? And how are you allocating resources in anticipating what might come?

On the first quarter call, we talked about -- we said it was like a chessboard. I don't know I used a different term, but it was like a chessboard. And I said think about 1 axis, 1 axis is the retail channels and the other is our portfolio and segment. And that those numbers -- those intersections are what we're managing, how well is -- are carbonated soft drinks doing in this particular channel. Not to make the answer too complicated. But even within carbonated soft drink, TAMs are growing and 20-ounce plastic bottles are not right now. So you going to have to manage it down to the pack size and SKU level. That is the game board that we're looking at on a constant basis. And -- but I said picking up data that allows us to see the changes in trends faster and having the management protocols and disciplines and pace to make the changes across the enterprise fast to respond to those. That's how we're going to continue to succeed. And the reason I answer it that way is, I don't think I can predict the future better than anyone else. We don't think we could predict the future better than anyone else. And every time we land on a single-point forecast, we've seen that we could be wrong, both to the positive and to the negative. So what we talk about is managing across a range of outcomes with a number of contingencies, if this happens, what would we do? If return to office happened faster, what will we do? And so we've mapped out numerous scenarios but haven't locked in on any one of them. And what gives us the advantage to use that management discipline I talked about is a really broad portfolio that covers a wide range of needs and a really broad route to market system that allows us to play that effectively, but you got to manage it actively is the point I keep coming back to. And that leads me to the point like we believe there's going to be a recession, almost certainly. We think the trends that I described that would describe March, April and May are moderating. People are coming back to the restaurant. People will come back to the office. So there's that kind of real high-level thing that we could all guess that, but what happens if there's a second wave? So that's why we don't get too locked in on any of these and think that this was a storm that blew through and it's behind us. Now we're recovering. We're very wary of what else can happen in the future.

Yes. And how -- what is your assessment of how the business will perform in a recession? I mean I think there's more history on the cold side of the business, the legacy Dr Pepper business. But the Keurig business, it's been around for over a decade, but it's also much more developed than it was then. How are you preparing the overall portfolio for, as you say, a recession that is likely going to come?

Yes. So I'll start with the cold side of the portfolio because as you point out, there's a longer history. As you know, anything that has a high degree of in-home consumption does well in a recession. We know that CSDs and juices and ready-to-drink tea, et cetera, applesauce, those all do very well in a recessionary environment. You might have to get sharper on promotions, and you have to think about different pack sizes, but that's really getting detailed on that one. From a fountain and foodservice perspective, our on-premise business, we tend to skew towards QSRs, quick-serve restaurants, and they tend to do very well in a recession. And we talked about it before, but again, it's worth repeating for this audience. Dr Pepper is the most available carbonated soft drink in QSRs, which is a surprising fact to people. It's not the largest, but it's the most available. And so that piece of it -- it's, again, you have a lot of levers to pull to manage your way through a recession, depending on how long is it and how deep is it. Hot side of the business, you're right, is less -- has less history, and you could argue is less tested, but it's very well established right now. If you think about the approximately 1/4 of American households being in that level where you're really embedded. We know that in recessionary times, people move from away from home to in-home. So coffee shops into home will be a benefit for us. And if you think about the work that we've done on the Keurig system, we now have brewers that are as low as $50 at a very high-quality, all the way up to $200. And we have consistently and intentionally lowered our price of pods, even though as you know, every quarterly earnings call, we get a question about when will the pricing decline stop, and our answer is always -- but we're doing it on purpose, and we have it covered by productivity, as you can see in our margin. That's going to serve us well in any recession because in the recent history, where it was $0.50, $0.75 early, early days approaching $1 per pod, you can get a high-quality pod in the $0.30s. You can get a mid-price pod easily in the $0.50s or even at the low end of that, and premium is now in the $0.60 to $0.70. That is no longer the huge premium or a premium, especially the low end that it once was, especially given the benefits that consumers get from the system. So I think we prepared ourselves well to weather through any recessionary storm. And those are some of the many things we would do.

Right. And let's talk about those 2 businesses sort of the DSD-focused business and the coffee business in order in a bit more detail. The DSD business, it's been -- the trends have been -- I mean, clearly, there's an away-from-home headwinds and on-premise headwind. But the business as it relates to channels that are open and functioning, where consumers are shopping, it's been exceptionally strong based on results that we -- what you've reported and based on the consumption that we all see. I guess, your view as to why you're effectively winning, at least from a share perspective in this environment? And then how do you think about the longer-term potential of that DSD business as a whole? Why was that so attractive back when you brought on Dr Pepper as a strategic acquisition? What is the potential of that from a profit growth standpoint going forward?

