Good morning, ladies and gentlemen, and thank you for being here. Welcome to Keurig Dr Pepper's Earnings Call for the Third Quarter of 2023. This conference call is being recorded. I would now like to introduce Keurig Dr Pepper's Vice President of Investor Relations and Strategic Initiatives, Jane Gelfand. Ms. Gelfand, please proceed.

Thank you, and hello, everyone. Earlier this morning, we issued two press releases: the first detailing our third quarter 2023 results, and the second announcing our sales and distribution partnership with Grupo PiSA for Electrolit. During today's call and consistent with previous quarters, we will be discussing our Q3 performance on an adjusted basis, which reflects constant currency growth rates and excludes items affecting comparability. The company believes that the adjusted basis, while not in accordance with GAAP, provides investors with meaningful comparisons and appropriate insight into our business and operating performance trends. Details of the excluded items are provided in the reconciliation tables included in our press release and our 10-Q, which will be filed later today. Due to the inability to predict the amount and timing of certain impacts outside of the company's control, we do not reconcile our guidance. We'll also speak about the concept of underlying performance, which removes the impact of nonoperational items in the current and prior years. These items include gains on asset sale-leaseback transactions, reimbursement of litigation expenses related to the successful resolution of our BodyArmor lawsuit, a business interruption insurance recovery, and a change in accounting policy for stock compensation. Finally, our discussion this morning may include forward-looking statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are subject to a number of risks and uncertainties that can cause actual results to differ materially, and the company undertakes no obligation to update these statements based upon subsequent events. A detailed discussion of these risks and uncertainties is contained in the company's filings with the SEC. Here with us today to discuss our results are KDP Chairman and CEO, Bob Gamgort; and our Chief Financial Officer, Sudhanshu Priyadarshi. I'll now turn it over to Bob.

