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

Good afternoon, and hello, everyone. Thank you for joining us today, whether you're here in person in New York City or participating over webcast. We are so excited to share with you our vision for and confidence in KDP's future. Since its formation, KDP -- hang on. Since its formation, KDP has been challenging the status quo in beverages. And our leadership team is here with us today to talk about how we plan to continue to build on that successful track record. Let me take a minute to acknowledge our teams in Frisco, in Burlington, in Mexico City and Montreal as well as out in the field. These sorts of events are large and cross-functional lifts and we couldn't have done it without the support of our colleagues and the bright minds at KDP. So to all of those -- to those of you who are here and on webcast, thank you. With that, let me make sure that you can get online and also ask you to silence your devices, please. And in recognition of the forward-looking statements that we're about to make, please review this slide. And as a reminder, we will be referencing non-GAAP financial statements throughout. Let me give you a sense of how our time together will go. After a short video, Bob will come up on stage and start us off with introductory remarks. That kicks off the presentation, which is going to last about 90 minutes. After that, Tim will talk through strategy and targeted outcomes, Sudhanshu will talk about financial outlook and then Bob comes back up, final remarks, and you get a break. During that break, that's your opportunity to enjoy our products and also interact with our colleagues. And then we'll reconvene for executive Q&A with a plan to end the event and the webcast by 3:30 p.m. Eastern. With that, we hope this is a productive and insightful session for you, and let's get started. [Presentation]

Everyone, great to see people here, familiar faces. And thanks to everyone who's joining on the webcast today. I think we've got a great presentation to take you through. It's nice to be able to take some time away from our normal quarterly earnings to get in-depth into our business, the strategy, the forward-looking philosophy that we have. And very importantly, we want you to meet Tim Cofer, who will be taking over as CEO in the next quarter, and also get to spend some more time with Sudhanshu, who you've gotten the chance to know over the past year or so. But to hear more from him, I think, is very, very important. So you'll hear the majority of the presentation very intentionally from them today. But I thought it would be helpful, given my experience with the business -- I always say I have 3 roles. I'm an employee, as a CEO; I'm a Board member, as a Chairman; but I'm also an investor, a big investor in this company. I thought what I would do is share a perspective with you primarily in my role as an investor and how I think about KDP going forward. So I'll keep it simple with 4 thoughts that I would share with you before we get into the presentation. Over the past 5 years since the formation of KDP, we have faced a series of once-in-a-lifetime events. I hope they're once-in-a-lifetime events. And also, we've had lots of conversation about different parts of our portfolio. Some are outperforming. Some are underperforming. But the reality is when you take a look at it, since its formation, the KDP model has delivered in a superior way. And I'll show you the numbers, and I'll compare them to our benchmarks. The second part of it is, it's also been quite a journey from a private company to a closely held company to a widely held company. And you saw a transaction just in the recent weeks that was significant. And I'm going to share with you some statistics around that, but I think most importantly is if we just look forward, we're in a really good position from a stability standpoint. We'll talk specifically about that. Having Tim join our team and Sudhanshu come on board about a year ago, it's great to have a fresh set of eyes who really understand CPG, to take a look at what's worked in the company and what can be improved and also to take a look at the strategy that we have in place and decide what to keep, what to change and what to leave behind. And what you'll see today is an articulation, I think a very clear articulation, of an evolved strategy that will guide us internally so that the entire organization is aligned around that strategy. But also gives us the conviction that the algorithm that we discussed is very much intact and in good shape. And I think you'll have the same confidence coming out of that. And that gets to the last part for me, which I think having run businesses over decades, strategy is important because it leads to the decisions. But activation of that strategy and execution is most important. And that gets down to people, talent, culture, capabilities. And I have a significant amount of confidence in the 2 individuals you're going to hear present today, but also the leadership team behind them and the depth of the talent that we have across the organization. So those are my 4 thoughts to frame the conversation for today. What I want to do is fairly quickly dial through each one of these to give a little bit more meat to the -- to my point that I'm making here. So first of all, numbers don't lie. If you take a look at the performance -- what a great time to update our file. I always love that. Thank you, Microsoft. If you take a look at our performance since inception, we came in at the high end of our revenue target when we formed the company, over the 5 years. We exceeded our EPS target. We delivered a nice TSR and so you'd say, "Hey, those are all equal to or better than our peer set. What's not to like?" I don't like the last number, personally. I think the valuation doesn't reflect the performance nor does it reflect the potential. And if I were to pull people in this room, and by the way, we're having some nice conversations over the innovation over there, and I look forward to having more conversations afterwards. If I were to pull people here and say, "Why are we trading at a discount?" I would paraphrase the James Carville saying of, "It's the economy, stupid." And then you would say to me, "Bob, it's the coffee, stupid," and I've been called stupid by many people. And I would say, yes, we're disappointed in the global at-home coffee category performance since COVID. It has not operated like any of us in the industry thought. But you're going to see in a couple of minutes that we built that into our expectations going forward. And we're certainly not sitting on our hands here. I mean look at all the innovation that we're launching, and there's more to come, as there always is. We plan on continuing to reinvent and reshape the category. So from that standpoint, we're not sitting back. But from an expectations perspective, I think we have it fairly well defined. But I'm going to give another reason why I think is a contributing factor why we trade at this discount. And it's not one that gets talked about very much, if at all, but I'm going to share with you some interesting statistics. So here is, on a nice, neat page, and we know that it's never this neat in reality, our transition from what was once a private company to a tightly held company, a closely held company, to one that's widely held. And you say, "Yes, I've seen this before in other industries." My question was always, has anyone ever seen it before at this scale? Because I don't -- I wasn't aware of anything. So 900 million shares put into the marketplace over 5 years, not always in an orderly fashion, has to have some impact on us. So we went and did some research using some smart investment bankers, and they were stunned at the results. So here they are. The monetization of KDP over this time period is the second largest ever of investors into the public market of any company. It's the largest in the past decade. What's the largest ever? It's the U.S. government's monetization of AIG after the financial crisis. We're #2. We're bigger. When we started pressure testing it, come on, Hilton and Blackstone. Now we're bigger than that. So it's something that, clearly, when you have that level of supply going into the marketplace at the pace that it did, it has an effect on the price. And we've managed our way through it. Here's two pieces of good news on that. We've been able to attract a great roster of high-quality, long-only investors who continue to add to their positions. And for those of you who have done that and many of you in the room, I know it's not always easy, but we appreciate you doing that. The second part of it is when you take a look at the position that we have right now, and you saw the communication of JV put out there, I think the heavy lifting is behind us. And we're in a nice, stable position with an anchor shareholder, who's committed to holding 20% of the company going forward. So I like where we are going forward. I don't want this to be backward-looking. I want to be forward-looking. So with that as the foundation, it allows us to take this strategy, that Tim is going to take you through in some detail, and show you how it delivers against our algorithm. And for us, it's mid-single-digit top line, high single-digit EPS. And our cash situation and the optionality that it provides, Sudhanshu is going to take us through that, again, I think is a difference maker. You combine that with the discipline that we've used over the past 5 years around our allocation of capital, I think it's a huge competitive advantage. So my last part that I had described before was the team. And in these presentations, let's be honest, everyone gets up and says, "Hey, the team is great." Let me give you 2 points about this team. I think one is this is a significant milestone for KDP because what you see on this ELT, our executive leadership team, is a combination of good talent that we brought in from the outside. Tim is a great example. Sudhanshu is a great example about a year ago. But also on here are 4 promotions from inside the company. For a company that's only 5 years old, that's reflective of a very intentional program to develop talent within the organization and have a leadership pipeline. And you can't see below this team, but the talent pipeline below this team is very, very strong. When you merge 2 companies, you end up selecting the best of both, and you don't have a talent pipeline. And so it's taken us about 5 years to get there. But we're incredibly proud now that we've got a mix of internal and external candidates. And you'll see that shift to more and more internal over time because we have that much confidence in our leadership pipeline. So I made, I think, several pretty bold statements today. I mean one is the model works. We can talk a lot about the coffee market. We could talk a lot about issues out there in the macro environment, but the reality of it is we've outperformed our peer set. Second part of it is it's been quite a journey from private to public and the size of which -- that we did it at, I wouldn't recommend for anyone else, for anyone who's listening and thinking about that, not for the faint of heart. But we're done with the heavy lifting. And even the dollar value of that monetization surprised us and some of the outside people that we asked about. I've tons of confidence in the strategy. I love where it's going. I have confidence and conviction on our ability to hit the algorithm. And I think most importantly, I have confidence in the team behind it. Now words are great, but actions are better. And if you're an investor, actions backed up by money are even better. So what I would point out to you is since the fourth quarter, midway through the fourth quarter, as you know, we've purchased $1.2 billion as a company worth of our own shares because as we look at M&A targets, there was no better M&A target than our own stock. Every time we would look at something else, we would say, "There is no better use of our money than to acquire our own company at this valuation." And the 3 individuals who are presenting you today have personally acquired more than $20 million worth of stock over that same time period. So at these prices, we're buyers as a company and as individuals as well. And I think that's probably the best statement I can make about putting substance behind our confidence. And that is a perfect time to hand it over to Tim Cofer, who will take you through his vision and his strategy. And of course, we'll come back at the end for Q&A. So Tim, over to you.

