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

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Keurig Dr Pepper's Earnings Call for the Fourth Quarter and Full Year of 2024. This conference call is being recorded [Operator Instructions] I would now like to introduce Keurig Dr Pepper's Senior Vice President, Finance, Jane Gelfand. Ms. Gelfand, please go ahead.

Thank you, and hello, everyone. Earlier this morning, we issued a press release detailing our fourth quarter and full year results, which we will discuss during this conference call and in the accompanying slide presentation that can be tracked in real time on the live webcast. Before we get started, I'd like to remind you that our remarks will include forward-looking statements, which reflect KDP's judgment, assumptions and analysis only as of today. Our actual results may differ materially from current expectations based on a number of factors affecting KDP's business. Except as required by law, we do not undertake any obligation to update any forward-looking statements discussed today. For more information, please refer to our earnings release and the risk factors discussed in our most recent Form 10-K, which will be filed with the SEC later today. Consistent with previous quarters, we will be discussing our Q4 and full year performance on a non-GAAP adjusted basis, which reflects constant currency growth rates and excludes items affecting comparability. Definitions and reconciliations towards the most directly comparable GAAP metrics are included in our earnings material. Here with us today to discuss our results are Keurig Dr Pepper's Chief Executive Officer, Tim Cofer; and Chief Financial Officer and President, International, Sudhanshu Priyadarshi. I'll now turn it over to Tim.