Thanks, Jane, and good morning, everyone. We are pleased with our Q3 results. KDP's diversified beverage portfolio and strong execution continue to support consistent delivery of our company goals and commitments, even as the operating environment around us remains dynamic. In Q3, healthy organic sales growth and significant gross margin progress fueled reinvestment and bottom-line growth, reinforcing our full year outlook, which remains unchanged. Third quarter constant currency net sales grew 4.1%. As expected, net price realization moderated from the first half but remains the primary top-line growth driver, while volume mix strengthened sequentially. Our performance reflected continued share gains in U.S. Refreshment Beverages, gradual recovery in U.S. coffee segment results, and strong momentum in our International business. Gross profit margin expanded significantly, up 100 basis points year-over-year and the largest improvement in four years, reflecting an improved balance between ongoing inflation, pricing, and productivity. Gross profit growth enabled us to continue reinvesting in the business, including increased marketing for the third consecutive quarter, while simultaneously driving bottom line growth, which was slightly above the expectations we shared with you back in July. As we move through Q4 and plan for next year, we expect our revenue growth drivers to continue to normalize as pricing moderates relative to recent history and volume mix continues to improve. To be clear, pricing is expected to remain a key part of the top-line equation, especially considering that inflation is likely to persist, albeit at more moderate levels than over the last couple of years. Simultaneously, our focus will be on supporting volume mix by balancing margin flexibility between reinvestment and future top-line growth and earnings flow-through. Let me take a step back and frame how we assess consumer health, our portfolio, and our strategy in the macro environment. The consumer remains healthy with demand resilient and category elasticity is manageable. Even so, consumers are closely calibrating where and how they shop. For instance, growth in club and other value-oriented channels has accelerated while the convenience of e-commerce and pickup and delivery services continues to resonate well after any pandemic-related uplift would have normalized. Consumers remain responsive to high-quality innovation and activation, but price and package architecture is another increasingly important dimension, including smaller pack sizes that hit key price points and multipacks that offer value and convenience. On the margin, we also see some migration of lower to middle-income households towards at-home meal and beverage occasions, which should benefit our more essential categories like CSDs and coffee. The business is well positioned against this backdrop, thanks to a compelling all-weather growth model. The ability to seamlessly meet the consumer across all beverage need states and to service those occasions across all channels is at the heart of why we formed this modern beverage company. Since then, we've made even more progress as we significantly grew the portfolio reach and strengthened our internal capabilities. Looking forward, our distribution prowess across retail is broad-based with very strong in-market execution, yet we also enjoy a scaled online business, particularly on the coffee side. Our robust 2024 innovation pipeline has been well received by the trade and spans product, format, and packaging news. It captures a combination of value and premium price points as well as low and no-calorie and indulgent beverages. We also continue to price nimbly across the entirety of our portfolio, including by leveraging our strong mix management capabilities. In short, the consumer is resilient but selective, and KDP is positioned to drive attractive top-line growth through a combination of volume, mix, and price levers. Our successful growth model rests on our exclusive focus on North American beverages and a winning strategy. It begins with KDP's powerful twin distribution assets, our multichannel cold beverage distribution system, including DSD, and an installed base of nearly 40 million active households using the Keurig system. This is an unparalleled combination in the industry, which, enhanced by strong R&D and commercial backbone, enables us to grow our categories, gain share across our base business, and further build out our portfolio through high-value M&A and partnerships with counterparties who increasingly seek us out. When we fill in category white spaces, such as through our announcement today of the partnership with Electrolit, it fuels a virtuous cycle of growth, investment, and growing returns on that investment. As the new brand scales and our portfolio expands, our capabilities get stronger. Drop sizes get bigger, our merchandising gets more impactful, we service each store and household more frequently, and our commercial and consumer relationships tighten. This enables further investment in growth that begins to cycle anew. We have proven this model over multiple years. In U.S. Refreshment Beverages, we have consistently outperformed our categories, growing dollar share in at least 75% of our business in all but two quarters since the beginning of 2019. We also entered multiple strategic white spaces within the past twelve months such as ready-to-drink coffee, energy, and, after today's announcement, sports hydration, all achieved in a very capital-efficient manner. The growth path ahead is increasingly evident with both owned and partner brands. The latter, where our relationships are strategic and long-term, growth and mix are positive, and our economics are attractive. Coffee, in the single-serve segment, has continued to steadily gain share in at-home coffee, cementing Keurig's leadership position with this important category. At the same time, we are expanding our total coffee strategy to encompass iced, ready-to-drink, and other forms of coffee within and beyond the K-Cup format. In Canada and Mexico, we have leveraged similar strategies across our Refreshment Beverages and coffee business as well as deeply experienced local teams to build a combined business approaching $2 billion in revenue, with a mid-20s operating margin. As a result, our International segment has become a scaled contributor to the overall portfolio with significant growth runway ahead. I'll now briefly discuss how this strategy played out in Q3, with Sudhanshu to follow with greater detail and guidance. In U.S. Refreshment Beverages, 82% of our business outpaced category growth in the quarter. The CSD business is healthy, with Dr Pepper building on the momentum of strawberries and cream earlier in the year, along with a successful sixth season of the iconic Fansville marketing campaign. Other brands such as Canada Dry and Squirt also saw strong gains. Polar's momentum continued in sparkling water, where it now commands the number two volume share position. CORE and Evian remain strong drivers in premium waters, with CORE, in particular, seeing great traction from our partnership with U.S. gymnastics. That said, we have work to do elsewhere in the still portfolio, including with Bai, which is undergoing significant restaging and reformulation next year. Importantly, our partnership with Nutrabolt on C4 is proceeding very well. In Q3, C4's market share and earned display accelerated while velocities remain strong across those regions where KDP has taken control of the brand throughout the market. Even as the C4 rollout continues in its first year, we have significant room for future growth