Thanks, Bob. Good afternoon, everybody. So I want to start by saying what a privilege it is to have the opportunity to be a part of this great, young, dynamic company. And I couldn't be more energized to join Bob, our Board of Directors and the 28,000 colleagues here at KDP to unlock our next chapter of growth and value creation. I'm also looking forward to developing an ongoing dialogue with you, our investor and analyst community. And we certainly appreciate your interest in KDP, and we'll always value your perspective. So I'd like to begin the conversation by sharing some reflections that underpin my confidence in the future of KDP. And these are some of the key points I hope you leave with today. As you know, and as Bob mentioned, I joined KDP in the fourth quarter of last year. And while it's only been a couple of quarters, I do bring 32 years of global CPG experience, mostly in food and beverage, to this powerful platform. So I can say with conviction that the beverage industry is a great space to play, and KDP is an advantaged platform within that attractive space. KDP has many of the differentiating factors that determine success in this industry. And Bob and the team have worked tirelessly over the last 5 years to make it happen. Those efforts have driven standout results that you just saw, and we certainly plan to build on that going forward. For this next chapter, we have a very clear-eyed view on strategy. We will focus on evolution, not revolution. Today, we'll talk not only about the strategy but also the outcomes we expect as we operationalize it. The combination of these elements will support our attractive growth algorithm and most importantly, our expectation for consistent, predictable delivery against it. Now all of this is easy to say but challenging to do in practice. And the element that gives me additional confidence building on what Bob said earlier is the winning culture at KDP. I mentioned it on our Q4 earnings call. I want to say it again, there is a challenger mindset at KDP. We empower our people to challenge convention, to innovate, to disrupt even ourselves. This is something I plan to nurture, strengthen and leverage going forward. With this mentality, we can and will continue to win. So throughout the presentation today, you'll see each of the observations I'm going to share with, evidence of either emerging or proven results. So let's dive in. Let's start at the industry level. The beverage industry is a particularly attractive part of consumer packaged goods. Of course, hydration is essential to life. Everybody needs to drink. And there's long been a structural move away from tap water. The average consumer in the United States drinks about 90 ounces of liquid every day. The per cap amount of total beverage intake doesn't change, but the composition of consumer beverage choice is very dynamic. And as a result, packaged beverage volumes grow with population while sales growth are consistently more robust with positive mix, price realization representing important growth components over time. We all know consumers' tastes and preferences change continuously. And that means new pockets of growth will always emerge. And while it's fair to say just about anyone can develop a new beverage offering, there are considerable barriers to scaling that idea. And this is where differentiated route to market becomes a real source of competitive advantage and an enabler to building share in the still fragmented industry. Shifting to the coffee category. When it comes to coffee, as Bob said, we recognize there are some short-term challenges in the category. And we're certainly moving to counteract them, and you'll hear more on that later. But that said, I think it's helpful to step back. Let's look at the bigger picture. And it's certainly this broader view that underscores why we remain bullish on the coffee category. You probably know this, but excluding water, people drink coffee more than any other beverage, with over 60% of consumers drinking it daily. In fact, U.S. coffee past-day consumption recently hit a 50-year high, reinforcing the relevancy of the category in today's world. This is indeed a very special category. There's ritual, emotion. Coffee addresses a fundamental consumer need for energy, but you know what the #1 reason is why consumers drink coffee? The unique taste. It's natural. It's plant-based. It's highly artisanal. It has great scope for personalization. No wonder Americans of all ages are incredibly passionate about the coffee category, including the almost 80% of Gen-Zennials who drank coffee in the last week. I can tell you, I for one could not imagine a day without coffee. I'm usually on my second cup by 6 a.m. Nearly 3 out of 4 cups of coffee are consumed at home. Yet this represents only a fraction of total dollars spent on coffee, highlighting our opportunity to drive premiumization and quality of experience at home. At-home single serve volume has grown 4% over the last 5 years. Single serve now represents almost 30% of the at-home market and has been a steady share gainer for years. And yet, there is still significant opportunity to continue to grow that share, including through converting more households from drip to single serve and by bringing away-from-home occasions back into the home. As single-serve pioneers with Keurig as the preeminent single-serve system in North America, we're well positioned to capture this growth opportunity. Let's shift now to KDP. As I said earlier, we are uniquely positioned in the beverage industry. On the one hand, we're scaled, $15 billion of revenue, 28,000 employees, a strong local presence in each of our countries, including an integrated network of manufacturing and distribution sites across North America. And yet, despite our scale, we remain a challenger. And we have the entrepreneurial spirit to drive and disrupt. With bold actions, we can move the needle for ourselves and the industry and most importantly, create outsized value while doing so. To our portfolio. Our portfolio composed of 3 large and high-margin segments, U.S. Refreshment Beverages, U.S. Coffee and International. As you can see on this slide, each segment is anchored by brands with category leadership positions and emerging growth platforms with significant potential to further scale. More on each of these segments later. Now as a brand builder throughout my career, I am energized by our portfolio of iconic brands. We have 30 brands with retail sales north of $100 million. This starts with our 2 namesakes. Both Keurig and Dr Pepper have retail sales of approximately $5 billion, and Canada Dry crosses $1 billion each year. 11 more brands generate more than $0.5 billion in retail sales each, including favorites like 7UP, A&W, Snapple and one of our newest partner brands, C4. In total, we manage a portfolio of 125 brands, including many very strong players in their respective regions or segments. Our brands, they're the real deal. They're iconic, they're instantly recognizable, and consumers are passionate about these brands. This combination of relevance and scale is powerful. Now as Bob shared earlier, we've done a great job delivering results since our merger, and we're now activating an evolved strategy to chart the next chapter of our value creation. As I said earlier, this will be about evolution, not revolution. We've spent the last few months crafting a sharp strategic articulation. This one slide that you see here, this is the one pager that I hope every KDP employee will have tacked onto their proverbial office wall. And it provides a blueprint to guide how we will direct our time, our attention, our resources and the values we'll practice while pursuing our goals, all underscored by this invitation you see at the bottom of the page to our employees and to all our stakeholders to drink in the possibilities. Everything on this page is deliberately phrased with clear language meant to inspire and engage our employees as well as to direct our corporate and portfolio decisions. So let's take each element in turn. First, we know who we are. We know why we exist. It all starts with a purpose, and our purpose is drink well, do good. We know we have the opportunity and the responsibility to enhance every beverage occasion. And when we do that, it creates a positive impact on the lives we touch. This includes our consumers, our employees, everyone with whom we do business and also importantly, the broader environment around all of us. Our purpose supports a rich, multiyear corporate responsibility agenda, which we continuously measure ourselves against. We're equally clear on our vision. As a total beverage leader, we can delight consumers across every need, anytime, anywhere. We cover every beverage occasion from dawn to dusk. Our portfolio and our insights make us invaluable to our retail partners, and most importantly, keep us agile and responsive to our consumers' needs. So let me take a few minutes to describe our strategy, which is what guides our actions every day. As we execute against each of these 5 elements, they will drive strong business outcomes that will translate to compelling financial results, growth, margins, returns, value creation. So let's start at the top with champion consumer-obsessed brand building. This is all about putting our consumer first as we build and cultivate genuinely iconic brands. We lead with deep consumer insights that inform our brand positioning and surface opportunities to address unmet needs. We identify relevant applications of these insights for each brand with tailored messaging, activation, and then we invest behind the most promising ideas. That also unlocks potent innovation and also gives us the right to disrupt our categories and even ourselves. Next, we already have a tremendous route-to-market advantage and a unique DSD capability. Now I've led multiple businesses with DSD assets. I'm fully aware of this distribution system's advantage in building and sustaining in-market momentum. The job ahead for us is now to further amplify our DSD power. This will maximize the benefits of our brand building, extend our reach and reinforce our market success. One of the many ways we can do this is via technology. We will continue to invest in digital tools, digital capabilities as part of our route-to-market strategy and is one element of a holistic digital transformation across the enterprise. Beyond driving the core, evolving the portfolio to more growth-accretive spaces has been a key value driver since KDP's creation. And it will undoubtedly continue, if not accelerate, in this next chapter. We've established in a very disciplined way multiple attractive growth platforms in new and emerging categories. We're going to keep running the same play, pursuing growth through innovative structures, including win-win partnerships with visionary beverage entrepreneurs. And beyond the U.S., we also see significant growth runway in our International segment. And I'll share more on the International plan shortly. Now to support all of this, we're going after the next chapter of productivity at KDP. The last several years has been enormously volatile for everyone, and we were not immune. Yet despite this, our company made critical transformational investments that opened the door to a robust continuous productivity cycle and network optionality. And we will exploit these opportunities in the next chapter. In addition to continuous productivity, we're going to keep a sharp eye on overheads. The combination of these will drive increasing operating leverage and fund our growth investment. Last, but certainly not least, is capital allocation. We recognize the power of smart, disciplined and dynamic capital deployment. We're going to continue driving the business while improving returns within the envelope of an optimized capital structure and, of course, driving top-tier TSR for our shareholders. So those are the 5 evolved strategic objectives. And these, in turn, are the commitments. These are the commitments or the outcomes you should expect from KDP. We will leverage our leading capabilities to continue to drive strong base business momentum. We're going to support the portfolio growth by expanding into high-growth segments. Our International business will continue to grow as a percent of the mix, and it will become a more significant needle mover for us as a company. Thanks to a robust productivity agenda, our margin structure should expand even as high-quality, high ROI investments grow. And capital deployment will remain KDP's calling card and a key differentiator in enhancing our return profile. Together, these outcomes clearly support our growth ambitions, which we continue to articulate via this familiar and attractive long-term financial algorithm. Bob showed earlier mid-single-digit top line growth, high single-digit EPS growth and strong free cash flow conversion. We've performed well on each of these dimensions since merger, and our ambition is to deliver consistently against these going forward. So let's now dive deep into each of those 5 outcomes we seek, and I'll start with driving base business momentum. We have a solid track record of mid-single-digit net sales growth. There is inherent diversification across our total beverage portfolio. And it allows the enterprise to perform steadily and attractively as segment growth rates naturally vary. For example, as you see here, over the last 5 years, we delivered 6% net sales growth, the top end of our algorithm, with only 2% growth in U.S. Coffee. Importantly, we achieved this set of outcomes demonstrating strong momentum across the board from both our own brands and our partner additions. So as we pivot to the next chapter of KDP, we're confident in our ability to sustain the strong base momentum we've enjoyed to date, thanks to our leading capabilities. Let's talk about these capabilities. They start with how we build our brands. They extend to how we partner with our customers and ultimately to how we build physical availability for our products at the point of purchase. So let me walk through each of these 3 elements in turn, and I'll try to emphasize how we deliver value at each step. All of our activities start with the consumer at the center. We have invested considerable effort into developing a unique understanding of beverage demand spaces. And in recent months, we've enriched these insights further. And we're now in the process of embedding this powerful framework through our demand-facing functions, starting with marketing, sales and R&D. So what's the demand spaces framework? Basically, it explains the who, what, when, where, why behind our consumers' beverage habit. It unpacks both the physical and the emotional needs that drive purchase and ultimately consumption. And it segments demand behavior, very simply, whether at home or on the go, whether alone or with others and across day parts from dawn to dusk. Given this deeper, richer understanding of each demand space, we can then deploy that knowledge to do a number of things: sharpen the positioning of our brands, improve the quality of our messaging, refine our renovation and innovation agendas and ensure our activation is resonating with our shoppers whether in-store or online. A couple of examples. Canada Dry and Original Donut Shop, I think, are 2 great examples of how we've recently applied the demand space knowledge estate to grow our businesses. You can see here how distinctive demand spaces and insights for each brand are deployed to drive targeted communication, innovation activation and, of course, most importantly, results. In the case of Canada Dry, we targeted an evening unwind demand space, emphasizing the benefit of relaxation with a soothing communication line, sip into your comfort zone. We complemented the work with delicious innovation of Canada Dry Fruit Splash, and we're pleased with our results to date. We are now the #1 brand equity in the relaxed need state with a strong start to our new Fruit Splash innovation. With The Original Donut Shop, we targeted a casual get-together demand space, reinforcing our treat equity and indulgent positioning. We translated this into collaborations with Snickers and Twix, which contributed to strong growth, particularly among the critical Gen-Zennial coffee drinkers. Now I can't stand here today without sharing the third example of really brand building at its best in our company, and that's our flagship Dr Pepper brand. It has undeniable momentum supported by the same demand space framework. Since our merger, Dr Pepper brand has gained nearly 2 full points of market share and has become the #1 flavored CSD by volume. Dr Pepper at its core is about connecting with friends, and it provides a one-of-a-kind treat like no other. And when we add winning innovation like last year's Strawberries & Cream and you layer on things like the remarkable college football activation with Fansville, that's when we create brand love and retail excitement that's without compare. We just concluded our sixth consecutive year of Fansville while remaining fresh and distinctive. I can tell you personally, as an on-the-field ambassador at both the Big 12 Championship and the National Championship last season, our Dr Pepper team does an amazing job. From the famous football halftime college tuition giveaway where they toss the ball into the bucket, the Dr Pepper can to be specifically, to the presentation of the College Football Playoff National Championship Trophy, to the incredible social buzz that amplifies our efforts, we activate Fansville across all media channels, nationally, locally, digital, social, unpack, in-store and on campus. But this marketing excellence goes well beyond Dr Pepper. Let's share a video showing how we apply our consumer-first perspective to bring our entire portfolio of brands to life each and every day. [Presentation]