Yes. So the DSD system, just to describe it real quickly to everybody. Our DSD system allows us to reach 75% of the U.S. with our company-owned equipment and employee -- and company employees. And the remaining 25% approximately is handled by long-term relationships with independent distributors. The combination of the 2 allows us to reach 100% of the U.S. population cold single-bottle, single-can merchandising format, which is really powerful. They're only -- what attracted us to it at the time of the merger was the fact that we were getting -- we'd be able to get access to 1 of the 3 systems of scale in the country that could do what I just described. So there's a scarcity value on that. But we also said that we didn't plan to just buy it and hold it. We've planned to invest in it and improve it. And that's exactly what's happening right now is you're seeing a combination in the marketplace of the management discipline and protocols that I talked about before and our ability to move quickly between demand and supply and delivery on a real-time basis. But you're also seeing in these numbers just the fundamental improvements that we've been making in our DSD system through investments in technology and people and process. So it's a combination of those 2 is working right now. And I think it's hard to predict the future, but we're very pleased with the performance we've seen in the past 3 months. And we're pleased with the trajectory that we're on, both from a performance and a cost standpoint. We don't feel like we're anywhere near finished on that. We felt like we're really in the early days of this performance improvement when the crisis hit. So it's been a really interesting space for us.

And as you parse that, the recent successes, have you been able to demonstrate that you can leverage the improvements that you've put in place in your own company-controlled territories and also essentially export those learnings and best practices to your partners such that the whole system's -- you're kind of uplifting equally? Or is it skewed to where you have control? Or how is that laying out?

It's an excellent question. So our performance goes well beyond just where our company DSD is. And again, that comes from a number of things, including strength of our portfolio. If our brands are strong, Dr Pepper is very strong, it will perform across all systems in which there's distribution, assuming that there's reasonable execution. But we've been working hard over the past 2 years to really build the relationships with our independent distributors, sharing a lot more of what we're doing, building trust. And anything that we think that is in our DSD system that would benefit one of our independent distributors, we're not shy to share that with them or offer them those resources. So again, I think we've built a lot of trust, and I think we're in the stage now of rolling that out. But again, very -- in the very early stages of that, but they are absolutely critical to our success.

Great. The other thing that has been an ongoing topic with your DSD businesses is the concept of the Allied Brands and leveraging that system to grow brands that may today be under-scaled, but tomorrow could be the promising brands of the future. You guys have approached that with a different kind of exciting framework relative to how DPS in the past managed that business. It used to be, in my view, sort of a way to fill capacity that was basically excess, whereas you guys have pivoted and said, no, this is a strategic lever of growth. We can take this third system in the country and offer it up to promising entrepreneurs and be able to capture that growth. The sample size is still small, but there's been some mixed successes on that. Is your confidence -- as you now run this for a couple of years, is your confidence the same? Is it greater? Has it raised questions? What's been the experience?

Yes. So the Allied Brand model that you described that the DPS team ramped proved the strength of its system because there are a large number, as you know, well-established brands that are out there, that are successful, that were born in the DPS system. The problem is a very large number of those brands are in somebody else's system right now. And so that is the challenge of that strategy and the structure that they created, which is they didn't get rewarded enough for the sweat that they put in to build these brands. And so our point of view is we're open for business. If we've got white space in our portfolio, we want to partner with entrepreneurs. And we will work our tails off to make their brand successful, but we want to be rewarded for that. We want to be credited for the value that we create. And so what we've said is, if you want to come into our system at an early stage and we build -- mutually build a great success, we want a prenegotiated path to exit for you. We don't want to be in a situation where we've been wildly successful, built the brand and then have somebody else come in and pay a much higher price than that. And that's the difference. To your point, it's very early. Remember, in the first year of our merger, we had to clean up the existing Allied Brands portfolios. We bought some brands, some left, some came in, and we needed to stabilize all of that for about a year. It's actually a little more than that to get that up and going or having to get evian ramped back up in our system again. And we felt like we were in a really good place. And now, we brought in our first of these experiments, if you want to call it that, is A Shoc, which is the energy drink partnership with Lance Collins. Hard to read where we are with that one because that was just scaling up when COVID hit. As I mentioned before, energy has been a challenged segment. So we don't really know, although we're getting good distribution. You wouldn't want to read anything off of that. So I would say we're going to stay disciplined to our strategy because, Steve, from our standpoint, we'd rather build our system off of a level of volume that is predictable rather than go out rent some volume, bring it in, build somebody's business and then have to pay a disproportionate price. And then I guess my last point because I'm leading to it is we've shown this in the past. We've studied the major beverage acquisitions, those that are a high multiple of sales. And I'll just mention one that's in our system, right. Bai was one of those. I won't mention anybody else's. And we couldn't find one that ever created value. And so from day 1, we said that's just a game we're not going to play, and we're not going to put ourselves in a position where we are forced to pay that kind of multiple. We'll pay a fair multiple, but we want to be rewarded for the brand value that we create. So time will tell how that strategy plays out. But in our opinion, that's a far better strategy than going out and paying out a very high multiple.