Thanks, Jane, and good morning, everyone. 2024 was a pivotal year for KDP. In a demanding operating environment, we delivered attractive performance consistent with our long-term algorithm and full year guidance. We unveiled our refresh strategy, which we activated as the year progressed to set the stage for KDP's next phase of growth. And we took bold action to extend our portfolio into attractive white spaces and strengthen our commercial capabilities. In short, we struck a thoughtful balance between achieving our annual commitments and setting up KDP for consistent, sustainable success. 2025 is shaping up as another dynamic year for the CPG industry, and we will remain agile in our execution while targeting a similarly balanced set of outcomes, delivering on algorithm financial results and simultaneously advancing strategic priorities to fortify our long-term growth model. Let me start with a quick review of our key 2024 accomplishments, which spanned each of our 5 strategic pillars. Beginning with consumer-obsessed brand building, a successful innovation slate and engaging marketing campaigns drove attractive growth across many of our iconic brands. To provide just a few examples, Dr Pepper Creamy Coconut was our largest limited time offering ever and generated significant buzz. We capitalized on the dirty soda cultural phenomenon powered by social media, which helped drive our eighth consecutive year of market share growth for Dr Pepper. Canada Dry's first brand extension in year, Fruit Splash Cherry was the #1 innovation in the CSD category. The Mott's fall marketing campaign highlighting its fresh, minimally-processed apples fueled full year share gains in juice and strong back half momentum in sauces. And in Coffee, our owned and licensed brands accounted for over 50% of the pod category innovation, spearheaded by our distinctive The Original Donut Shop Refreshers line, which was the #1 new product in the category and doubled our initial plan. We shaped our now and next portfolio, seamlessly transitioning Electrolit and La Colombe to our DSD network and onboarding several new cola partners include leading brands such as Black Rifle in the U.S. and Canadian icon, Kicking Horse. GHOST is yet another example of our portfolio strategy in action. Through this acquisition, which closed at year end, we added a successful emerging brand in the high-growth energy category that will benefit from inclusion in our advantaged distribution system. In total, our actions accelerated KDP's portfolio evolution to structurally faster-growing segments within the beverage industry. We amplified our route-to-market advantage and further extended the reach and power of the KDP DSD system across multiple geographies and sites. Most notable in 2024 was the territory acquisition to extend our manufacturing and distribution presence into Arizona. The transaction provided direct exposure to a growing market and added high quality scale to our supply chain and logistics networks. We also executed well across our existing footprint, translating to healthy marketplace trends for our base business and strong performance for our partner brands. Our fuel for growth focus permeated the organization, driving productivity savings at the high end of our target and generating SG&A overhead leverage, particularly in the second half of the year. And finally, we strengthened our free cash flow generation, which funded dynamic capital allocation activities. These included $1.1 billion of share buybacks, our fourth consecutive annual dividend increase and over $1 billion of strategic investments that will enhance our ability to deliver consistent, profitable growth in the future. Our strategy and the 5 pillars underpinning it represent our North Star. In 2025, we will set a high bar for operational excellence, while further advancing each of these pillars as we become an ever stronger and more advantaged beverage company. To summarize our full year 2024 financial performance, we delivered results consistent with our long-term algorithm, with constant currency net sales growing approximately 4% and EPS growing 8%. Strong productivity and overhead savings drove P&L leverage and funded higher marketing investment. Free cash flow generation and conversion also improved considerably relative to prior year in keeping with our expectations. The strong performance during the year was led by our U.S. Refreshment Beverages and International segments, which each demonstrated standout momentum and together represent over 70% of revenue. In U.S. Coffee, we made progress and strengthened our business resiliency as the industry heads into an inflation-driven pricing cycle. Moving to Q4. At the enterprise level, we finished the year with momentum. During the quarter, KDP delivered a meaningful top line acceleration and solid bottom line growth. Constant currency net sales increased more than 6% led by U.S. Refreshment Beverages, which delivered an impressive double-digit sales gain. Notably, the net revenue trend across each of our 3 segments accelerated relative to the third quarter. Volume/mix was the primary top line driver, with year-over-year growth in each business. Price was also a positive contributor, with gains in U.S. Refreshment Beverages and International more than offsetting temporary price pressure in U.S. Coffee. Our top line growth, productivity savings and overhead discipline mitigated escalating inflation, enabling increased investment behind our brands and solid EPS growth. Focusing on Q4 segment results. U.S. Refreshment Beverages net sales grew a very strong 10%, led by a volume/mix increase in the high single digits. Our teams executed exceptionally well to deliver this growth, which reflected base business momentum, traction from new partnerships and route-to-market additions. Carbonated soft drink momentum was particularly strong in Q4. The category remains healthy, and we benefited from compelling innovation and brand activity, as well as offerings that appealed to value-conscious consumers. Our CSD brands continued to win in the marketplace with market share gains in the quarter. Full Flavored Dr Pepper is now the #2 CSD in the category. And the Dr Pepper brand is the undisputed leader in the vibrant CSD flavor segment. Dr Pepper was also the CSD category's largest share gainer during Q4, reflecting its consumer appeal, unique positioning and the benefits of our commercial activities. For example, the seventh season of our Fansville college football marketing campaign was our most successful yet. We also saw continued traction from Dr Pepper's Zero Sugar portfolio, which will remain a strong growth vector going forward. Canada Dry was another top CSD performer supported by our Fruit Splash Cherry innovation. And 7UP grew market share as consumers responded to our Shirley Temple Holiday LTO and refreshed brand design. In 2025, we expect robust CSD growth to continue supported by engaging full funnel