A button from our friend, Kevin Costner, there at the end. I think that video clearly captures the energy and the potential of our beverage brand portfolio. So in 2024, we'll extend our end market momentum beginning with a robust slate of innovation. I'm really excited about our '24 innovation plans, both in cold refreshment beverage and in coffee. So in U.S. Refreshment Beverage, our consumers will see activity across literally every major brand, tailored by package and format. Now if you like coconut, as I do, I know coconut could be a little polarizing, but if you're a coconut fan, you are going to love our limited edition Dr Pepper Creamy Coconut. It's launching just in time for summer. And as you heard, we're already seeing excellent in-market results for our Canada Dry Fruit Splash. Our CORE water brand is proud to sponsor this summer our USA Gymnastics team as they compete for gold in the Paris Olympics. Our Bai brand has a major relaunch with new packaging, new flavors, a sharper positioning around WonderWater and a strong collaboration with Sydney Sweeney. We plan to continue the exceptional momentum in C4 Energy with new flavors. And we look forward to scaling Electrolit sports hydration here in the U.S. What about Coffee? Well, on Coffee, we expect a gradual acceleration in our volume momentum throughout the year. We're pursuing a total coffee strategy, which means understanding category behavior from a consumer lens and having that inform our 2024 innovation pipeline in pods, in brewers, and in other formats. This innovation slate starts with our largest push ever into cold coffee. Today, about 10% of total coffee occasions are cold, yet approximately 70% of away-from-home coffee shop beverage consumption is either cold or iced. That means we have a significant opportunity to develop this incremental at-home occasion, offering cold coffee shop quality for a fraction of the price. In 2024, we're introducing the new K-Brew + Chill brewer. We've got a demo or a sample for you over there. It creates truly cold beverages even before you put in the ice. This will be complemented by a variety of new pods designed to make specialty cold beverages, from refreshers to cold brews, ice lattes and more. Shifting to our Green Mountain brand. You saw it on the video, we're activating some of the strongest marketing we've seen in years behind a major first of its kind partnership with Kevin Costner. It includes some specific blends that we developed in partnership with Mr. Costner and additional media activation around his epic Horizon films that will come out this summer. We also continued to develop the super premium tier of K-Cups, representing artisanal coffee brands and appealing to today's sophisticated coffee palate. Our Lavazza partnership is now enhanced, and now it's an important licensed brand. And our new La Colombe pods started shipping in Q4. This rounds out a very strong premium and super premium pod tier, including brands like Philz, Intelligentsia, BLK & Bold. We're also moving quickly into ready-to-drink in partnership with La Colombe. New draft lattes with upgraded packaging and coffee will leverage our DSD infrastructure and build distribution throughout the year. Now as the single-serve category steward, we approach brewer innovation with the same consumer-first lens in support of 2 growth vectors that I've mentioned. First, continuing to convert at-home coffee drinkers from drip to single-serve. And second, drawing out-of-home coffee occasions into the home, where they can have the same great experiences at the coffee shop at a fraction of the price. How do we do it? Consistently delivering taste and quality, variety and value and a coffee shop experience, whether a consumer wants hot or cold, iced coffee or refreshers. These consumer-informed priorities are at the heart of our 2 upcoming new brewers, the K-Brew + Chill I mentioned a minute ago and our smallest brewer ever in a variety of chic new colors designed to fit in every space and every budget. And we've got some models over on the side at the break for you to check out. Very cool new brewers. We are also unafraid to think outside the box or in this case, outside the pod. Behind the scenes and over multiple years, we've been challenging ourselves to deliver breakthrough solutions for single-serve coffee that truly represent a step change versus any product currently on the market. You probably saw our big announcement last week we did right here in New York. We're excited to announce that later this year, we will start beta testing an entirely new next-generation consumable and brewing system with advanced capabilities. So what were we looking to achieve in pursuing this disruptive path? First, an unlimited combination of drink formats, from high-quality espresso to specialty beverages to traditional long American coffee in various sizes and configurations, all representing a diversity of experience, which requires an ability to brew at different pressures and with multiple pod sizes. Of equal importance, we wanted to forge a more sustainable path, unencumbered by plastic or aluminum, all while not compromising the same great features we already have, including temperature functionality and connected machines that make custom drinks by recognizing a brew code. And of course, we wanted a system that safeguards our extensive know-how and our extensive investment. This demanding combination of features is precisely what we're getting ready to deliver. We're excited about this entirely new innovative and disruptive K round format and what it can do to revolutionize single-serve coffee at home, plastic-free, aluminum-free with multiple sizes supporting a full range of hot and cold coffee shop beverage experience. Let's watch this video. [Presentation]