in energy, where KDP's market share is only 3%, and C4 has tremendous potential. With the Electrolit announcement today, we are extending our portfolio into the large and important sport hydration category, another quickly growing mix-accretive white space for KDP. Electrolit is a brand that has established a strong regional foothold, thanks to its unique product attributes, scientific heritage, and extremely loyal customer base. The brand is the market leader in sports hydration in Mexico, and that popularity extends to the U.S., where Electrolit enjoys broad multicultural appeal but over-indexes with Hispanic consumers. Though it has good scale today in the U.S. and already generates more than $400 million in retail sales, representing more than a tenfold increase over the past five years, Electrolit has significant upside potential. We are excited to partner with Grupo PiSA, Electrolit's parent company, to meaningfully expand the brand's distribution breadth and depth in the U.S. and across all channels while also leveraging KDP's commercial expertise to further enhance the brand's position at retail. With C4, Lock alone, and Electrolit having entered our portfolio over the last twelve months, we have meaningfully increased the growth potential for each of these brands while extending a positive halo on the rest of our business. For example, our total volume in chain convenience stores will increase by approximately 50% after incorporating these brands, providing scale and efficiency benefits across the entirety of our portfolio. This is the virtuous cycle that I described just a few minutes ago and which will continue to fuel KDP's success. Turning now to U.S. coffee, where our back half is focused on driving segment margin improvement in the context of gradually improving at-home coffee category volumes. With visible progress on both fronts, let's address each in turn. I'll start with the segment margin improvement. We have a greater ability to control in the short term than we do with category trends. In Q3, we began to deliver against our objective with a strong inflection in segment margins and operating income, which meaningfully improved both sequentially and year-over-year. Importantly, we expect the margin improvements to continue. We previously said that delayed pricing would flow through our partner brands, and it has. We have now strengthened the pricing protocols across these long-term partnerships and do not expect any significant lag between inflation and pricing to recur in the future. Plus, commodity cost headwinds are now moderating and productivity is building across the segment, enhancing our visibility to continuing to grow the bottom line even with ongoing reinvestment. Moving to category performance. At-home coffee category volume growth accelerated relative to Q2 but the pace of recovery is admittedly gradual. From Q2 to Q3, volume trends across the broader category strengthened by about 100 basis points in measured channels, though volumes are still modestly lower year-over-year. Single-serve continues to gain share of at-home coffee, with our proprietary data, which is more comprehensive, indicating that Q3 Keurig's compatible pod consumption volume was approximately flat versus a year ago, improving from down approximately 3% in Q2. These green shoots are encouraging, and we will continue to nurture them as the single-serve market share leader. During the quarter, we saw our competitors begin to lean more aggressively into price promotions in the single-serve category, resulting in some share shifts across the various brands in the ecosystem. As a reminder, because we manufacture nearly 80% of all Keurig compatible pods in the U.S., we tend to participate if share changes occur between our branded and private label partner brands and our owned and licensed brands. Nevertheless, we must responsibly manage our owned and licensed brands' price gaps within the category and intend to stay nimble to the changing operating conditions around us. Importantly, as we choose to surgically respond to the recent price activity, we expect segment margins to accelerate in Q4. We also do not expect the competitive pricing activity to meaningfully accelerate at-home coffee category buying, which we know are far more responsive to high-quality activities that influence consumer choice and lean into emerging trends. As the single-serve leader, KDP will continue to drive category growth as we always have through innovation, renovation, and white space expansion that build penetration with new households and increased usage among our existing consumers. With 90 million U.S. households drinking coffee at home, of which fewer than 40 million are actively using Keurig brewers, there is a significant multiyear opportunity ahead. In 2024, we will continue to pursue that growth through new consumables like cold brew, expanded ice varieties, and refreshers. New brands like La Colombe, which, by the way, begin to ship in ready-to-drink and K-Cup format starting in Q4, significantly new innovation in brewers, all supported by strong marketing and brand activation activity, including exciting new collaborations across our owned and licensed brands. Moving on to our International performance in Q3, which remained impressive with revenue growth once again in double digits and continued segment margin expansion. Both our Coffee and Refreshment Beverages businesses performed well. In Canada, the ready-to-drink alcohol and no alcohol segment is growing, and we are contributing to that growth. ATP gained significant share as velocity and distribution built and a blast from the past, vodka-based Tahiti Treat RTD generated exceptional consumer demand. In Mexico, our powerhouse Pena CL and Squirt brands both grew at a double-digit rate, leveraging our strong go-to-market and DSD capabilities behind which we continue to best. In Mexico, like in the U.S., we have significant growth potential ahead across both our core portfolio and through partnerships as we leverage these unique distribution assets. KDP's strong balance sheet and cash generation profile are powerful enablers of our broader growth strategy, with today's Electrolit announcement yet another example of how we can grow our portfolio and market reach in a highly capital-efficient manner. As a result, our financial policy approach can be flexible and dynamic. This year, we are deploying some of our cash flow to strategically reduce our supplier financing program. Simultaneously, we announced a 7.5% increase in our annual dividend furthering our track record of regularly growing dividend income for our shareholders. With over $3 billion remaining on our share buyback authorization and having already repurchased 24 million shares of KDP stock over the last two years, we have substantial flexibility to opportunistically lean in when we see compelling value in the business we know best. Wrapping up, our third-quarter results represented another period of consistent delivery against our commitments. Our top-line growth was strong and resilient, and we reinvested in our brands and differentiated capabilities. We also achieved important proof points in our margin recovery journey this quarter as visible in our consolidated gross margin progress, and in U.S. Coffee segment results. Our Q3 results provide enhanced visibility to our unchanged 2023 outlook for constant currency net sales growth of 5% to 6% and adjusted EPS growth of 6% to 7%. We expect to close out 2023 having significantly improved our composition of earnings profile, lending further support to our aspiration to be on algorithm in 2024. I'll now turn it over to Sudhanshu.