marketing activations and a promising CSD innovation lineup designed to extend our flavor leadership. This includes Dr Pepper Blackberry, which combines Dr Pepper's original 23 flavors with rich sweetness of blackberry; 7UP Tropical, which blends the crisp taste of 7UP with mango and peach flavors; and exciting seasonal activations across other iconic brands, including an indulgent and nostalgic A&W Ice Cream Sundae beverage and new flavors from our Crush and Sunkist brands. Notably, Dr Pepper Blackberry marks the first time we are simultaneously introducing an innovation across bottles and cans, fountain and frozen to maximize availability across various formats that our consumers enjoy. Beyond CSDs, the next largest driver of our Q4 growth was Electrolit, which is enjoying accelerating trends after converting to the KDP DSD system. Electrolit is one of the fastest-growing brands in the sports hydration category, and we see significant runway for future expansion. In 2025, we will focus on strengthening Electrolit's distribution, including further transitioning the brand from Hispanic specialty to the mainstream sports hydration aisle. We will also leverage our DSD muscle to build Electrolit's presence in multipack and zero sugar offerings, where the brand meaningfully under indexes versus the category leaders. Also during Q4, we made significant progress advancing our energy strategy. We drove strong growth for C4, gaining share within the attractive performance energy space and achieving an additional equity milestone in the process. We also began to transition Black Rifle Energy and Bloom to our DSD distribution network and closed on the GHOST acquisition. With a formidable distinctive and complementary energy portfolio now in place, we are enhancing our operating structure and adding dedicated resources to ensure KDP's success in this important high-growth category. Just 3 years ago, our share in energy would have been close to 0. Today, it is over 6%. In 2025, we expect well over $1 billion in retail sales from our energy brands, and have set our sights on achieving a double-digit share position in the coming years. Overall, we are pleased with the performance of our U.S. Refreshment Beverages segment. Our exceptional Q4 results capped a strong 2020, and we have exciting plans in place to support sustained momentum in 2025. In U.S. Coffee, Q4 net sales decreased 2% with a modest volume/mix gain, including pod volume growth, more than offset by a temporary net price decline. We are encouraged by the improving state of the category and traction from our own portfolio efforts. Let me elaborate. First, year-over-year trends in the at-home coffee category improved on a value basis when compared to Q3, and the exit rate was healthy, with December representing the strongest month of the quarter. Second, in Q4, we continued to emphasize affordability, drive premiumization and advance at-home cold coffee offerings, all initiatives that we believe will have multiyear relevance in the category. Consumer acceptance of our price pack down counts remained strong. Our premium product tier continued to grow through our expanded commercial relationship with Lavazza, and we captured incremental consumers and occasions through cold offerings like K-Cup Refreshers and our new K-Brew + Chill brewer. Third, we made progress expanding our participation in coffee formats and channels where we have historically been underrepresented. Our ready-to-drink coffee partnership with La Colombe performed very well, with retail sales growth meaningfully accelerating in Q4. Momentum in away-from-home coffee also improved in the quarter, and we see significant opportunity into 2025 as in-office work ramps and we further push into channels like hospitality and food service. The combination of these factors put U.S. Coffee on firmer footing exiting 2024, positioning it to be more resilient in 2025. We expect category conditions to be quite different this year given the inflationary pressure from coffee commodity costs. Accordingly, we are managing the business with 2 primary objectives. First, to preserve profit dollars and our ability to reinvest despite escalating green coffee costs. In response to this inflation, we announced pricing in Q4 that began to take effect in January, and saw many competitors take similar steps. However, the commodity price has continued to move even higher since then and we are evaluating all available options to offset the incremental pressure. These levers include driving greater productivity, optimizing mix and may also require further pricing actions with some elasticity offset. Our second objective is to continue to steward the single-serve category through marketing, innovation and activation in brewers and pods, while expanding our presence across total coffee occasions and solutions. We are planning to introduce compelling new products in various formats this year. And behind the scenes, we are advancing work on more disruptive launches like Keurig Alta and K-Rounds plastic and aluminum-free pods for the years to come. Turning now to International. We delivered another quarter of healthy top line growth with constant currency net sales increasing at a high single-digit rate. Momentum was broad-based across the portfolio. In International Coffee, our top line was driven by market share gains for brewers and pods. In cold beverages, our performance was led by Mexico LRBs, which grew nicely despite some signs of a macroeconomic slowdown. These results were propelled by Peñafiel line extensions, the expansion of power brands like Dr Pepper within Mexico and route-to-market investments across traditional and modern trade. During the quarter, we signed a Canadian licensing deal for Nestea, the leading iced tea brand in the country, furthering our international partnership strategy. The partnership will pick up later in 2025. And through this iconic brand addition to the portfolio, we expect to establish a leading position in an important LRB category while benefiting from enhanced scale across our total Canadian operations. All in, our International segment continues to perform well. We are prioritizing this business for reinvestment, underpinning our confidence it can remain an outsized growth driver going forward. In closing, I'm pleased with our performance during 2024. We delivered strong results in a challenging environment while simultaneously positioning the business for the long term. This outcome was a direct output of the talent, dedication and hard work of our 29,000 colleagues across KDP. On behalf of my executive leadership team, I'd like to thank them for their efforts and impact. Our challenger mindset is well suited for the current environment, and we expect to continue to see strong results in 2025 from empowering our teams to play offense and take calculated risks. I'll now turn it over to Sudhanshu and will return with some closing thoughts about the year ahead.