We think this is truly breakthrough, and we're energized to take single-serve coffee into the future. If you haven't seen it already, I highly recommend you also watch the longer version of the video that's on our website, and it describes our system in a lot more detail. Hopefully, by now, you have a sense of the passion and the science that we bring to brand building to win the hearts and the minds of our consumers. But as you all know, winning in the beverage market also requires sophisticated skills and differentiated assets on the commercial and route-to-market side to build physical availability of our products. So let's discuss these. I have to tell you, our commercial organization, for me, is a clear strength at KDP. I've been very impressed with the capabilities and the gearing of how our commercial model works to engage our retail partners and to develop and execute winning solutions at the point of purchase. These commercial centers work hand in hand with our customers and our strategic partners to optimize our collective impact at retail. Together, we tailor plans to maximize activation, ensure the right price pack architecture is available by channel, by brand and we complement this with occasion-based promotional bundles and merchandising assets to generate excitement at retail. Thanks to the breadth of our brand portfolio and our reach, we have a deep repository of data augmented with digital tools to rapidly evaluate and adapt our trade strategies based on consumer behavior, both in-store and online. The proof is in the results. In addition to our own success in 2023, we were a top growth driver for our customers across total food and beverage. Now beyond just a point of pride for us at KDP, contributing to our customers' success obviously creates a tangible positive feedback loop that, in turn, enables our future momentum. What's unique about beverages is the critical and complex role of distribution. Winning in the industry requires a multichannel route to market to build and maintain scale and momentum. But there's also beauty and scarcity in this complexity. For instance, in DSD, as you probably know, there are effectively 3 national LRB distribution systems, one of them being ours. My extensive experience with DSD in food and snacking convinced me of the power of these systems and investing in them to supercharge brand momentum. Beyond DSD, we have strong route-to-market capabilities in warehouse direct, away-from-home and direct-to-consumer. More on DSD. DSD is indeed a scarce asset, and it's a key investment priority for KDP. Our company-owned DSD now serves nearly 80% of the U.S. population and covers a variety of channels, while strategic partners help us fill in the balance. As you might imagine, I've already spent time on the front lines with our more than 12,000 DSD employees. They bring beverage expertise and importantly, muscle to the over 180,000 outlets, and that gives us a real competitive edge. Over the last 5 years, we've completed approximately 30 acquisitions to extend our reach. In learning the ins and outs of KDP's DSD, I've reviewed these acquisitions, and I feel very good about the ROI. Going forward, you can expect us to continue to invest in these capabilities, expanding and enhancing the system's reach. A healthy DSD system that builds scale fuels a virtuous cycle of growth, benefiting drop sizes, store visit frequency and overall economics. Scale begets scale, and momentum translates into further success. We've proven that through our sustained market share momentum in LRBs, which, in turn, draw attractive, high-potential partner brands to our system. This is particularly important in convenience stores, a critical channel in beverages and one where scale really matters. For instance, in adding C4 and Electrolit to our portfolio, we expect to see an increase of 50% in our scale at chain convenience stores, which, in turn, should lift the performance of all of our owned and partner brands on that same truck. We also have immense opportunity for growth in food service and away-from-home channels. It's a little known fact that actually Dr Pepper is the most widely available fountain CSD across the U.S. So no wonder this is our primary offering in food service. But if you look at this market, CSDs make up only a fraction of the dollars. It's easy to see that we have the brands, we have the categories to play across a much broader swath of away-from-home channels, and we intend to do so. In '24, for instance, we're aggressively pursuing single bottle, on-the-go opportunities in both CSD and other refreshment beverage categories. We're also working with our QSR partners to bring more high-quality cold brew coffee offerings to their menu. Let's shift to the online channel. Our e-commerce business continues to be a priority and a driver of outsized growth. We all know the pandemic reinforced the ease, the convenience of shopping online, auto replenishment features and the personalized and enhanced service that e-commerce can deliver. Today, e-commerce represents 12% of our retail sales. It's been growing double digits across both hot and cold beverage occasions. In coffee, in particular, keurig.com is a significant proprietary channel. It represents a unique platform for us to build direct consumer connections, and it's a core part of our partner value proposition. Through keurig.com, we have the opportunity to provide auto subscriber replenishment and gain a lot more insight into consumer behavior as it relates to coffee, which obviously we can then leverage internally and also share with our strategic partners. So you've now heard from me about our strong brand building muscle, the sophistication of our commercial engine and the differentiated profile of our multichannel route-to-market system. We've proven time and again that when these 3 pieces come together and when they're activated properly, the results are undeniably positive. More importantly, they're self-reinforcing, and they're sustainable. And we certainly intend to keep powering that virtuous loop. Now I mentioned it briefly earlier, a key enabler of our next chapter is a comprehensive digital transformation, and it's now underway at KDP. Let me just give you a bird's eye view of the various initiatives on our digital agenda. We're evolving across the enterprise, from how we engage with our consumers and create new products, to how we drive intelligent automation and lower our supply chain cost, to how we optimize the effectiveness and efficiency of our corporate functions. This agenda is underpinned by strengthened and harmonized digital foundations that are cloud-first, data-driven, agile and ROI-focused. Let me give you one example today. We recently developed, and we're in the process now of deploying a strategic marketing allocation platform. This tool allows us to make better investment decisions in a data-driven way by synthesizing all of our marketing analytics, presenting us a much shorter cycle and holistic view of our performance across all touch points and then leveraging the feedback loop to develop forward-looking scenarios. This allows us to get it right more often and if we don't, to fail faster. As a result, we make better connections with our consumers. We grow more agile in flexing our spend across categories, brands, campaigns, channels and, of course, most importantly, drive higher returns on our investment. Let's now shift to the next outcome to which we're committing, and that is expansion into high-growth categories to drive an advantaged portfolio. The benefit of our pure-play beverage focus and the breadth of our portfolio is that we're highly attuned to changes in consumer behavior. And as a result, we can adjust, we can adapt and ideally anticipate when those changes are really gaining traction. We've done just that in a very capital-efficient way over the last 5 years, and we will continue to demonstrate that same discipline going forward. We employ a flexible buy, build and partner strategy, and we've cultivated multiple emerging growth factors in the portfolio. Each represents a large and quickly growing part of the beverage industry, and we continue to lean in. On this slide, you see many of the exciting brands that we've welcomed into our portfolio in the recent years. And sometimes you see multiple bets in each growth category. We will continue to push into these and other growth spaces in the same deliberate and disciplined manner. Now I'm sure as many of you already appreciate, striking strategic win-win partnerships with high potential brands has become a core part of our recipe in building out these growth platforms. Our track record of mutual success has also made us a preferred partner in the beverage industry as entrepreneurs seek to scale their brands thoughtfully. When a high-potential company seeks a partnership, it's looking for a number of things. It's looking for a combination of intellectual collaboration, strong capabilities, a cultural fit and a partner with enough white space to ensure that their brand is adequately prioritized. KDP's insights, our assets, our people, most importantly, our mindset position us to be exactly that kind of partner. We've refined the structure of these deals to include elements like equity stakes and PIK interest, Board representation, earned incentives, long lives that can survive a change of control and limited exclusivity provisions. These features win us more optionality over time without being locked into a single path for value creation. They also allow us to be highly capital efficient while expanding our portfolio without compromising on profits and returns as we drive growth. In fact, our economics are enhanced even more when you consider the positive impact of partner volume back on the base business, particularly that DSD virtuous cycle that I mentioned earlier. So you see some names and photos you may recognize. Our partnership model has attracted many of the industry's best and most creative minds. We are assembling a founder's network, full of visionaries who feed off of and contribute to KDP's challenger culture. KDP benefits from these entrepreneurs and their continued engagement and involvement in the businesses they created as well as the thought partnership to keep us on the leading edge of the beverage industry. The last 18 months have been especially dynamic at KDP when it comes to entering new growth spaces. So let me talk briefly about each of these and other significant opportunities ahead. I'm going to start with energy. As you saw a few slides back, energy is among the most attractive categories in LRBs. It's a $23 billion category, and it's growing at a double-digit CAGR. Over the past year, we have successfully activated our C4 partnership with Nutrabolt, in which we now have a 34% equity stake. Our strong execution, I think, is evident. You see it here. C4 has grown 63% since we unleashed the power of KDP DSD. We have achieved multiple performance thresholds, and C4 had great momentum, yet it's still only a 3% share in total energy with a long runway for further growth. And in 2024, we plan to further scale C4 and build on that success. Let's go to another high-growth space, sports hydration. Just last month, we kicked off our distribution partnership with Grupo PiSA for Electrolit. Electrolit is the sports hydration category leader in Mexico. It's also a rapidly growing regional brand in the U.S. with a passionate, multicultural consumer base. Sports hydration is an $11 billion category in the U.S. and Electrolit already has a 4% market share, despite not yet fully playing on the national stage. And of course, we plan to change that. This is a special brand with Mexican heritage, a science-based formulation, strong alignment with health and wellness trends, supported by Grupo PiSA's pharmaceutical roots. We know it will be a continued winner as we scale this great brand over the course of the year. Let's shift to coffee. Our partnership with La Colombe and the equity stake in Chobani, its parent company, accesses 2 distinct growth opportunities in pursuit of our total coffee strategy. First, we've entered the exciting $4 billion shelf-stable ready-to-drink coffee category. And secondly, La Colombe further enhances our super premium tier of K-Cup pods. La Colombe is uniquely positioned in the space, thanks to its vertical integration and the ability to leverage Chobani's dairy expertise. That's a key component, as you may know, of specialty coffee beverages. Now another plug here. If you haven't tried the newest La Colombe draft lattes, truly, I highly recommend them. Try them at the break. We have some samples here. They are delicious. They are coffee-forward lattes that offer far less sugar and far less calories than the leading RTD coffee with the quality and expertise of La Colombe's artisanal coffee credentials. It's certainly early days in our partnership, but we're seeing solid traction in the La Colombe pods, and we look forward to having RTD scale throughout this year. Let's go to another significant vector of growth in beverages, and that is the emergence of RTD alcohol, low and no alcohol alternatives. There's been a lot of discussion in the industry, especially of late, about what's the suitable operating model to access and grow in these spaces. But I think an underappreciated reality is that KDP already has significant exposure. Our diversified approach highlights our versatility in creating value through multiple structures and models. As you see on this slide, today, we generate over $0.5 billion in retail sales through owned brands like Clamato, Atypique and a portfolio of mixers as well as licenses like in the case of Bud Light Chelada. We also have an equity stake in Athletic Brewing, a rapidly scaling nonalcoholic beverage company, which doesn't contribute to our revenue today but provides learnings and other means of value creation. I think these examples underscore our current participation in alcohol and alternatives. And we will continue to evaluate further opportunities to expand our iconic brands, while ensuring we do it in a profitable and sustainable way. Another often underappreciated part of our business is our International segment, which, given its faster growth in our portfolio, will become an increasingly important third leg of our stool. Let me tell you a little bit more about the current positioning and the strategies we're pursuing outside the U.S. So first, let's put things in perspective. Our International business has significantly increased its net sales and its adjusted operating profit since the merger, both growing at or near double-digit rates. We see no reason why this shouldn't continue as we work to expand within the large TAM across these 2 huge markets and think selectively about adding other international exposure. Today, our largest international markets are Mexico and Canada. Taking a look at each of these from a macro lens reveals constructive demographics that can support continued strong local beverage growth. The beverage industry is well developed in both markets and should continue to grow nicely, driven by increases in Mexican per cap spending and consistent population and GDP gains in Canada. In both countries, we are a top 3 beverage leader, operating a scaled business. In Mexico, our portfolio is exclusively focused on cold beverages. Here we have a handful of very strong brand equities, anchored by the market-leading Peñafiel mineral water. Our momentum in Mexico is underpinned by a company-owned DSD system, just like in the U.S., which, as you can imagine, is vital given the vast traditional trade. We also have an export business to the Caribbean and across Latin America. Shifting to Canada. We have a diversified cold and hot beverage portfolio. Here, like in the U.S., Keurig represents the market standard for single-serve coffee, whereas our Canada Dry brand anchors our CSD business. Depending on the brand and the product, we reach our consumers through a multichannel system in Canada. It spans warehouse direct, partnerships with third-party DSD and away-from-home. We have talented executives in both these markets. They're long tenured. They're local. They have deep industry and market expertise. We empower them to run their businesses locally while enabling them to source the best practices from across all the KDP portfolio. Now like in the U.S., we have strong base business momentum across our international portfolio, which is translating into share gains. We're also pushing ahead into multiple higher-growth segments where in some cases, we already enjoy leading brands. For instance, in Mexico, our CSD portfolio has meaningfully outperformed the competition in recent years, while our Peñafiel brand has been a market leader in mineral water for 75 years, and it remains extremely vibrant today. DSD investments in Mexico have powered our brand success and continue to be a priority in the years ahead. We similarly see healthy share gains in Canada across many of our leading categories. In 2024, we have exciting product news across our major brands designed to extend our momentum in both markets. Along with considerable innovation to support our base, we're actively building our presence in growth segments like ready-to-drink alcohol and alcohol alternatives as well as super premium coffee pods in Canada. We're doing this in part by combining our strong local brand equities with winning playbooks that are already proven in other markets. Give you an example here. In Mexico, we just launched a line of Schweppes mocktails. These leverage our know-how from our market-leading position in Canada in that low alcohol category, where Atypique brand already enjoys a 40% market share. Our cross-market learnings are also evident in the increasing usage of a buy, build and partner model to accelerate our growth abroad with many of the same benefits we see here in the U.S. We've entered new categories like energy in Mexico through our partnership with Red Bull and the alcohol alternatives category I mentioned in Canada through the acquisition of Atypique. In RTD alcohol in Canada, we're successfully leveraging our own brand equities, most notably Clamato, to become the third largest player in the category. And in coffee, we're beginning to build a super premium pod segment through the conversion of Lavazza from a partner to a licensed brand and the addition of a super premium artisanal brand called Kicking Horse. The establishment of these platforms has raised our growth profile in a capital-efficient way, and we have significant additional white space to target. So you've heard about how we will further our base business momentum in the U.S. and abroad while supporting our portfolio by leaning into new and emerging categories. Let's now switch gears to discuss how we intend to support these ambitions through investment while simultaneously driving margin expansion. Over the past 5 years, KDP has been on a productivity and cost savings journey, which, in many ways, reflected broader shifts across the company and the operating environment. Our evolution thus far has been in 3 distinct chapters with the third chapter still playing out today, early days. First, the company successfully delivered $600 million in post-merger cost synergies. This was tremendous work, a newly formed team, bringing together 2 legacy companies, mining for smart efficiencies while creating 1 beverage giant. Then despite the onset of COVID, we pushed ahead and entered a second productivity chapter. This period was focused on the daily imperative to simply maintain customer service levels during an unprecedented disruption in global supply chains while also beginning to build a foundation of future projects through large-scale supply chain transformation projects. So last year, in 2023, with service levels now restored, these transformative investments started to bear fruit. We began to shift our mindset and transition to this new chapter, one focused on continuous productivity that will generate fuel for strong top and bottom line growth over the next several years. Let's take a closer look at some of these transformational projects I mentioned. We built modern facilities in Allentown, Newbridge and Spartanburg for aseptic, beverage concentrate and K-Cup manufacturing. And though the pandemic prolonged our timeline and made operationalizing entirely new manufacturing technology more challenging, we're now well on our way to building a next-gen supply chain. Allentown and Newbridge, they're complete. And we're building low-cost capacity in Spartanburg on a multiyear ramp. Related efficiencies are starting to become more apparent across the supply chain, and importantly, our enhanced manufacturing capabilities open up other options for streamlining the legacy network. As production ramps up in new high-efficiency plants, we will continue to shift production away from our least efficient lines and facilities as we've done recently. As supply chain constraints began to recede in 2022, we shifted our focus. After prioritizing customer service really at any cost during the pandemic, which obviously dampened our productivity run rate as you see on this page, we refocused our energy on driving a continuous productivity discipline starting in 2023. With our productivity savings having step changed last year versus '22, we demonstrated that we're quickly establishing this discipline. We will sustain and institutionalize it even further going forward. We're targeting a 3% to 4% gross productivity run rate, supported by a robust pipeline of projects that we can flex depending on the inflationary environment coming our way. We're now explicitly aligning incentives, driving even more executive team stewardship over these large initiatives. So we can ensure we harvest the benefits of recent next-gen investments. We will also wage an enterprise war on waste including in packaging, manufacturing as well as breakage and obsolescence. Design to value is another powerful lever to drive out costs that do not specifically support a consumer or customer-led value component. And importantly, we will increase cross-functional collaboration since productivity is a team sport, not just the jurisdiction of supply chain. We're also focused on overheads as an important lever of cost control. We're currently in the middle of the pack on this dimension. And over time, we believe we can responsibly reach top tier. By focusing our resources closest to the consumer and the customer, maintaining a lean corporate center and implementing more digital tools we intend to grow overhead expenses at or below the rate of sales. So hopefully, by now, you have a good sense of the initiatives to underpin our growth agenda and the fuel we can generate to expand margins to drive that growth. One of the other defining characteristics since merger has been thoughtful capital deployment, a discipline, we will continue to differentiate as we go forward, and it will allow us to further enhance our returns. KDP's business model is strongly cash generative. I've already described the leading capabilities we funded and the M&A and partnerships we've efficiently undertaken since merger, to expand across multiple high-growth [ white ] cost spaces at a cost of less than $2.5 billion. At the same time, we've de-levered considerably from post-merger highs, and we've strengthened the balance sheet. We've returned cash to shareholders continuously through a growing dividend and opportunistically through share buybacks and we have delivered industry-leading TSR while improving ROIC. So as we look forward, our top capital allocation priority is unchanged. Internal investments in our business to further our growth. The return profile of investing in ourselves is always the clearest and it creates a high bar for any other choices, including inorganic options. We will also strike the right balance between allocating capital for profitable growth and returning the cash we generate to shareholders. Throughout, we will, as before, stay dynamic in our choices with an eye towards maintaining an optimized capital structure and driving consistent delivery. Now before I turn it over to Sudhanshu to talk more about the financial outlook, I want to talk about arguably, one of the most important elements in KDP's Advantage platform, our people and our challenger culture. Culture is simultaneously the least externally visible and perhaps the most internally critical ingredient in a company's success. I have prioritized it consistently in past leadership roles, and I will again here at KDP. Here's the great news. KDP already has a unique identity. We are challengers in the beverage industry. I like it that way. We know we can move the needle and we can make an impact. If we push ourselves to think differently, move faster, work smarter while leveraging the tremendous scale and capabilities that we already have in place. Let me draw your attention to the 4 value pillars. On the right side of this slide. They've actually been in place for a few years, and they were developed by employees for employees. Look at the keywords in those values, big, bold, fearless, team. These are powerful. These are the attributes that govern KDP's approach and the value is permeating in everything we do, including how we measure ourselves internally, and how we compete in the marketplace. As you can imagine, they also position us as an employer of choice that can attract, develop and retain the best beverage industry talent. As I said on the last earnings call, it's this special sauce that did play an important role in attracting me to join this great company. And I plan to build upon this challenger culture as a key ingredient underwriting our next chapter of growth. So let me conclude where I started. We have a compelling clear eyed strategy to direct KDP's next chapter. We're confident that this strategy and our capabilities will produce a set of compelling operational outcomes that support our attractive long-term growth algorithm. It's certainly my privilege to join this powerful platform and take on the CEO responsibilities next quarter, and I look forward to many years of dialogue with all of you. You have my commitment that Bob, the Board, the leadership team and I will work tirelessly to deliver outsized value for all of our shareholders in the years ahead. And with that, I'll pass it on to Sudhanshu.