Thanks, Bob, and good morning, everyone. Our consolidated third-quarter results were solid. Top-line growth was resilient and supported future momentum by reinvesting in the business, and we delivered modest EPS upside relative to the expectations we shared with you last quarter. Revenue advanced 5.1% to $3.8 billion with healthy constant currency sales growth of 4.1%. Pricing remained the primary growth driver, contributing 5.5 points, as expected, by the moderation from the second quarter as prior year pricing actions were lapped. Volume mix strengthened sequentially, posting a modest 1.4% decline year-over-year. Gross profit margin inflected positively in the quarter and expanded a strong 100 basis points year-over-year as pricing and efficiency gains begin to offset input cost inflation. Total SG&A deleveraged 130 basis points year-over-year, reflecting our focus to reinvest in our brands and capabilities while combating sustained inflation. SG&A saw another quarter of double-digit increases in marketing spending, while transportation, warehousing and other corporate costs such as labor remained headwinds. Adjusted operating income grew 3.1%, which, combined with below-the-line leverage, resulted in mid-single-digit EPS growth to $0.48, slightly ahead of the guidance we shared last quarter. We achieved this result without the benefit of any nonoperational gains in the quarter as we continue to make progress on reinforcing our earnings base looking out to next year. Moving to the segments. U.S. Refreshment Beverages grew net sales 5.9%, led by 7.1 percentage points of pricing. The price contribution moderated quarter-over-quarter as anticipated as we begin to anniversary some of the last year's pricing activity. Volume mix declined 1.2%, reflecting outperformance versus our categories across the vast majority of our portfolio and the growth contribution from C4 Energy. As Bob said, we expect price to remain a continued driver of the top-line growth algorithm in quarter four and into next year, even as growth rebalances across volume, mix, and pricing contributions. The consumer is resilient, category elasticities are manageable, and inflation to moderating remains a headwind. Segment operating income grew 6.1% in the quarter and segment margins were approximately flat year-over-year. This performance reflected the favorable impact of pricing and productivity, net of inflation, offset by increased investment in marketing. In U.S. Coffee, net sales decreased 3.2%, improving versus the second quarter trough as expected. Pricing sequentially strengthened and contributed 3.1 percentage points of growth. Some of this reflected pricing that lagged realized inflation across our partner portfolio and is now flowing through after a delay. In future cycles, we expect the pricing pass-through necessary to offset inflation to be more seamless. Volume mix declined 6.3% year-over-year in quarter three. Brewers grew 8% as we moved past destocking in the first half and shifted towards the important holiday period. For the back half, as a whole, we expect brewer shipments to track point-of-sale strength, which remains softer in today's macro environment and is still declining in the mid to high single digits compared to last year. Importantly, Keurig brewers continue to gain share within the coffee maker category and we still expect to finish the year having grown penetration to approximately 40 million households in the Keurig ecosystem as compared to approximately 38 million at the end of 2022. All shipments declined 8%, similar to last quarter. However, by our measure, category consumption volume in single serve were flat year-over-year across all channels, a sequential improvement relative to quarter two. As we previewed would happen last quarter, shipments lagged category consumption in the period due primarily to two factors: First, the competition against a year-ago channel inventory build; and second, the volume impact from our decision to exit certain low-margin private label contracts. We anticipate a smaller combined impact from these factors in quarter four and expect all shipments to sequentially strengthen relative to quarter three. Office segment operating income grew 5.7% and operating margins expanded strongly. At near 33%, segment operating margins increased 280 basis points versus the prior year and also compared very favorably relative to 30.4% in the first half. The significant inflection was driven by pricing, productivity, and moderating inflation, and we expect it to sustain. As Bob mentioned, part of the expected revenue recovery is slightly altered relative to our original plan due to some prudent pricing arrangements in a competitive environment. Nevertheless, margin trends are expected to accelerate further in quarter four. Fundamental progress is expected to drive continued solid operating income growth year-over-year, even as we lap a difficult comparison given nonoperational benefits partially contributed to U.S. Coffee operating income last year. International segment sales increased 20.8% in the third quarter against a double-digit growth temper in the year-ago period. Constant currency sales growth was very strong at 12.9%, with volume mix increasing 9% and pricing up 3.9%. Our top-line momentum is broad-based across Mexico and Canada. Segment operating income grew very strongly at 39.4% on a reported basis and 31.7% in constant currency terms, thanks to operating leverage and efficiency gains netting favorably against inflation. And anticipated, our free cash flow conversion strengthened sequentially in the third quarter to $459 million, reflecting the combination of profit growth and moderating working capital usage, consistent with our expectation for free cash flow conversion to strengthen in the second half. Our capital allocation approach remains unchanged. Our priorities include organic and inorganic investments to support our growth, further strengthening our balance sheet, consistent with our long-term net leverage ratio target of 2 times to 2.5 times, and returning cash to shareholders through our dividend and opportunistic share buybacks. We dynamically adjust between these priorities on an ongoing basis. In quarter three, we closed on the highly strategic La Colombe partnership first introduced in July, which included a $300 million equity investment. Today, we announced another important partnership with Grupo PiSA to sell, distribute and merchandise Electrolit in the U.S. This is a meaningful step forward into sports hydration for KDP and establishes another mix-accretive growth platform, even as it comes with minimal capital commitments. As Bob pointed out, with entries into energy, RTD coffee, and sports hydration over the past twelve months, we have penetrated three large and important white spaces for a relatively modest capital outlay of less than $1.3 billion. We also have the ability and desire to continue to return cash to our shareholders. In September, we announced a 7.5% increase, marking our third consecutive year of growing our dividend and representing a cumulative 43% increase over that time. Our CRE purchases will remain opportunistic, and we have demonstrated a willingness to step in when our share price becomes dislocated from the long-term value we expect to create. With approximately $3.2 billion remaining on our share repurchase authorization, we will continue to assess the market for such opportunities. Moving now to guidance. We are reaffirming our consolidated outlook for 2023 and continue to target constant currency net sales growth of 5% to 6% and adjusted EPS growth of 6% to 7%. Our EPS outlook assumes minimal benefits from nonoperational items in 2023, implying double-digit EPS growth on an underlying basis. Our guidance for below-the-line items is consistent with last quarter. For the year, we continue to expect interest expense in a $470 million to $475 million range, effective tax rate of 22%, and approximately $1.41 billion diluted weighted average shares outstanding. We expect a strong end to the year in quarter four with similar top-line dynamics in quarter three and even stronger gross margin expansion. At the same time, we will be lapping approximately $67 million of nonoperational gains in last year's fourth quarter, primarily concentrated in the U.S. Coffee segment, which creates a challenging comparison. Blending these factors together, we expect Q4 adjusted EPS of approximately $0.54 or 8% year-over-year growth. On an underlying basis, this represents strong double-digit EPS growth. With that, I will now turn the call back to Bob for closing comments.