Thanks, Tim, and good morning, everyone. We are pleased with our results for the year with demonstrated excellent execution across the organization. We delivered 3.9% of sales growth, drove robust productivity to expand gross margin and leveraged SG&A through tight expense management. As a result, we grew operating income 9% and EPS 7.8%. We also meaningfully strengthened our cash flow generation and as Tim outlined, made notable strategic progress to lay the groundwork for our success in 2025 and beyond. Our fourth quarter closed the year on a strong note. Net sales grew 6.2% in constant currency, showcasing an acceleration relative to the first 3 quarters and led by U.S. Refreshment Beverages and International. Enterprise volume/mix grew 5.3%, reflecting healthy base business trends and an ongoing contribution from new partnerships. Net price realization was also a positive contributor, increasing 0.9%. Gross margin contracted 120 basis points versus the prior year. We generated significant productivity savings in the quarter, and also benefited from positive price realization. However, this was more than offset by building inflationary pressures and the impact of lapping a tough year-ago comparison. SG&A leveraged 20 basis points despite an increase in marketing investment, reflecting an enhanced overhead efficiency mindset across the organization. All in, operating income grew 3.4%, and including a tailwind from lower shares outstanding, EPS advanced 5.5%. Moving to the segments. U.S. Refreshment Beverages net sales grew an impressive 10.3%, accelerating from a mid-single-digit growth rate in the third quarter. Volume/mix was the primary driver increasing 7.5%, led by base business momentum, particularly in CSDs. We further benefited from an incremental contribution from Electrolit, where our partnership is progressing well and growth is accelerating. The quarter also included the modest benefit of an extra shipping day due to calendar shifts. Pricing grew 2.8% in the quarter, primarily reflecting favorable price realization in our CSD portfolio. Segment operating income increased 8.6%, driven by the very strong net sales growth and robust productivity savings. We delivered this result while reinvesting even as we absorbed a net headwind from lapping a larger C4 performance incentive in the year-ago period. In U.S. Coffee, net sales declined 2.4%. Volume/mix grew 0.7% in the quarter, driven by a 1.1% increase in port shipments. Our strategic initiatives showed traction with the underlying themes of affordability, cold and premium to remain in place on a multiyear basis. Brewer shipments declined 4% in the quarter, below point-of-sale consumption due to seasonality. On a full year basis, which smooths out the seasonality-related noise, brewer shipments increased 7.3%. Segment pricing declined 3.1% in the fourth quarter. We had expected some lingering pressure this quarter, but nonetheless encouraged by the improving trend. We anticipate category pricing will strengthen further in 2025 based on actions taken in response to green coffee inflation, including our January price increase. Fourth quarter segment operating income declined 5.7% with productivity savings more than offset by the net price decline and green coffee inflation. Moving to International. Net sales grew 8.5% in constant currency. This strong result was led by volume/mix, which increased 6.5%, reflecting positive momentum across regions. Net price realization was also a growth driver, contributing 2%. Inclusive of unfavorable effects, reported net sales increased 0.8%. Segment operating income declined 8.6%. This reflected 2 primary factors: First, a strong reinvestment in the quarter, including DSD expansion activities in Mexico and higher marketing across the segment; second, escalating green coffee costs in the fourth quarter, with related pricing actions in Canada due to take effect in the middle of the first quarter. Importantly, we see these as temporary dynamics and expect our International segment to remain a strong top and bottom line growth driver in 2025 as a whole. Moving to the balance sheet and cash flow. We generated a strong free cash flow of almost $700 million during the fourth quarter. This brought full year free cash flow to $1.7 billion, a significant step-up versus prior year, and we expect further progress in 2025. Cash generation is the hallmark of KDP, and we remain on track to restore our business to healthy structural conversion levels over the next couple of years. As Tim discussed, during 2024, we deployed the cash flow we generated in a variety of value-enhancing ways, including over $1 billion of strategic investments to acquire a 60% ownership in GHOST and expand our DSD footprint into Arizona, $1.1 billion worth of share buybacks and a 7% increase in our quarterly dividend, marking our fourth consecutive year with a dividend raise. We ended 2024 with management leverage of 3.3x, which reflected the GHOST transaction. This was above our long-term target of less than 2.5x, and more of our focus since 2025 will be on deleveraging. However, we feel comfortable that our accelerating free cash flow profile can support a disciplined, multipronged capital allocation strategy that also includes investments and steady dividend growth. Moving now to our 2025 guidance. On a constant currency basis, we expect mid-single-digit net sales growth and high single-digit earnings per share growth in line with our long-term algorithm. Based on current rates, we anticipate that FX will represent an additional 1 to 2 percentage point headwind. Our outlook assumes good momentum in our U.S. Refreshment Beverages and International segments and an incremental contribution from the GHOST acquisition. The plan also recognize that U.S. Coffee is likely to remain more subdued in a dynamic commodity environment even with higher pricing. We expect strong productivity and overhead discipline to generate fuel for growth and to support healthy operating income gains in the coming year. Below the line, we forecast interest expense in a $680 million to $700 million range, and effective tax rate of approximately 22% to 23% and approximately 1.37 billion diluted weighted average shares outstanding. There are a couple of factors worth considering when it comes to the quarterly phasing in 2025. For one, Q1 will reflect the impact of a later Easter and one fewer shipping day compared with prior year. Plus the balance between inflation, pricing and productivity generation is slated to improve over the course of the year. As a result, we anticipate stronger top line and bottom line momentum in Q2 through Q4, particularly as the contribution from GHOST builds following the transition to our distribution network. In closing, we are pleased with our 2024 performance and a good finish in the fourth quarter. We drove healthy marketplace trends across our base business, secured additional scale in attractive white spaces, strengthened our advantaged route-to-market system and embedded a greater efficiency focus throughout the organization. And we did this all while delivering on our plans. We are confident 2025 will be another year of progress for KDP. We expect to showcase our operating agility in a dynamic environment, our relative insulation for currency volatility and most importantly, our building momentum in the industry. With that, I will turn the call back to Tim for closing remarks.