Thank you, Tim. Hello, everyone. Great to see many of you again today and to meet others for the first time. I'll pick right where Tim left off. We are committed to best-in-class performance. Our next chapter will be guided by the sharply articulated strategy that Bob and Tim just shared and the outcomes that it will produce. These elements support consistent delivery against our attractive long-term financial algorithm, which we believe will translate to value creation for all shareholders. These elements, support the algorithm we just laid out, and I will walk you through how we intend to build to this algorithm. Since merger, our net sales have grown at a 6% CAGR at the high end of our algorithm with roughly 2 points of growth from volume mix and 4 points from pricing. Going forward, we also expect to grow at the mid-single-digit rate with a balanced contribution across growth drivers. Volume mix will reflect many of the factors we discussed today, continued base business momentum, expansion within high-growth areas and the contribution from strategic partnerships. Many of these initiatives will also shift our business into higher price per ounce categories and formats, representing an incremental tailwind. We expect pricing to be an opportunistic and market-driven growth lever, although at a more normalized level than over the past couple of years. We will translate top line momentum to strong adjusted EPS growth, represented by our high single-digit bottom line target. To do so, we will need to deliver ongoing margin expansion. We expect to drive margin upside through operating leverage from net sales growth, the robust continuous productivity efforts that Tim described and through our commitment to maintaining lean overheads. These drivers should help us offset inflation while also funding healthy investments. Productivity provides the most significant tool for reinvestment, which we will deploy in areas that support a virtuous cycle of growth. Here, you can see 2 of our investment priorities, CapEx and marketing. When it comes to CapEx, our historic spend has generally trended between 3% to 4% of sales with a recent focus on the next-gen manufacturing transformation discussed earlier. We believe 3% to 4% range should still be appropriate for our business going forward. but the mix of spend will change with a greater focus on digital capabilities. As for marketing, during the merger integration period, we eliminated nonworking and inefficient spend from our marketing base. Then like many others in the industry, we chose to spend less during the early pandemic given strong demand and supply constraints. Through these actions, we pressure-tested the levels of marketing our brand would need to sustain their market share momentum. Since then, we have incrementally increased marketing each year using an ROI lens. Our continued broad-based market share gains suggest that this model is working quite well. We intend to grow our marketing investment with the same discipline going forward rather than targeting a top-down goal for marketing as a percentage of sales, we will remain guided by an ROI lens. In doing so, we will leverage some of the digital marketing optimization tools that Tim discussed. Strong free cash flow generation and conversion have been hallmarks of our company since merger. We expect that to remain the case in the future. In late 2022, we've proactively decided to begin to reduce the size of our supply chain financing program given the higher rate environment. This stance continued through 2023, and temporarily weighed on free cash flow conversion last year, though it strengthened our balance sheet in the process. This was the right decision. And 2023 was the peak year in terms of cash flow impact from supply chain financing reductions. As a result, we project that free cash flow conversion will trend sequentially higher in 2024, even with some wrap impact from 2023 decisions. Longer term, we remain confident in the strong underlying cash generation profile of our business. with a free cash flow conversion target that is aligned with our largest peers. Back to the points that Tim has underscored, we are focused on deploying our cash in a thoughtful, disciplined and dynamic way. We know from experience that when correctly deployed, our strong cash flow can unlock enhance value creation and greater flexibility for KDP. Our first priority is investing in internal growth which generally provides the most compelling returns and directly funds our sustainable growth model. We also consider investments in M&A and partnerships targeting attractive segments and brands where we know KDP has a strong ability to win and to create value. However, our bar for M&A and partnerships is high. Given our discipline, we look at everything out there, but ultimately pursue very few options. And you should expect us to stay just as focused going forward. We will continue to support a growing dividend and intend to stay agile when it comes to buying back stocks based on an opportunistic rather than a systematic approach. While our views on capital structure will be informed by the stage we are in and the environment around us, our capital allocation model is underpinned by an unwavering commitment to a robust balance sheet. This commitment is being recognized by our credit agencies, which recently reaffirmed our investment-grade rating following an upgrade by Moody's in 2023. We also remain committed to our long-term leverage target of 2 to 2.5x. Though our dynamic and opportunistic capital allocation approach may mean it's not always a linear path. Over time, we will manage steadfastly towards this range. We have a track record of thoughtfully returning cash to shareholders, which we plan to extend going forward. In other words, we understand the important role this plays in enhancing total shareholder return. Since merger, we have returned approximately $7 billion in dividends and buybacks. The majority of this happened more recently, ramping after we achieved our de-leveraging objectives post integration. We approach dividends and buybacks differently. With dividends, we are committed to steady growth over time. You have seen proof of this in the healthy increases in each of the last 3 years and the double-digit dividend CAGR over that period. Buybacks, on the other hand, are conducted opportunistically. Philosophically, our share repurchase activity reflects the value we see in ourselves, our view of whether or not the market is appropriately reflecting that value as well as other competing priorities for our capital. Echoing Bob and Tim, we see significant opportunity for the company and for the stock ahead. As a result, you have seen us step up our buyback activity over the course of 2023 and again in 2024. Year-to-date, we have repurchased an incremental 38 million shares for a total of $1.1 billion. 35 million of these shares were repurchased through a highly efficient deal structure done in context of a JAB secondary. With $1.8 billion remaining on our share repurchase authorization, we will continue to be opportunistic. This morning, we reaffirmed our 2024 guidance, which corresponds with our long-term algorithm. Our mid-single-digit constant currency net sales growth is driven by our expectation for continued momentum in U.S. refreshment beverages and international. Our outlook also expects sequentially improving revenue trends in U.S. coffee in 2024. Our high single-digit adjusted EPS growth outlook reflects gross and operating margin expansion partially offset by a net below-the-line headwind from higher interest expense. Let me also remind you of our comments on 2024 phasing. We expect our momentum to build throughout the year. This accounts for differences in timing in our innovation and investment calendar versus last year as well as building partnership contributions in the back half. These dynamics as well as a slower start to the year in U.S. coffee contribute to our unchanged low single-digit forecast for Q1 net sales and EPS growth. Overall, we are on track to deliver our full year top and bottom line guidance. To close, we are an advantage player in an attractive industry. Our pure-play focus and sharp strategy allows us to be agile and thoughtful as we secure the operational and financial outcomes we seek. We have established a strong foundation and track record of financials and TSR outperformance since merger, and we expect to extend both in the years to come. I will now turn it back to Bob for some closing remarks.