Yes. Perfect. Let's -- if we pivot over to the coffee side of the business. Yes, almost a similar dynamic in the near term, where you've got the away-from-home part of that business, that's clearly having headwinds. But the at-home business is on fire. I think one of the most exciting parts of that is just what I perceive to be not just accelerated consumption, where there are already brewers in households, but also incremental household penetration activity. Can you talk about the movement you're seeing on that in the current environment? And then what's the longer-term vision -- for folks who haven't heard you articulate, what's the vision of the penetration opportunity over time?

Yes. So as I said, we're just under 25% household penetration, right? It's the number we talked about. And we've said we will talk about that at the end of the year. So I'm just pulling the number that we talked about at the end of last year on our earnings call. And we said we would update that on an annual basis. But we believe that there's upside to be well north of that. And there's an Investor Day presentation that's March of 2018 that really shows the significant amount of upside that we have on household penetration. It describes not only the absolute number, but the target of people -- opportunistic target of people who should be coming into the system. Then we even took a step further and we described what were the barriers to those people coming in. And what you've seen since then is that our innovation pipeline and our marketing efforts have been very targeted against the right individuals solving those barriers to come into the system. And so we've seen a really steady, but high level of growth in household penetration. It's too early to tell, and it wouldn't be appropriate for me to talk about it on this call because it would kind of violate how we've talked about these things in the past. But if you look at, for example, NPD data or some other publicly available data, you're seeing a lot of interest in brewers in total as people have outfitted their home and also in Keurig brewers specifically. And so the difference, as you said, the category is way up, it's a combination of household penetration growth and what we call attachment rate, which is usage per machine. And I would remind people that we have a 10,000 roughly household panel where we get real-time consumption on Keurig brewers. And we could actually see hour by hour as people were told to work from home, we could see their coffee consumption going up in their homes. And we know when they return to work as that number will come down. But we also have a sense that it will land at a slightly, if not meaningfully higher number because people have kind of rediscovered their machine. But the people who've come in for the first time, the good news about them is they stick for a very, very long time. The dropout rate once somebody comes into the system is very low. So we'll give more detail on that. You'll see it in our Q2 earnings, which will be coming up. And then at the end of the year, we'll provide an update to our household penetration number. But the macro trends are certainly in our favor right now.

Yes. And you had mentioned the pricing discussion that often comes with this business. And I guess the -- I think you've done a good job articulating as to why you pursued that strategy and the benefits that it's had. The question that I think lingers for longer-term investors is, does that -- does the need to hit specific price points today while it's good, does it communicate a lack of longer-term pricing power? Right now, it's doing benefits and coffee costs are favorable. But over time, is there some inherent ceiling on pod pricing that will inhibit longer-term growth? And how do you respond to that?