Thanks, Sudhanshu. We achieved a great deal in 2024, and we're committed to delivering another strong performance in 2025. As we look to the year ahead, we are cognizant of the demanding operating backdrop, and will act with agility to navigate uneven consumer sentiment, higher inflation and a shifting regulatory landscape. We have momentum across much of the portfolio with an exciting slate of marketing, innovation and sales activation plans. We are moving with speed to unlock significant productivity savings and where appropriate, implement pricing in response to inflation and to ensure continued investment in the business. And we are hitting the ground running with GHOST, which we will activate in a big way as we transition distribution over the coming months. These factors support our confidence in another on-algorithm year, during which we will continue to distinguish ourselves as an advantaged player in the exciting beverage industry for the long term. Thank you for your time, and we're now happy to take your questions.

[Operator Instructions] The first question today comes from Chris Carey with Wells Fargo.

So I wanted to just maybe talk through the building blocks for 2025 beginning with the commentary on Q1. You've got the leap year, and you've also got the Easter dynamic, so revenue and profit -- well, and you also have green coffee, so revenue and profit do build. But I think there's also a dynamic where we're looking at year-to-date consumption trends which are very strong, particularly in your U.S. Refreshment business. So are you seeing anything different versus what we're seeing? Or are we really just talking about some calendar timing dynamics and green coffee inflation as we build through the year? And just connected, when you think about the overall delivery from a top line standpoint from volume/mix versus price and from a bottom line standpoint, do you have any thoughts on kind of where you would be thinking you're trending within the range given we're so early in the year? So just any thoughts on that underlying momentum you see in the business entering the year and just some thoughts on relative ranges and drivers for top line and bottom line.