Picked up on webcast. Thank you, Sudhanshu, and thank you, Tim. And thanks, everyone, here for hanging in here so nicely. I have one slide, and then we're going to take a break at that point in time. Tim talked about our strategies and it leads to outcomes, which allows us to deliver our algorithm. And I think that's probably the best place to end this conversation before we pick up with the Q&A. We think we're an advantaged platform. We love the beverage industry. We love our position within it even more. If you think about how we're going to implement that strategy, you will expect the outcomes of continuing the great base momentum that we've seen in the past going forward. We still have significant upside to expand into high-growth categories. The partnerships that we've done have been accretive to our growth and have gotten us into spaces that we couldn't get to fast enough on our own. But as Tim pointed out, as exciting as those positions are, they're still relatively small. We have significant upside, and we don't have exclusives in our agreements. So we're free to continue to do so. In the model that I would point to you to suggest what we could do in other categories is premium water. We're through a combination of organic growth, acquisitions and partnerships. We're now the #2 player in that category. That was a very intentional strategy and it's the same approach that we take as we think about other high-growth categories. International is not a segment that we have spoken enough about on our earnings call. And I think as a result, it's very much underappreciated. But 5 years later, after the merger at $2 billion and rapid growth and significant upside, it's worth talking about. It is a contributor to our overall enterprise growth. Productivity is a really important driver going forward. We had good success with it in 2023. We have great plans going forward, as Tim shared with you. We delivered $600 million in synergies during the merger and then we got into that period where we were post synergies and now into supply chain disruption, we didn't deliver at the levels we want. But we have reinvigorated that whole area, have done well in '23 and are really bullish on the future on that. And the last part of it is our strong cash flow gives us the ability to create above and beyond value creation through deployment. Our deployment has been incredibly disciplined. Which spans everything from de-leveraging to dividend increases to partnerships and opportunistic share buybacks. And we stay opportunistic. You can see how we've behaved. We have dialed it up when we see our share price at a value that we think is very, very attractive. We back off when we think it's less so. And that's the way it should be. It should -- in our opinion, it should not be formulaic. And the last part is my opinion on this, that I think it's very important as Chairman of the company is the leadership team we have in place, you had a chance to hear from 2 of our leaders in Tim and Sudhanshu. But our broader leadership team is incredibly strong. As I said, it's a mix of talent that we've recruited from the outside as well as people we promoted from the inside. And then the depth of talent and the pipeline below them has never been stronger. And that ultimately gives us the highest level of confidence in the future of the company. So we get to take a break. I know I need one. 2:45 is when we want to come back in, and we'll be able to answer your questions, which I know you have, and continue the conversation then. So we'll see you 2:45. [Break]

Everyone, if I can ask you to find your seats. We will begin the Q&A shortly. All right. Yes. Please, executive team, find your seats. So we're about to kick off the Q&A session. But before I do, I want to give an acknowledgment and a shout out to key members of our broader team who are here. Olivier Goudet, one of our KDP directors is here, Monique Oxender, our Chief Corporate Affairs Officer. And last but not least, you've got Phil Drapeau, who runs Future coffee Systems and Morgan Lombardi, who is on the K-Cup systems. So thank you to the broader team for your support once again. We're going to kick things off. There are 2 microphones traveling around. Please raise your hand, and we will call on you. Here we go.

Thank you. Dara Mohsenian from Morgan Stanley. So Bob or Tim, maybe can you talk about the international opportunity? Obviously, you highlighted it's been a strong growth business for you guys over the last few years? Is it more a continuation of the strategies in place from here? Or are there sort of new strategies you're putting into place and any investment behind that business. And then maybe just on the coffee side. Obviously, there's been some short-term weakness in the last few quarters. Can you just talk about the recovery potentially in that business as you look out over the next few quarters? What are the key factors behind that as you look at it and just sort of diagnose to us that business and the path to recovery going forward.

Dara, I would suggest that Sudhanshu, start off on international because international reports into him. And I think, Tim, why don't you take the coffee question because Tim has been digging into that in his first few months fairly heavily.

Dara, so international for us is close to $2 billion business. And we did this segment last year, and you saw the growth we have laid out in the last 5 years is close to the high single digit, both top line and bottom line and in both the growth we're seeing, we will need that kind of growth to deliver our mid-single-digit algorithm on top line. Mexico and Canada is the primary market. We're doing very well. We have lots of room to grow there. So the strategy is continue to do well what we were doing in Mexico and Canada, continue to lift and sift ideas from U.S. that [ perk the ] RGM, but we are also investing in routes in coolers. That's what we do in DST company, and we're doing it. But we will always be doing it. So the goal there is keep international as a growth driver. And we also will look at some inorganic item because inorganic ideas there, it's a lower multiple there than in the U.S. But we have lots of white spaces to grow in those 2 markets, and we will continue to driving the outside top line and bottom line growth there.

Yes. And coffee, Dara, I'd start by saying, as I said in the prepared remarks, overall, stepping back, we're bullish on coffee. I like -- I've worked in coffee before. I like this coffee business a lot more than the last one that I ran, which was far more RNG roast and ground centric. Obviously, the margins on this coffee business are excellent. For me, I kind of start by saying, look, is there a serious coffee problem, more structural, more generational, et cetera. And I've come to the view, no, there's not. And I shared some of those stats today. I mean, coffee literally hit a 50-year high in U.S. consumption in 2022. There isn't a coffee problem. Coffee is a great category, #1 drink -- LRB in of all LRBs and equally salient and important in the younger generation as it was in our and above generation. So I tend to rule that out in a hurry. No doubt of late, it's been more challenging. And I think the big macro backdrop on that is the massive disruption and just basic consumer behavior on the other side of COVID that initially provided an at-home coffee business, the huge tailwind and subsequently, a headwind, and we're still kind of working through what is the new behavior there. Beyond that, there's a couple of other things going on. And I think a couple of other things informed our plan around a turnaround. The turnaround you will see gradual recovery in 2024 in our view. And I think it's around the elements that I mentioned here, and I'll quickly highlight them again. I think, first of all, cold, there is no doubt that there is a move from hot to cold coffee, particularly among youth. I'm really excited about our brew and chill I'm excited about our new pods specifically formulated for it. I'm excited that we're pushing into refreshers. So I think the cold push is a big idea. I think on -- I want to talk kind of the barbell of the economy, both affordability and premium. I'll start with affordability. The price per cup of a K-Cup relative to drip and relative to away from home is as compelling, if not more compelling than ever. That relationship, I don't think we have a problem. Having said that, the absolute price point that she has to shell out at her favorite club store or mass or grocery outlet, given overall inflation that we've seen. And given the fact that coffee is one of the top dollar rings out of the top food and beverage categories across the marketplace, there is a price point there. And one of the things we've done is we've looked at -- we've kind of segmented our consumer base into low, medium and high income. The higher income kind of the top tertile, no issues whatsoever. Growing consumption, growing love for Keurig, all good. We are seeing a little bit more on this side. So that informs on the one hand, some things we can do on that. What does that mean? Let's get our price promotion strategy right. We're seeing that in the market. You're probably seeing that in some of your data on owned and licensed, we're seeing recovery. Let's make sure we got the right price pack architecture. So when she buys that 10 or 12 pack or 40 packet club or whatever, you're hitting a decent key threshold. The other thing for me is I think we can do an even better job of explaining the amazing value relative to the out-of-home experience. As we've raised our game in quality, as we've brought super premium brands into our system. And as we innovate the brewers like we talked about today, truly the chance to remind or educate a new consumer group around the relative affordability of a great cup of coffee, latte, Cappuccino, et cetera, relative to what she's still paying $5, $7, $8 out of home, I think that's a big opportunity. So that's on the affordability. Then on the premium side, we're going hard after premium. You've seen it. We welcome Lavazza in. We've got La Colombe. We're going to push on the premium side. And then think about total coffee. The last thing I'd say is ready to drink. We are bullish on the La Colombe. I've seen a number of you have tried it. Hopefully, you like it as much as I do. I think La Colombe is a great opportunity for us to make probably the first very meaningful push into RTD. So I think in a nutshell, Dara, we are pursuing this total coffee strategy, really looking at it from a consumer lens to drive the turnaround.

Chris Carey, Wells Fargo. So just on the cold side of the business, from a DSD capability, can you maybe talk about -- well, you talked about it already, but a little bit more of why the DSD business gives you that competitive advantage to be able to win more business. And I guess underlying the question is, clearly, there's been a lot of debate around near and medium-term growth in your coffee business? Have you gotten more comfortable or confident in the ability of your U.S. refreshment business to perhaps be a bit faster over the medium to long term, maybe leveraging a bit of this partner strategy? And then maybe just comment on the margin mix implications as you start to fold in some of your partners over time.

I think Chris, in terms of DSD, as we talked about in the presentation, there's really 3 systems of scale in the United States that can reach every retailer in merchandising a single or a can or a bottle in a cold format, and we have one of those 3 systems. Company-owned, we cover about 80% of the U.S. population all the way down -- our employees go all the way down the store. And then we've got dedicated distributors that cover the remaining 20%. That is really a critical enabler for growth in beverages. It allows us to lift the performance of our existing brands. So one of the reasons why you see 2 points of share growth on Dr Pepper, yes, it's the marketing, it's the innovation. It's also the fact that every year, we've improved the quality of our distribution system that is kind of underappreciated and how much of a driver that is across our portfolio. It is the single biggest attraction for partners to come into the system as well. There are other elements and Tim outlined them really nicely that it's more than just that, but that is the single biggest thing. And when you take a look at entrepreneurial brand scaling, they can get to a certain scale somewhat on their own. But to get to national scale, they have to build a network of 200-plus individual distributors. It's very difficult to manage and they are into a distribution system in many of these markets, it's not the top tier system. So many of these entrepreneurs have come to us, come to us because they're in that system and they want out of it. La Colombe is a great example of that. And that's the door opener for us that allows us not to accept everyone, but to sit down and say, is there a business opportunity for us? Can we make money at this? Can we create a win-win scenario? And do we think with like minds about the industry. So it is a critical enabler not only to drive organic growth in our portfolio but also to attract new partners into the system. It's an expensive asset. We know that. So we continue to make it more efficient and improve its effectiveness. And it's an overused term, virtuous circle, I have been using it for 20-some years or whatever in CPG, but it is true in CPG that when you get volume, and you get to be a scale in DSD, you're able to have bigger drop sizes, which means more frequent coverage, which means better merchandising and fewer out of stocks. And for us, we've had good scale and large outlets but not sufficient scale and small outlets. And that's where a big portion of the growth in profitability is in beverage. Just by adding C4 and Electrolit, as Tim pointed out, we get a 50% increase in the scale and chain convenience stores, which allows us to get into that mode of now bigger drop sizes, more efficient cost structure, better servicing, which lists all of our brands. So all of this works together. It's the innovation, it's the marketing, it's the distribution quality and all of that also attracts partners into the system. The other thing that I would point out is every partner who has entered our system in the past, call it, 5 years, has won. And we've done it in a way where even in the category I described where we had multiple entries, premium water. Not only do we, as a company, become the #2 premium water player, but each individual brand in that portfolio in water grew simultaneously. And that has a great word-of-mouth effect to it, and we're seeing the flow of great high-quality brands who want to come into our system and talk to us about equity investments and other incentives that we talked about, just on the rise. And so this is -- we talked about this back in 2018, I think a lot of people were skeptical. Look at it 5 years later, a lot of what we talked about with learning and some mistakes along the way has really come true, and we keep making this model better and better.