Sure. And we have talked about it that way, and I'll reference it back all the way to that same investor deck that has a lot of detail on this. We talked about pricing over time. We said it would decline for a period of time because we were driving the decline. And then we said, over time, we expect it would moderate. We actually are seeing moderation before the crisis. Now during the crisis, you're actually seeing prices go up. And the reason is because when you're selling at this rate and you can tell that you're having trouble with keeping in stocks, they want fewer promotions. That's the real reason why that's happening And you're also seeing something that's very interesting was as people trade from away from home to in-home, the growth in premium pods is higher. So they're trading their coffee shop purchase to in-home, they want that brand. And they're willing to pay slightly more for it because it's still a great value versus what they've been able to get. So there's a lot of interesting dynamics happening on the pricing point. My comments really are focused on the fact that we have long-term agreements with our partners. And when we signed the agreement with Nestlé, which we announced earlier in the year for the Starbucks brand, we said that we have now have all of our branded partnerships locked up for a very long time. Those partnerships contractually have agreements on what our pricing are. So whatever the pricing is going to be, which I'm not projecting for anybody right now, the thing you have to know is, we know what it is. And that's for the majority of our business. And the reason we had confidence in doing what we did, which was a pretty bold move, was because when we did that household penetration analysis and the barrier work that I described earlier, when we took the company private, by far, the #1 barrier was the price of pods. And when we took a look around the world at what are Nespresso pods in Europe, what are Senseo pads in Europe look like, we realized that we weren't at equilibrium or even close to equilibrium. And so we had a strategic choice to try to protect the pricing that was in place at that time, which would limit our household penetration or drive massive productivity and efficiency through investment and lower the price. And we chose to latter route. But I know it's challenging for somebody on the outside trying to build an external financial model when they see a negative number on pricing. There are just not used to seeing that. But as I always point out, look at the volume growth, look at now the revenue growth, which we hadn't seen until recently, and then also really importantly, look at the margin expansion because it tells you we have great visibility on what we're doing here.

Now you have -- and Ozan has spoken to this at the top, you've given some pretty clear financial objectives to the market and set for yourselves as to what you want to deliver through '21. For investors who are coming to the story now and they're trying to think about the 3-year horizon from today as opposed to from the starting point, how do you advise them to think about it? Because I think that a lot of what we talked about today paints a picture of what the -- where the top line can go and where -- what the addressable market opportunity is. But from a productivity standpoint, when synergies reach their conclusion at the end of '21, assuming the current schedule holds, what are the levers of top line leverage and profit growth? And how should longer-term investors think about that looking out longer term?

Ozan, do you want to pick up the first part of that, and I'll come and talk about beyond 2021? Or you can cover that as well?

Yes, absolutely. However you want. Absolutely. So let me start then. So Steve, I mean, first of all, as we discussed many times, right, it's great to reiterate again, we remain on track for our 2020 and 2021 financial targets to deliver despite the pandemic COVID-19 working environment due to several reasons, as we have been discussing now, due to the, I mean, several economic uncertainties. So we have been delivering since the merger, and we have another 18 months to go on our targets. We should not forget that. So if I want to make a quick summary, strong top line growth, with the 2020 outlook ahead of the target that we put for ourselves 2% to 3%, that we announced in greater detail during our quarter 1 call as well as the year-end call that we announced 2019 results. Our earnings per share growth, intact -- stays intact despite the pandemic-driven economic conditions. We delivered the first wave of synergies with the remainder to come through the end 2021. And as we discussed many times, when we say synergies, we should not also forget the strong base productivity programs that we had, and we have been implementing very successfully against that. That is nothing to do with the synergies, and we see them to continue for the foreseeable future. We didn't discuss, but I think it's very important to note that we generated free cash flow of $3.8 billion since the merger. And as we announced, when we look to the cash flow, strong cash flow generation, clearly it's best-in-class. For example, at the end of 2019, our conversion ratio of net income to free cash flow was in excess of 140%. And the same metrics at the end of quarter 1, 2020, was in excess of 115%, which clearly demonstrates our ability to generate strong and high levels of free cash flow, and we expect this strong delivery to continue. And with that, we are also continuing to deleveraging our balance sheet as a critical part of our value creation. As we said, we started approximately 6x. And at the end of Q1 2020, we were at 4.2x, which puts us nicely on the trajectory that we put out there to be at 3x following 3 years into the merger. Bob, do you like to top it off?

Yes. And I think if you think about -- everything you said is perfect and takes us through the end of '21, which is still 18 months away. So to have that line of sight towards those kind of returns for another 18 months is unique. And then beyond that, if you think about where we go, our leverage will be below 3x, it gives us a lot of optionality. The significant CapEx investments that we have been and are making right now will pay off in return, but also will slow down in terms of cash flow needs. And then we still have considerable white space in our portfolio with a number of different ways to get there. So I think we have clearly an interesting play for the next 18 months and a very interesting play beyond that. And that's -- as we move forward, that's an area we'll be talking about more and more.