Thanks, Sudhanshu. I'd like to close by saying how excited we all are that Tim Cofer has joined KDP as Chief Operating Officer on November 6. From there, we are looking forward to a smooth CEO transition between Tim and me in Q2 next year, in continuity as I serve as KDP's Executive Chairman thereafter. Upon joining KDP, Tim's immediate focus will be immersing himself in the business. He will also partner with Sudhanshu, the full executive leadership team, and me to drive our annual operating planning process for 2024. A lot of robust work is underway, and we expect to provide you with a detailed outlook when we report our Q4 results. For now, let me just say that our entire organization is focused on delivering a strong finish to 2023. We expect that Tim will join Sudhanshu and me in this forum in February, and I know you will enjoy meeting him after that.

Our first question will come from Andrea Teixeira with JPMorgan. You may now go ahead.

Hi, good morning. This is Drew Levine on for Andrea. Thank you for taking my question. So, I just wanted to ask on U.S. Coffee. If you could talk more specifically to the trends during the quarter, both in tracked and untracked channels, if the recovery is sort of playing out sequentially as you expected, and what we could think about the exit rate for September and October being? And then secondarily, I think the expectation was for pod volumes to perhaps see moderating declines in the quarter. They were pretty flat. So, anything changed incrementally during the quarter from a pod shipment perspective? Thank you.

Sure, Drew. Thanks for the question. On our last call, we talked about drivers of improved coffee performance going forward. One was margin improvement and the other one was a rebound in the total at-home coffee category. And so that goes beyond single-serve to all forms of coffee consumed at home. Obviously, as you saw in the results, we've experienced the inflection that we expected on the margin side, and that's largely under our control and a big driver of our performance. The category is experiencing sequential improvement. But admittedly, it is gradual. When we take a look at the consumption of single-serve and we use our proprietary data, which looks at tracked and untracked channels, and remember, the tracked channels represent roughly 60% of total consumption, we're seeing that the volumes are flat, which is an improvement sequentially, but a bit slower than we expected. And so, that's really the core of any shipment shortfall versus expectations driven by the category. I would remind you, within that, KDP continues to grow share within that category. The themes that we've talked about before about controlling the controllables, margin, and share performance are really quite good. The challenge is really this total at-home coffee category, which is moving in the right direction, albeit at a slower pace. My last comment on that is what we're experiencing on at-home coffee in the U.S. is not unique to the U.S. It's a trend that we're seeing in most developed markets as well.

Our next question will come from Dara Mohsenian with Morgan Stanley. You may now go ahead.