So just one quick follow-up. Productivity was another key focus today, felt a bit incremental. The revenue line is so debated right now because of coffee and going back to just attacking this from a different angle. Do you feel better today about your ability to protect that high single-digit earnings algorithm over time, even if there is some volatility in the revenue line. I know that's not what you're expecting on the top line, but that is the market debate right now. So does this productivity give you increased confidence in your ability to protect earnings over the next few years as it -- as compared to maybe the recent few years where productivity was under a bit more pressure?

So if we looked at our past performance, we grew 6% net revenue and 11% EPS CAGR. That's what we have delivered, and you saw coffee was only growing 2%. So that shows that the coffee only grew 2%, and we delivered top line and EPS growth of 11%. We did talk about during COVID time, productivity took a backseat and it's the -- like customer service at any cost, and that was the right decision to do that then. But we started doing the productivity work in 2022. We started second half. You saw that 2023, it helped us. We -- on the underlying base, we delivered our algorithm. If you take out all the nonoperating items out, our EPS was in double digit. So we feel pretty good about our productivity program. You saw our focus on overhead. This is back to less pricing that the way you run a CPG business, you do organic growth, you do volume mix growth, you expand gross margin, you create operating leverage. And we feel pretty good about our long-term algorithm. And these are -- the building blocks are productivity. We will invest some in marketing. I talked to detail how we will invest money in marketing, but we feel pretty good about our algorithm.

And Chris, I think it's important that on any aspect of our business, there are metrics that we control, there are metrics we heavily influence, and there are metrics we have less influence over. And so our belief has been that we really drive and take accountability on the things that we can control to help offset those we have less control of. I think coffee is a good example of that. We've improved our margins dramatically on that, a combination of productivity and getting pricing realization, and this isn't retail pricing realization. This is pricing with partners that was lagged during inflation. We've improved our relative share within the marketplace. And we continue to gain share of occasions as a category and as Keurig specifically. And the one we don't fully control was the global at-home coffee category. I personally don't believe that that's something that will last forever. And as it rebounds, we put ourselves in an advantaged position by having bigger relative share and higher margins. And also in the short term, to your question, it gives us flex if it doesn't come true.

Bonnie? Thank you.

In there, Robert. I don't think you can see him. He's all the way over there too.

Okay. Thank you. So you've announced some interesting innovation today with your new chilled brewer and then the K-Rounds. But in the context of that, it sounds like your investments are going to step up. So could you help quantify that for us? And then when you expect to achieve returns on those investments? And then also, I'm wondering how incremental you expect the new innovation to be, thinking about it in the context of your existing consumer base or do you think it's going to cannibalize? And then in the context of that, how do you think it's going to evolve your annual 2 million new household target that you have each year? Will it accelerate that? Is that still a target on the table?

Do you want to do Brew + Chill?

Sure.

I'll do the investment in the K-Rounds. I'm going to do that and then anything we left out.

Good. Well, as mentioned earlier, Bonnie, we're really bullish on Brew + Chill. That will launch this fall. Obviously, we're going to put some marketing and some muscle around it, both from a brewer standpoint as well as a corresponding pods. Big push on refreshers as well from Donut Shop. I don't think we're in a position to kind of quantify the amount of marketing spending, but our intent is we will be spending more, certainly versus the past, and that's going to be a big priority around our investment. I think that also does, given the fact that at-home coffee significantly under-trades on cold relative to the out-of-home experience, I do think that will be a meaningful driver in our continued pursuit of adding further penetration to our brewer estate out there.

Yes. I think our experience on our cold or iced journey to date has been interesting. We introduced Brew Over Ice features on most of our brewers. It lowered the temperature, provided more concentrated coffee. When the ice melted, you got an acceptable iced coffee. We enhanced that over time. We've introduced ice pods. We introduced a line two years ago called K-Iced, which was the next version of that. And when we introduced K-Iced, we knew consumers came to us and said that we want one that really comes out chilled. And now we have the Brew + Chill. As we've introduced those, we find that the incrementality of the ice brewers, it's well north of 50%. I can't remember the exact range, probably closer to 70%, but well north of 50%. These are new users to the single-serve category and in most cases, because they're exclusively cold coffee drinkers. So when they saw K-Iced and they see the pods, they realize there's a brewer finally for them. And so they come into the system. And once they are in the system, as we know, they stay in the system. That's true across all of our brewers. I think the Brew + Chill takes it to the next level. It will be a premium machine that over time, hopefully, we can get the price down on that and expand our coverage of it. And we're attracting two things when we do that. We attract a younger consumer, in general, into the franchise. And also, we open ourselves up for an afternoon consumption occasion that we don't always get with hot coffee. With regard to the investment and the scale-up timing and everything else on K-Rounds and [ K-Café ], we're not going to talk about that today. In fact, the reason we've been talking about it with you at all is because we started sharing this with partners and retailers. And we're about to launch a beta test, and we were right on the edge of news leaking out. And so instead of it leaking out and you learning about it secondhand, we figured we would talk about it directly. Learning from a study of past experience on new system launches, whether it was Keurig system, competitive systems or in other categories, what we decided is the best time to launch it is when we feel like we have it just right. And so we don't want to be in a situation where we overpromise and then are chasing a date. We're going to let the consumer speak. We're going to do the beta test, we're going to learn from it. I'm sure we'll gain some great insight that will make the success of that even higher. And we'll -- as soon as we're ready to roll it out, then we'll be in a position to talk about investment, margins, expectations, et cetera. Your last point about when you add this all up, is there any change to our long-term outlook in terms of the way that we will grow household penetration, there's no change in that. That's -- this is -- we've driven it by bringing innovation. I look at this as a way. Once we get to K-Rounds, it will be a different conversation, but we're not ready to talk about that.

So we should still just think, just to clarify, 2 million each year is a realistic target.

Yes. I mean we continue -- we think about steady household growth over time.

I think, Robert. You can see him over there.

Robert Ottenstein, Evercore ISI. Two questions. On one of the slides, I think you had a number of income statement metrics. I think one of them is advertising. You had numbers and then you had a target. And the target was up a fair amount. Did that target represent '24 spending or some time in the future? Just trying to get some clarification on that and then what the drivers are there. And then the other question is on the cold side. You are very strong with the lower-end consumers, and I'd love to get your sense of the state of that consumer segment. And in terms of your algorithm for this year, are you expecting the lower-end consumers, more stressed consumers to be stronger in the second half of the year? Given that wage growth has been pretty good or other people thinking second half could be tougher. So I'd love to get your sense of what you're seeing now and what your expectations are in the second half of the year that underscore your algorithm for this year.

Sudhanshu, you want to cover the first one and then...

So the question is we've talked about that one of the pillar we have for full for growth. So obviously, productivity and any overhead savings we have, we will invest in brand. But whatever we factored in 2024 is factored in our algorithm. So our algorithm for 2024 is mid-single-digit top line and high single-digit EPS. We have factored all marketing investments. The arrow is all about, we will continue to invest in brand. We have iconic brands, so that -- you signaled that, that any savings we get, productivity we get, our first dollar will go to building our brand, and marketing investment will be there. Obviously, we will do it in an ROI way, the way I explained. But for 2024, all of those things are factored in the algorithm, which we just reaffirmed today.

Yes. What I would add to that, too, is if you go back to, I think, 2020 was the lowest year, we've been stepping up our spending each year since then on the demand side of our business. What I think is interesting is in the previous days of marketing, and I grew up in that world, you would target marketing as a percent of sales. We now have such sophisticated tools that the right way to do it is to target it based on an ROI. And we can measure the effectiveness of each dollar that we'd invest next. And we're still very much in the steep part of that return curve. Theoretically, there's a part -- a point in which it levels out, and that's when we know that we've maxed out. But I can say that we're still very much in a steep curve, and that's why we drew the arrows up and made it ROI-based for clarification.

Just to add to that, that was labeled illustrative, right? What we want to demonstrate to you is that we're committed to high-quality investment behind our brands and capabilities. We will approach that through that ROI lens that Tim and Sudhanshu talked about. But I wouldn't look at that and say, how high is the bar, and that's exactly the target.

I was going to measure it and got a ruler.

Do you want to talk about the consumer, especially with regard to our LRB business?

Sure. I think, first, we've got a nice diversified portfolio that offers from value through to premium, including on the cold side. So clearly, CSDs are a large part of our business, but we've got plenty of premium expressions in other categories from premium water and premium tea and coffee, et cetera. We've seen what I'm sure you've seen, which is to the extent there is any sort of prolonged economic concerns at a macro level, actually, these categories tend to perform very well starting with CSDs. And then in terms of what is our assumption for the 2024 plan and the guide, we aren't assuming either a miraculous recovery economically nor a significant downturn. I think it's -- we feel good that based on what we're seeing sitting here today in mid-March, in terms of the state of the economy, that we've got the right macro assumptions that we can deliver on that MSD top line and HSD bottom line.

Yes. I also think I'd like to keep it really simple and look at the beverage industry in aggregate over time. The beverage industry moves with population growth from a volume standpoint. As Tim said, people drink about 90 ounces a day. That doesn't change over time. So that would imply that the beverage industry would have grown at 1%. But it's grown closer to 3% to 4%. That's been through premiumization. And it's not just taking pricing. It's also high -- offering higher-value products that people are willing to purchase because it has more functionality to it. So there's a mix opportunity for us. And then also, we have another advantage and that is the white space in our portfolio allows us to capture share by entering new territory. And we've got a partnership and investment model that I think is differentiated. So we layer all of those on top of each other, the way that we think about it. We are sensitive to pricing, especially on the lower-end consumer. But we have many levers to pull to be able to drive growth even with that being challenged.

Let's start at the front and work our way back, if that's okay.

Bryan Adams with UBS. Sudhanshu, I think this is more so for you. Just on the coffee margins, that's the one business where if you look where we are today, still a few hundred basis points below where we were at peak. So I guess I'm just curious, as we think about getting back to those mid- to high 30s operating margins, how much of that is contingent on like the single-serve coffee category? I know you had it up there, like a 5-year CAGR of 4%. How much of that is contingent on getting back to that kind of growth in the business versus some of the other levers that you've talked about today in terms of the productivity? Maybe even some mix accretive innovation, if I don't miss my guess, not sure. But -- so if you could just kind of dimensionalize how important that is in getting back to those levels.

So I talked a lot during the last call, the margin compressed for last two, three years. And one of the big lever was the partners contract. We didn't have the inflation built in. And then that time, inflation is high, and that was one of the reason. The second reason was productivity, focus for service at any cost during COVID time. Last year, we started working on it. And we said, all our contracts, partners contract, we put that clause in and so structurally, we changed it. So now it's for the long term, it's fixed. Nobody will do any long-term contract without inflation. We learned it the hard way. But it took us two to three years the margin to go back to. So that's what I said, it will take us two to three years to get back to the margin. We said that in 2024, we will -- it will be better than 2023 because all of those things happen in the second half. But that's where we come -- how much -- what investment we make to drive the category. So that's the lever we will use to drive the category, how much investment we need. Category is one factor in, but the productivity, the partner pricing, those things, we control, the mix management, that's CPG 101. So we feel pretty good about that we will get back to the margin we were before. But it's not one-quarter, one-year journey because it took us two to three years to get there.