Thanks, Chris. So first of all, we are pleased with our on-algo performance in '24, and you saw the exit run rate in Q4. And we feel we are well set up to deliver our algo MSD top line and HSD EPS yet again in 2025. Now let me walk you through the sales and EPS driver as we see them today. This year will be a year with a lot of macro things moving. But what we see today, there are some differences in how we think on sales and how we think on EPS. So when it comes to the revenue growth, it's fair to say that we see a path towards the upper end of our MSD net sales growth range. And the key drivers are continued momentum in U.S. RB and International. This is underpinned by strong innovation, commercial plan and some modest net pricing. As I said before, a subdued trend in U.S. Coffee in a dynamic commodity environment, even with higher pricing, and we think this is an appropriate planning stance. And the incremental contribution from GHOST, which will begin to consolidate in Q1 at a smaller contribution, but it will ramp as distribution builds primarily starting in Q2. Now let me come back to EPS. So we expect net sales growth and moderating -- a modest operating margin leverage that will translate into HSD constant currency EPS growth. We should have a good profit flow-through from volume/mix momentum both in U.S. RB and International. Now we also feel that GHOST will be modestly accretive this year, a bit better than we originally affected due to earlier distribution. But on the flip side, the inflation outlook is certainly more challenging than we thought even 3 months ago based on the direction of green coffee. We will look to offset this through pricing, strong productivity, mix and overhead discipline. So as we think right now, all in, MSD and HSD percentage are the right range to target in constant currency. I will also remind you, in reported term, we expect an additional 1- to 2-point FX headwind. But as I said, this is a challenging environment, and this outlook requires discipline and agility in the face of record coffee inflation and macro uncertainty. When it comes to quarter 1 and phasing, Q1, we do have a less shipping day, a fewer shipping day and also later Easter and only a partial benefit from coffee pricing and a smaller GHOST contribution as distribution transition occurs. So as I said during the call, we expect growth to accelerate over the balance of the year as the calendar normalizes, gross distribution ramps and pricing builds. EPS, too. Q1, EPS growth will be limited by net sales phasing, a lag of pricing to inflation, a tough lap from C4 earned equity in prior year period and a full quarter of financing costs for GHOST, with limited contribution from distribution. We also expect EPS to accelerate over the balance of the year, reflecting a better expected balance between pricing inflation, the GHOST distribution ramp and the phasing of productivity and savings realization.

The next question comes from Peter Grom with UBS.

So Tim, I was hoping to get some perspective on coffee, just as you look back to 2024. It's been a category that's been more difficult to call. I think the improvement has taken a bit longer than many anticipated. So I guess just as you look back, do you feel like you have a better understanding on maybe why category growth remained more subdued? And then just as you think about the stronger exit rate, what do you think drove that? And I know you're expecting more subdued growth in '25. But I guess my question is, do you feel like you have better visibility on category growth where we sit today versus maybe where we've been over the last year?

Absolutely, Peter. So I think stepping back first, coffee remains an attractive category long term. We remain committed and bullish on long-term coffee prospects. I remind you and others that it is a ubiquitous category. It maintains wide and passionate consumer appeal. It's the most consumed beverage outside of water. I think we believe even in an inflationary environment, there's ongoing opportunity for premiumization. We think there's an opportunity for us to have an even wider diversity of formats and channel penetration to distinct different -- to attract and capitalize on different need states. And I think in this inflationary environment that we've transitioned into, there's an opportunity for us to further showcase the value of at-home coffee relative to away-from-home. And that includes, obviously, our single-serve leadership position, but also our ready-to-drink offering with the new partnership with La Colombe. So to your question, back in '24, it was a year of relatively benign inflation, and it didn't start to ramp until the very end of the year. So our focus in much of the category was on volume stabilization. And I would tell you, overall, we were pleased and we felt like we were successful. Volume/mix in the year grew about 1% in '24. You saw pod volume turn positive in Q4. Obviously, now as we go into '25, we're in a completely different environment with record green coffee costs. We are shifting our focus. We must protect our ability to invest for the long term. We understand that with the pricing moves that we and others have made, there will be some volume elasticity trade-off. We're willing to accept that because overall, we think we need to play the long game here. And so as I said in my prepared remarks, as we go into '25, it's really 2 primary objectives: one, preserving those profit dollars in light of that inflation through a combination of the pricing action we've taken, mix, productivity, et cetera; and continuing to invest in the future, which we do think remains bright for coffee across our innovation and activation plans, pods, brewers and really stepping back and making sure we're expanding in the full coffee portfolio beyond single-serve position where we've got strong leadership. Having said all that, I'll remind you what both Sudhanshu and I said in the prepared remarks, we're planning for U.S. Coffee segment performance to remain subdued. And even with that, we feel confident in our overall KDP enterprise outlook of MSD on the top and EPS HSD.

The next question comes from Steve Powers with Deutsche Bank.

So I was hoping you could -- maybe building on what you outlined in your prepared remarks around KDP's ambitions in energy, maybe just a little bit more color on how you're viewing that market in 2025. Obviously, for you guys, GHOST is a big part of your plan for the year, plus activity around C4 and Black Rifle and Bloom. And we've seen a lot of activity articulated from other players as well, whether it's Red Bull or Monster or the news last week regarding Celsius and Alani Nu. So maybe just a little bit of perspective on how you're seeing consumer demand taking shape within the category and then how your portfolio is positioned to take advantage of white space opportunities within that fairly busy and changing competitive landscape.