So, just to follow up, do you expect the category will continue to recover going forward sequentially from here? Can we get back to growth going forward? And maybe can you detail what's driven the acceleration in untracked channels and how sustainable that is going forward? And then just second, if you could take a bit of a lookout to 2024, you mentioned on algo for the total company. Does that apply to the coffee business in terms of a more normalized organic sales growth and profit growth pace as you look out to 2024? Thanks.

Sure. I think that when you take a look at the shipment or the trajectory of the coffee category, I think it speaks for itself. We talked a lot about mobility as a big driver, and we certainly weren't the only ones that were looking at that. So, mobility is no longer a factor. It's gone back to a more normalized environment. And so, I think that the trajectory that we're seeing right now on improving coffee consumption will continue. The drivers of that, I think there are multiple contributors to the slower but steady improvement in the category, including really a change in work routines, where you're looking at more hybrid work. The afternoon occasion, for example, changes on that. On the margins, we could see some impact from pricing and inflation, and also some of the trends in cold coffee, which also indexes to out-of-home. But there's nothing structural going on right now. And you can imagine, we spent a lot of time digging into the fundamental consumer drivers of coffee. The tailwinds are incredibly strong. The movement towards improving growth looks to be right in front of us here. But we're being honest in saying that the total at-home coffee category has been more gradual than we originally expected, although we don't, like I said, see anything structural. With regard to the untracked channels, why is that stronger? It's really driven by club and e-commerce. E-commerce, which was growing prior to the pandemic, accelerated significantly during the pandemic, and it really has shown no signs of pulling back from that. And we talked before about the importance of e-commerce in our total business. But you can imagine when you look at individual segments, that single-serve coffee is really an ideal segment for e-commerce. It's lightweight, high value, long shelf life, not fragile to ship. So, you can really have quite a good business on e-commerce. In addition to that, remember, we've been increasing our own subscription business and services to the consumer. And as we put more smart brewers out there, it allows for smart consumption-based reordering, I think that e-commerce will continue to grow. And I think club is an overall consumer shift towards that channel. It represents a good value. I also think that some of the changes away from home coffee trends, meaning office coffee trends have also benefited the club channel as well as people in small and mid-sized offices are picking up their supplies there as well as in e-commerce. And then with regard to 2024, I mean, we've given you our macro outlook. We're not going to break it down by individual segments. The one thing I would say that I believe is important is this gradual or more gradual rebound in coffee is something that we've been able to factor in our thought process as we think about our total company algorithm. And obviously, it's something that we've digested and built into our expectations.

Our next question will come from Bryan Spillane with Bank of America. You may now go ahead.

Maybe Bob, to just pick up on that last point, and maybe at a little bit higher level, just thinking about the consumer. As we've gone through this earnings season, it just seems like economizing behavior in a lot of different forms has kind of emerged more as we've moved through the back half of this year, and Hershey talked a little bit about it this morning as well. And so, can you give perspective on two things? One, just how you're thinking or how KDP is thinking about the consumer next year, stronger, weaker, and how maybe you're adjusting your plans across all businesses for that? And then the second, just because it's been so topical, just kind of how KDP is digesting all of the sort of information about GLP-1? And is that something you're beginning to factor into your longer-term plans?

Yes. Thank you, Brian, for those questions. We plan our business based on a variety of potential outcomes. We've mentioned this before. We're closely monitoring consumer behavior and are concerned about shifts towards lower-priced options due to financial constraints. Currently, the consumer remains quite resilient, but we are considering how this might change in the future. Looking at our entire portfolio, we have the flexibility to adapt across formats, mixes, channels, and pricing strategies for both refreshment and cold beverages to respond to any changes. So far, we haven't observed significant shifts. There is a scenario where traditional retail consumers may lean towards lower-cost items and explore more value-focused channels. Additionally, there may be a trend moving from away-from-home consumption to in-home experiences. Recent consumer surveys indicate that when facing budget constraints, the first things consumers tend to cut back on are dining out and travel. This shift potentially increases in-home consumption, which benefits us. And if you could take a look at the broad portfolio across all formats but also specifically within coffee, we've been working really hard to provide similar options to produce specialty coffee, cold coffee, coffee any form that they get out of home in home. And so, I actually think that's a benefit for the category going forward. So, the conclusion is nothing as we sit here today. Very possible in the future and certainly in our range of planning, but lots of flexibility for us to deal with it and potentially some upside on certain segments, including coffee. With regard to GLP-1, we've had the opportunity to look at every trend possible from a consumer perspective for opportunities and risk. We've spent a lot of time digging into the most robust data that's available, and I would caution everybody that the data that is actually available is really limited at this point. What we would want to see as an industry, before you go with any conclusions, is you'd want to see known GLP-1 users and be able to match their behavioral data over time. Self-reported data, survey data, trying to figure out who might be a GLP-1 consumer is really dangerous. The data that we're able to access, which is quite limited on actual GLP users and their known consumption for us is neutral, maybe even more positive, but let me just say neutral right now. And here are the facts, which I think makes sense: there's no evidence that people drink less in terms of beverages. So, unless you believe the consumption of tap water is going up, there's no indication of that, and somebody in the beverage industry is picking up those sales. Are mix shifts possible? Absolutely, but we haven't seen anything significant in the data that we have in front of us within the world of beverage. And I remind you that we have a very broad portfolio. In fact, more than 60% of our products in our corporate responsibility portfolio are classified as positive nutrition. So, it's very similar to the conversation on recession. Consumers don't drink less if they change their mix in terms of which formats and types of beverages they consume. We have one of those occasions. And also, we have the ability to innovate should we choose to. We've had some questions on coffee. Specifically, all the data that we can see right now shows no impact on coffee consumption as a result of that. So, when we step back, we are surprised by the reaction. Quite honestly, we're surprised that the conversation is about food and beverage. We don't participate in the food industry, but I can tell you in the beverage industry, I really think that there's little to be concerned about here. Having said that, we're going to continue to study. We'll get more robust data. We'll be able to see what I said before: known GLP-1 users and their actual consumption patterns over time. I think the picture will become much clearer, but that's our conclusion today.