Just go directly behind Bryan. Right there. Right in front of you.

Brian Callen of BofA. Sudhanshu, just relative to the sequential improvement in free cash flow expected, I guess, this year and beyond, can you just describe a bit more about what's left in this supply chain financing unwind? What are the suppliers' conversations versus maybe just the wrap effect? To us, it looks like there's maybe -- if you normalize sort of the supply chain financing relative to payables, that maybe there's a quarter or two left of drag. So if you could dimensionalize that for us? And then related to that is, how should we think about working capital maybe from a dollar perspective, the headwind this year from that program, and the offsets sort of as we think about cash flow improvement?

So two things. First is supply chain financing program. That was the right strategy at lower interest rate environment. We were -- our goal was to de-lever, and you saw how we went from 6x to 3x. But when higher rates started happening, it didn't make sense to us because our balance sheet is much stronger than individual supplier balance sheet because it is the cost to the program. At the peak, it was close to $4 billion. I think it's second, third or fourth quarter of 2022, and we ended the year last year with around $2.4 billion. So the bulk of the pain is done. That was the right thing for us to do because it's also strengthened the balance sheet. It's also helped us, our gross profit, because when we remove the vendor out of supply chain financing program, you open up the base, this basic demand supply. And that helped us get better pricing, and you saw all of those operating profit, gross profit benefit. Those things helped us to take out all the nonoperating items we had. We said in the year, we will be half in 2023, but we saw this opportunity. We pulled that lever. So bulk of the pain is done. But again, it doesn't make sense to make a zero supply chain financing program. That's not our plan. Our plan is it has to make economic sense for us. So if interest rate goes down and it's better for us to keep those vendors at that term, we will keep it that way. Impact of -- on cash flow in '24. As I said, bulk of the pain is done. Second half was better than first half with cash conversion, and you will expect sequential improvement in 2024 too. Will we get to close to [ $100 million ] this year? No, because they still have some wrap impact. And then we will make individual decisions depending on what the rate environment is, where we can get better supplier, better cost. But it's more of a day-to-day management versus a blanket systematic that we will be zero in supply chain financing. But 2024, we feel good about our cash conversion versus 2023 and our long-term target remains at the same level as our largest beverage peers. We generate a lot of cash.

Let's go to Rob and then ahead. Thanks.

Rob Moskow, TD Cowen. I think there were some comments about productivity accelerating to a 3% to 4% rate. But I think you also talked about productivity being kind of disappointing historically, and now you've realigned incentives within the organization. Can you be a little more specific as to what you realigned and how that will unlock more opportunity?

Yes. I would say, overall, first of all, for clarity, last year, we had a very good year on net productivity in 2023. And I think it was that first year post that COVID zone of those two to three years where it was literally all anyone could do, including KDP, simply to service our customers. So I think last year gave us the real proof point and the confidence that as we shift back towards classic continuous cost improvement, we can save money, and we can do it in a continuous way. As I think about the next chapter and you think about these incredible brands and these great ideas that we've shared with you, we know and Bob said it earlier to another question, and I've seen these curves, these S curves, there's still room and there's growth to be had if we could invest more in our brands. So certainly, for me, also coming in, dialing up our productivity focus as a company has been a big priority, and that's why we've called it out very explicitly in that new strategy. With that, I think, comes with all sorts of, I would say, governance, incentives, right, in terms of how we're structured, rhythms and operating routines. And really, messaging around big levers to pull. I gave a few examples in the prepared remarks. I think identifying waste across the system in every conceivable manner. Yes, of course, scrap off the production line, breakage in our DSD distribution centers. But there's also a lot of kind of invisible waste in our system in terms of ways of working, et cetera, almost from a white -- or clearly, on a white collar basis in addition to blue collar. Design to value is still, for me, a -- maybe, untapped would be too strong of a word, but a less leverage than it can and should be, lever for us to pull. So again, you think about every one our products and processes and really attacking it from a design to value, understanding what is driving the true value to consumer or to customer. Everything else, rip it out. Again, I won't do specifics, but I've asked some questions in both R&D and manufacturing around what have we done in those areas. And I think for all the right reasons, remember, the three chapters of cost. First things first, we took two terrific companies together, and we created $600 million worth of cost synergy merger, fantastic. Then we hit the COVID pandemic, and it was all we could do to get the cans out the door. And now we're here. So without being pejorative towards the past, the fact that there is still now that opportunity? Yes. And are we going after it? Yes. And are we putting more things in place around that in terms of a specific strategic call-out and the imperative on it, executive sponsorship incentives, more levers to pull, et cetera. In a couple of weeks, I'm getting the top 175 leaders of our company together. This is going to be a big thing, Robert. We're actually going to have a breakout session on it and everything. So I think you're seeing that. But again, for me, what builds confidence is we saw it in '23. You saw it on the graph. We stepped it up, and we will continue to step it up because I know that when we do that, we can reinvest that back into our brands and our innovation and we can drive good growth.

One thing to it, if I would. I think I ended up by saying strategies are great. People are what really drive this and empower it. And I talked about the strength of our leadership team, of people who are not here today, our supply chain leader, Roger Johnson, just for perspective, set up our entire brewer supply chain network. And I always said, you never heard us talk about missing any shipments during COVID, even though all of our brewers have chips in them. We did a masterful job with his team of doing that. But what he actually did is simultaneously took out hundreds of millions of dollars of cost in our brewers. We talked about that publicly, while improving quality, while lowering the price point to consumers and driving innovation. It's almost impossible to do all of those things simultaneously. He was elevated to the role of Chief Supply Chain Officer for KDP in end of 2022. And one of the reasons we had such a good improvement in 2023 was under his leadership, which is a mindset and a capability and training people. I would just add that to everything that Sudhanshu and Tim said to say why we have conviction around this. And you can tell, we have a lot of passion around it. The reason we have passion around it because it is the enabler to invest more in the brands and also, where necessary, improve margins.

On the incentive piece, what happened, we have now three-BU structure. So before, we're used to BU leaders, BU -- business unit folks used to get what they deliver. During COVID time, what we did to make sure we make the right strategic decisions, we put everyone in ONE KDP plan. Starting last year, when we created three-BU structure where we have top line, bottom line targets, we moving towards it. We may move in 2023, and we're going towards have the right incentive for BU leaders because we want to run it in a BU way. They have a top line target. They have the bottom line target. That allows the bottom-up idea of productivity because they're incentivized on that. So that's the one change. During COVID, we made it ONE KDP. We're going back to the BU-centric that was in 2023. We made a change in 2023, that more of the mix of folk's bonuses or incentives are going towards running your own P&L.

We probably have time for just one or two more questions. So let's just start there.

A while ago, you talked about the latent capacity utilization or latent capacity in your DSD system. So where does that stand today? And is there any way you can help us understand the incremental returns you get from your partner brands relative to your existing brands or just something more than they're accretive?

So as we said, the partners' brand gives us scale. So we give you an example of C4 or Electrolit. We go to C-store with those brands. It improves scale, it improves the basket size, drop size. It helped our own business, too. It has a halo impact on overall business. It's very hard to really do the ROI for that extra steps we made, the extra drop size we made, because it's helping the overall business. So I wouldn't -- the way I look at it, are we expanding margin every year in those business units or not? Are we -- so you can see the U.S. refreshment beverages where most of the DSD is, we're seeing margin expansion. We're projecting another margin expansion in 2024. So obviously, we look at each partners. It becomes very hard to isolate what happened for that product. You should measure us. Are we gaining market share in the -- across channels? And are we expanding overall margin in that business unit or not? It's very hard to parse out at which brand is getting the benefit because it helps overall portfolio when you make extra drop size, when you make extra trip to those stores.

And Brett, there's three or four things we're doing simultaneously to improve DSD. One of them is we've used a lot more of our tools and our capabilities to improve the effectiveness and the efficiency of the system. Tim talked about digital transformation. There's no better place than in a DSD system to be able to do that, where you get store-level data. The second thing that we've been able to do is actually invest. We've been buying up independent distributors. We've done about 30 of these acquisitions. In some cases, it allows us to expand our geographic reach. In other cases, it allows us to combine territories where there's overlap. New York is a great example of that. We made a sizable acquisition where we had three trucks going to stores with our brands in New York, and now it's down to two. And so you get a big boost out of that. By adding the partner brands, and I won't say it over and over again, you do get this virtuous circle where you get the scale and the effectiveness that gets into that. And so as you try to -- it's hard to tease them all out and say what's driving it. But they are all substantial drivers, not only of efficiency on a cost per case basis on effective -- but also an effectiveness on a merchandising performance and a growth perspective. The other thing I would point out on this idea of available capacity in the system, it's not like any of our trucks have ever gone out below capacity. Never. But what they have to do is they have to cover greater different distances. They have to have lower drop sizes. They have to make more stops per day, and they also have to skip stops. So the way the capacity works in DSD is we'll add trucks anytime we need to, to make sure that we're able to service. But what you really want is fewer stops with higher drop sizes and more effectiveness. And it feels like a capacity question, but it's really not. It's more of an effectiveness question there. And I would say that the effectiveness, I can say, without a doubt, the effectiveness and the efficiency of our system has improved dramatically, and we still believe we have a long way to go on that.

All right. Going once, going twice...

To your right.

Priya Ohri-Gupta from Barclays. Sudhanshu, just one for you. I appreciate sort of the reiteration of the long-term 2x to 2.5x net leverage target. Could you just frame for us how you're thinking about sort of that long-term period and whether we should just assume that the expectation is to grow into that, sort of appreciating that it's going to be a nonlinear sort of trajectory to get there?

So you see this year, we keep our capital allocation very dynamic. When we saw that we can get from JV when they were selling the secondary sale, we made a decision because we saw the value. But the two way you can get back to that target we have, 2x to 2.5x, one is EBITDA growth and then second is managing debt. Obviously, if some M&A comes, some investment comes, you make those decisions. But our long-term target remains 2x to 2.5x. But the other thing we're doing, the supply chain financing program, we're getting -- that's also strengthening our balance sheet. That allows us to be generating as much cash like before. We're just using it differently. So we can choose to reduce leverage if we see that's a better return versus through partnership, using -- removing more supply chain financing programs. So we've been making it more dynamic way, but we feel very good about it. You saw Moody's upgraded us last year. They reaffirmed our rating. We're very happy with the way our balance sheet is and the way we're making disciplined capital allocation decisions.

Okay. So you heard about strategy, outcomes and, of course, all of those pieces come together to support the algorithm. I'll just say, we have a lot of conviction, and we really appreciate both your support of shareholders and your interest more broadly. So thank you. And of course, we'll be available for any follow-up.