Yes, Steve, we're bullish on energy, no doubt about it. We all know it's one of the fastest-growing categories within LRB, close to a double-digit mark over the last 3 years. I think there remains lots of opportunity to continue to offer differentiated brands that hit unique demand spaces and unique targets. We also like the profitability of the energy category because it really helps to fund high-quality long-term brand building. The need is there, ever present, ever more so in terms of a universal need for alertness. And I think you're seeing a growing category sophistication in energy, meaning that, yes, there's continued upside in household penetration, but channel development, there's still upside, segmentation, price pack architecture and again, unique positioning. So one of the things you mentioned in your question is we've seen some category consolidation, including some news last week, including our own exciting acquisition of GHOST that we closed on December 31 of last year. I think that speaks to the attractiveness of energy. And quite honestly, these last few moves make us feel optimistic that it will help fuel healthy high-quality competition that should benefit the consumer and really expand the overall pie within energy. We feel good that we've constructed now a portfolio that has a right to win in energy. I'll remind you what I said in the prepared remarks, 3 years ago, KDP's share in energy was basically 0. Sitting here today, it's over 6%, well over $1 billion in retail sales. And as I've said, we've got a double-digit share goal in the years ahead. When you look at this portfolio we've assembled, it's a series of complementary brands that can really target distinct consumer cohorts and demand spaces. C4, our large anchor brand today in the performance space, in fitness, strong offerings in high-stimulation segment with the Ultimate line. Our Black Rifle partnership, mainstream, veteran-founded, unapologetically American, the new Bloom distribution deal that we have, a female-forward brand with a very strong following, tremendous momentum, just getting started. And then GHOST, a lifestyle brand, a younger GenZennial target, really exciting flavor range, a leader in zero sugar SKUs. We -- as we get deeper and deeper with GHOST, we feel great about this deal. I think it's an attractive asset. It's a fast-growing brand. There's opportunities for KDP to add the value that you've seen us add in other partnership deals. Quite honestly, just yesterday, I was with the founders here in our Texas headquarter office, Dan and Ryan, we've got big plans. And we're taking the distribution here in just a couple of weeks here in early March. As Sudhanshu said, you'll see us ramp from there. But I think that gives us an opportunity to significantly impact the brand's trajectory. And we're bullish on what we can do under KDP's ownership for GHOST and for our entire portfolio of energy.

The next question comes from Andrea Teixeira with JPMorgan.

So my question is, first, what is embedded in for the pod volume recovery? I mean, obviously, the price/mix impact is probably going to hopefully inflect in the next few quarters with pricing already announced and potentially, as you said, additional pricing that you're studying. And how have elasticities been? One of your competitors had talked about elasticity coming in a little bit better than expected. And a follow-up on energy. To get to the double-digit share, basically, you're thinking -- are you thinking 2 parts of the same question, one, organic or M&A or a combo of growth as you want to come from 6 to double digits? And have you been able to secure some of the distribution gains as you called out with GHOST coming up in March as well as the -- as C4? What are you looking in terms of velocity as you expect to reach that double-digit aspiration?