Our next question will come from Robert Ottenstein with Evercore. You may now go ahead.

Thank you very much. I have two questions. First, congratulations on the deal with Electrolit. When I attended NAX about a month ago, it was a hot topic with a lot of discussions. You mentioned it was beneficial for your mix. Could you explain what that means? I would have assumed this was just about the distributor margin you're earning, so could you elaborate on its impact on your business? The second question is somewhat dated. If we look back before Keurig, the previous management team had some reservations about smaller pack sizes. Dr. Pepper was not keeping pace, and there was some resistance to introducing a variety of pack sizes and can sizes due to concerns about adding unnecessary complexity. I'm curious about your current manufacturing and canning capabilities regarding how you can handle this greater variety of pack sizes today.

Yes. So, Robert, I'm glad that you saw Electrolit at NAX and the excitement about it. This is a business that we've been tracking for some time, and we've been really impressed with their strong growth. The fact that their consumer target is multicultural. It’s a perfect example, as we've discussed with C4, with La Colombe, with Polar, where we can take a brand that is very strong and has a clear consumer base and opportunity and help them grow through expanded distribution, improved merchandising, and access to our RGM capabilities, category management capabilities, and more. And so, this one, I think, is another one of these win-win structures. When we think about Electrolit coming into our business and its implications for 2024, clearly, it's a contributor to revenue growth. Similar to what we talked about with C4, in its first year of incorporation, we don't think about it as much of a driver of profit growth. But when you get into its second year, it will be able to contribute profitability and we'll provide framing around that at that time. That's because we make significant investments in the first year to get the brand on board. And also, as we discussed earlier, this gives us a wonderful opportunity to put more investment in our market system to be able to improve coverage, with the fact that we now have larger job sizes and increased frequency. As we said a number of times, that benefits all brands within our system. The fact that we put in the prepared remarks about the 50% growth in large outlet C-stores for us is a very significant consideration here in terms of our ability to cover our convenience stores for our entire portfolio. So, this is yet another great example of how we're able to build our capabilities. Your point about smaller pack sizes: yes, the other world has changed quite a bit. We have substantial distribution, and we have good manufacturing flexibility on small pack sizes. We see them as an incremental driver of growth. They also happen to be margin accretive. They're very much in line with consumer trends, where if someone wants to treat themselves, a portion of our portfolio is in the treat need state, and we give them an opportunity to do so in a smaller pack size. And that's been the case in other CPG industries. And as we think about our manufacturing base going forward, flexibility in formats and pack sizes is a critical capability that we continue to invest in to give us the optionality of price pack architecture moving forward.

Our next question comes from Bonnie Herzog with Goldman Sachs. You may now go ahead.

Bob, I was hoping you could give us some more color on the exiting of certain private label contracts in terms of maybe how big these customers are and if there's an expectation for more to come. And then you called out a tough comparison on your pod volumes in the quarter, given the trade inventory builds in the year-ago period. So just trying to understand how big of an impact do you think that was? And could you just confirm, I thought you said that you're already starting to see pod volumes improve in Q4? Thanks.