Perfect. Now there was news today. Your largest shareholder announced its intent to distribute about 143 million shares, about 10% of the current shares outstanding. Maybe just some comments on that as an effort to increase liquidity in the stock. And just -- you've got some other strategic investors in terms of Mondelez, et cetera. So maybe just some comments on that for those who aren't as close to it.

So we've talked about our JAB you're referring to, and their intent to work with us, and it was actually at our request to increase our public float. And so we've been -- in a very organized fashion, we've worked with them to sell some shares to put float out there. And we're sitting in about 24% public float. And the stock trades much better when the float is higher than it was when it was very restricted. It's actually very interesting. If you pull it apart and say, of the public float, how much is held by the top 10 shareholders and how much of -- how many of them are net buyers. You can see that our effective trading float was too small. So that's been really effective. This is something that's really different today. What this is, is we always talk about JAB and their partners. Well, now we're talking about their partners because we always -- everything always is a headline of JAB. What is happening is the partners that are part of this deal are receiving a distribution of shares. So this is not new equity. They're not selling shares right now. They're receiving some of the equity that they own right now in the holding company in the form of shares. And those shares, as you said, are about 10% of total public float, 50% of them are locked up for 6 months and then the other 50% are locked up for a year. And at that point, they're fully tradable if those partners choose to trade them. And so there's no immediate impact on the effective float in the marketplace. The first, there would be any impact would be 6 months from now, if they decided to do that. And the way I describe this is, this is very common within the world of private investing. So these are players who go -- whose investment go all the way back to the take-private of KGM. And so giving them the option for some liquidity, 5 years into their investment, is very typical. And so all 3 of the minority partners that are in the press release today have been with KGM and now KDP since 2015. So this is pretty normal stuff. You asked about Mondelez. Mondelez was not involved in this at all. And they're -- honestly, they -- we don't have any indication of what their intentions are. That's something that they would be willing to share with you, but they don't talk to us about. But hopefully, that clarifies what the event was today. It was very interesting because one of the first headlines that went out there was the JAB is selling 10% of the company, which couldn't be further from the truth. So it's nice to have an opportunity to clarify exactly what this is. But actually, if you read the press release, it's pretty clear within there.

Yes. Okay. Perfect. We're at the end of our time, but I want to close, just in terms of getting a sense for the biggest success factors for you. Clearly, we know what the objectives are for you financially, the outputs, so to speak. But I guess in terms of inputs, what -- how do you want to deliver those results? What are the -- what is -- you assess -- when you look back 6 to 9 months from now on what transpires from here to there, what do you want to be able to say to investors you were able to achieve?

Okay. On the coffee business piece, household penetration is always the most important driver of success in the long term. And we've mentioned before that there is not always a correlation, especially quarter-to-quarter between brewer sales and household penetration. I won't go into that long conversation, but it's really household penetration that is the key indicator of success in the coffee systems. On the cold business, market share performance within our categories. Yes, it's great -- the categories are growing faster like they are now, but we don't always control that. But we do have a strong influence over our market share performance, and I always think of that as a really important metric. What -- how we're getting those results is something that you should all look at, which is the quality of innovation on consumables and on brewers and the quality and the investment in marketing that we're making behind those over the long term. There's going to be fluctuations time to time on that, but that's an important quality driver of results over time. And then the last one is where I started somewhere in an earlier question you had is, we don't expect the environment going forward to be stable and predictable and return back to the way it was. And I've said internally to organization, I don't think January of '21 is going to look a lot like January of '20. And so those are -- the metrics I just gave you are really the core metrics, but the real driver of success will be doing what I just described in a way that's flexible and nimble, and we're not wed to any one path and that we're willing to shift course if we see the environment change. That's ultimately the only way to succeed in an environment like this.

Excellent. We have to leave it there, but it's a good note to end on. On behalf of Deutsche Bank and all of the investors who attended the conference and are listening today, thank you, Bob; thank you, Ozan; thank you, Tyson, for joining us. Thank you, Dr. -- I mean Keurig Dr Pepper. Be well, everybody, and stay safe. Thank you.

Thank you.