Thanks, Andrea. Starting with your coffee question. As single-serve coffee category leader, it's critical that we protect our ability to continue to fund high-quality reinvestment, including and even especially in these times of inflation. And so we implemented a pod price increase in January. We announced that in the fourth quarter. Many of our competitors, but not yet all have taken similar action. And any time we take pricing, we plan for a level of elasticity. Obviously, volume is going to be weaker. It's a little early to get a clean read on elasticity at this point in the year. And part of that is because the industry and competitive pricing is layering in right now at different rates, at different times in different channels. I would tell you on the whole, the consumer response to date has not been especially surprising, largely in line with our expectations. Seed price has moved higher, and it's been up and down as we track it daily, obviously. And so we're looking at any and all options to offset any sort of incremental pressure beyond that first move. That includes productivity, incremental productivity mix expense discipline. It may require another pricing move. We'll assess that each and every day. And as we make our decisions, we'll continue to monitor consumer response and really focus on that first priority that I mentioned, which is preserving profit as the #1 priority and our ability to continue to invest over time. So I think that largely handles the coffee question. And then the other was back on GHOST. As I mentioned earlier in Steve's question, we feel great about the GHOST acquisition as I've gotten deeper into it with the team. I think it's a very attractive asset, and there's significant opportunity for KDP to add value. Distribution is obviously chief among them, but it goes beyond that. I think there's supply chain opportunities for us, R&D insights, et cetera. The distribution handover is going to take place here into KDP DSD starting in March. And so we have the opportunity similar to what we've done with other partner brands you've seen in the past to build ACV, build average items carried, build the quality of the display, secondary location, coolers, et cetera. And obviously, we're working hand-in-hand with our customers. And I think our customers are excited about what we will bring to the party on GHOST. And consistent with what I said to Steve's question, we're bringing this full portfolio of distinctive and complementary brands that I think can really reinforce one another, help drive our energy sales and also have a benefit back to total KDP DSD in terms of drop size, store frequency and DSD economics.

The next question comes from Kaumil Gajrawala with Jefferies.

Over the years, no one has been better than you guys at finding partnerships and alignments, I guess in terms of conversations about energy, but the new at least big hot thing seems to be around modern soda. There's been some transactions in the place, Coke is launching one of their own. Curious how you plan to play there and what sort of structures you'd consider.

Absolutely. I'll step all the way back to our vision. Our vision is to provide consumers with a beverage for every need anytime, anywhere. And I think as you referenced in your question, KDP has done a very good job of shaping our portfolio as a key pillar of our strategy. And we've made great progress in the last few years. And certainly, energy is the one we're talking about a lot today. But as you say, the addition of Electrolit in sports hydration, La Colombe in ready-to-drink coffee and many other partners across still, Vita Coco, Evian in water, et cetera. You will see us continue to do that. You'll see us continue to transition our portfolio to areas where the puck is going and where consumers have strong interest. And that includes appealing to health-conscious consumers. We've seen that in our own portfolio. 60% of our portfolio today is what we call positive hydration, no or low calorie or the addition of nutrients, serving of fruit, no sugar added, et cetera. Where we see those durable high potential white spaces, including the area that you mentioned in your question, you can be sure we're evaluating any and all entry avenues to participate in that growth pocket. That might be organic, that might be through partnerships. But as you've seen us do, we will skate to that, and we will continue to future-proof our portfolio to have the most growth accretive position in LRBs.

The last question today comes from Filippo Falorni with Citi.

I wanted to ask about the puts and takes for gross margins in 2025. Obviously, we talked a lot about green coffee inflation. Can you talk a little bit about your hedging, how much visibility you have there? And then also in terms of other inflation, particularly in aluminum for the Refreshment Beverages business. And then overall, it sounded like you have a lot of productivity. Should we think the margin expansion is more below the gross margin line? Or do you still expect a potential for gross margin to be consistent or maybe expanding in 2025?

So this is Sudhanshu. So first, our '25 outlook implies a modest operating margin expansion. And let me give you a few key drivers. First is operating leverage from healthy volume mix growth, positive pricing and active mix management across each of our segments. And yes, we do expect another strong year of continuous productivity at the top end of our range, 3% to 4%. We had a very good year in 2024 and then ongoing overhead discipline. So as of now, we feel very good about our plans. And obviously, we will remain agile in managing across various P&L levers to deliver on our commitment while continuing to invest in the long run. Your question about aluminum. So as you know, our general approach, we hedge 6 to 9 months, but aluminum is an exception since we do not purchase it directly. Instead, like much of the industry, we source finished cans and lift from U.S.-based suppliers. We lock in pricing through supplier contracts and often take longer coverage that -- for direct commodity purchases. So -- but the hedging only delays, it doesn't permanently offset where we are. All of these things, we have factored in our outlook, and we feel good about MSD and HSD EPS.

This concludes our question-and-answer session. I would like to turn the conference back over to Jane Gelfand for any closing remarks.

Thank you, Betsy, and thank you, everyone, for participating. We appreciate your attention and your support, and Investor Relations will be available all day to answer any follow-ups. Thanks again, and have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.