Yes, regarding the exit of some private label partners, that started in the second quarter. To understand the impact, you can review the track data, specifically looking at KDP's manufactured share to see the distinction between unlicensed and licensed private label. This situation isn't a major driver of profitability and only has a minor effect on revenue, but it's a necessary decision for the long term. We provide significant value to our partners and take the lead in investing in brewer innovation and launches, which are crucial for the industry. Occasionally, we encounter partners in negotiations who are reluctant to pay for the value we add. However, we choose not to reduce prices because we are confident in the value we provide. It's worth noting that in nearly every situation, partners have returned to us over time because they recognize what they miss from KDP. You will see it in the tracked channels, and I don't think it's a significant issue. The second part of your question was about inventory, which relates to the difference between shipments and consumption. The best way to describe that is to say that while the category rebound is moving in the right direction, it's not progressing at the pace we anticipated. This situation creates a disconnect between shipments and consumption, with some shipments occurring ahead of consumption due to those expectations. That situation is normalizing, and you can expect the gap to narrow further in the fourth quarter. To me, this is a lagging indicator and a contributing factor to the shipment aspect, which deserves discussion this quarter. However, over the long term, key factors to monitor include the performance of the at-home coffee category, as that drives everything, our total single-serve share and total KDP share of at-home coffee, which continues to grow, and our margin relative to that volume, which is also very strong and improving. These three elements create value, but they have also led to some short-term disruption as we adjust from the rebound effects of the pandemic.

Our final question will come from Chris Carey with Wells Fargo Securities. You may now go ahead.

I know you're not going to specify what drove the margin improvement in the quarter specifically. But can you maybe frame the relative contribution of pricing, productivity, and easing commodity inflation? And also, you've been quite adamant that the mix impact of your own portfolio underperforming is not as great as what is sometimes debated. And so, I wonder how that impacted the quarter as well, and you're clearly looking for an acceleration in margins in Q4. And I think really what I'm trying to do is get some confidence that while pod volumes could be volatile within your portfolio, they could be volatile. But as you go into next year, here's why we're going to continue to have visibility on margins even if shipments or otherwise are a bit different than maybe what we would expect one quarter or two quarters out, right? So really trying to help frame the Q3 margins and to kind of get some help on the go forward.

Yes. Let me talk about the margin inflection that we've seen in the quarter, and we talked about prior to that. And then I'll ask Sudhanshu to take a look at where we are on from a segment operating income perspective and a forward outlook on that. We had a number of conversations in the past, as you'll recall, about the gap between pricing to partners and private label versus the inflation that we were experiencing that had never been contemplated in the prior years in which we had signed those agreements. And remember, that's very different than pricing that you see at retail, just to be clear, because I know when I say pricing, people immediately go to retail pricing. What I'm talking about is the contractual pricing that we have with partners and private label, who then in turn set their own retail pricing as a result of that. And so, we said that there was a lag, but it would flow through. It's flowing through. We have great visibility into it going forward, to answer your question, because it's contractual. I think the other point to make, and it's an emphasis of the prepared remarks, is that we've now adjusted all of those agreements going forward, and we don't expect a substantial lag to occur between pricing and inflation in the future. So, lessons learned from the past, a bit of pain that we had to incur over the past couple of years, but that's all catching up right now, and you're seeing that flowing through. In addition to that partner and private label pricing flowing through, we're also seeing some moderation in inflation, and we're experiencing an increase in productivity. As we said a couple of times, when we were in a supply chain disruption mode, and we were trying to get every case out the door, productivity takes a backseat. We're in really good shape on our supply chain from a capacity standpoint. We have the ability now to focus on productivity and dial that up. So, it’s a combination of partner private label pricing, productivity, and moderating inflation contributing to the margin inflection you're seeing now and also our confidence and visibility into the future. But Sudhanshu, why don't you take a minute to talk more about that last piece?

Thanks, Bob. Chris, as you consider the fourth quarter and beyond, we expect to see an improvement in pod shipments as the category continues to recover. Additionally, we plan to achieve higher margin expansion in the fourth quarter compared to the third. We have previously discussed this. We anticipate solid growth in operating income for the fourth quarter, with even stronger underlying results. As you know, we benefited from significant nonoperating income in coffee, so the underlying growth will be stronger since we aim to keep nonoperating influences minimal. Looking ahead to 2024, our strategy is to gradually rebuild margins in the coffee category starting in the third quarter. You may have noticed our margins increased from approximately 30% in the first half to 33%. We expect further expansion in the fourth quarter, as well as a continued buildup of our margins throughout 2024.

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

Thanks, Anthony, and thank you, everyone. We appreciate your time and attention this morning. And as always, the Investor Relations team is available to answer any follow-up questions you may have. Have a great day.

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