Keurig Dr Pepper Inc. (KDP) Q1 2025 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Keurig Dr Pepper's Earnings Call for the First Quarter of 2025. [Operator Instructions]. This conference call is being recorded, and there will be a question-and-answer session at the end of the call. [Operator Instructions]. I would now like to introduce Keurig Dr Pepper's Senior Vice President of Finance, Jane Gelfand. Ms. Gelfand, please go ahead.

Thank you, and hello, everyone. Earlier this morning, we issued two separate press releases detailing first quarter results and announcing the appointment of new independent directors to our Board of Directors. We will discuss these topics 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 and 10-Q, which will be filed with the SEC later today. Consistent with previous quarters, we will be discussing our Q1 performance on a non-GAAP adjusted basis, which reflects constant currency growth rates and excludes items affecting comparability. Definitions and reconciliations toward 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. Our first quarter results were strong. Net sales advanced more than 6% and EPS increased more than 10%. We believe KDP is well-positioned in today's fluid macro environment. The operating and regulatory backdrop demands a combination of organizational ballast and agility as a scaled beverage player. That is also the industry challenger. KDP is fortunate to have both. Q1 served as a good demonstration. Our resilience was evident in the strong top and bottom-line results. While each of our segments faced different conditions in Q1, we executed well to deliver strong and steady enterprise-level performance. During the quarter, we also moved quickly to assess and react to trade policy changes. Looking out to the balance of the year, our outlook now incorporates our best estimate of tariff-related pressures and mitigations based on the policies in place today. As a result, we continue to expect that 2025 will be another solid year of growth, and we are reaffirming our full year guidance. Let's now unpack the quarter's highlights and segment performance beyond the strong financial outcomes in Q1. There were several noteworthy achievements in the quarter also worth highlighting. These include market share gains across iconic liquid refreshment beverage brands like Dr Pepper and Canada Dry, as well as newer brands like Electrolit and C4. Accelerating price realization across each of our segments, reflecting actions to effectively manage inflation in 2025, a smooth start to the integration of Ghost Energy. We are hitting the ground running in establishing a true energy platform with a 6.5% market share position already, and momentum building. Strong operating discipline, particularly in overhead cost management and smart capital allocation, including the monetization of our very successful multi-year Vita Coco investment. Vita Coco has been a valued partner for the past 15 years, and we recently extended our distribution partnership to capture the significant growth opportunity ahead. At the segment level, U.S. Refreshment Beverages continued to outperform on the back of very strong CSD trends. U.S. Coffee experienced a softer start, as the category began to work through commodity-driven inflationary challenges, and international proved resilient against a dynamic macro backdrop. I'll now dive deeper into each of our segments. Let's start with U.S. Refreshment Beverages, which was the clear standout in the first quarter. Net sales grew 11%, driven by strength in our core CSD portfolio, as well as the initial contribution of our GHOST acquisition. Our CSDs outperformed in a healthy category. As consumer-obsessed brand builders, we delivered this result through a combination of impactful innovation, strong commercial execution, and full funnel marketing. Dr Pepper had another great quarter with sizable market share gains, including a meaningful contribution from our highly incremental Dr Pepper Blackberry launch in February. The new product, which pairs the iconic Dr Pepper flavor with the rich sweetness of Blackberry, has captured nearly a point of CSD share and is performing on par with our most successful innovations from recent years. The Dr Pepper franchise continues to gain distribution breadth and depth, thanks to innovation and zero format expansion, which remains a multi-year growth opportunity for this powerhouse brand. We also delivered healthy net sales growth in Canada Dry and 7UP due to attractive returns on recently stepped-up innovation, marketing support and product refreshment, including our early 2025 launch of 7UP Tropical. More exciting activity for these and other CSD brands like A&W is forthcoming. Our energy portfolio was another area of strength in the quarter. Entering year three of our partnership, C4 maintained its momentum, driven by DSD execution to expand the brand's distribution points and grow display penetration. Our integration of GHOST kicked off well, as did the distribution transition in late Q1. As we assume full influence over the brand all the way to the shelf, we are beginning to execute against GHOST's significant growth opportunities. We are doing the same with emerging brands like female-forward Bloom Sparkling Energy, which quickly scaled to a half a share point in the category during Q1, and the recently launched mainstream-focused Black Rifle energy line. Now, that our thoughtfully constructed energy portfolio is in place, we are confident in our right to win, and our team is eager to seize the opportunity. In sports hydration, another exciting emerging category for KDP. Our work with Electrolit is entering year two on a strong growth trajectory. In Q1, the brand enjoyed significant and accelerating share gains, which should sustain as we pursue distribution white space and new packaging and product forms. Alongside our partner Group OPIZZA, we are committed to building electrolyte into a national and mainstream player, which will be supported by a state-of-the-art manufacturing facility currently under construction in Texas. Overall, we're very pleased with our U.S. refreshment beverages performance. Our portfolio has momentum. We are executing at a high level, and we have strong commercial plans for the rest of 2025. In U.S., coffee Q1 was a challenging quarter with a 3.7% net sales decline and profit pressure. Though the single serve categories transition in 2025 from volume-led to pricing-led growth requires some patients to navigate, our dual priorities are steadfast. First, mitigating record green coffee inflation, and second, fortifying our long-term growth model by addressing evolving consumer needs. During the first quarter, we took actions in support of both of these priorities. I'll begin with mitigating green coffee inflation. Given the magnitude of the pressure that we and the industry are facing, we implemented a price increase across our owned and licensed brands to start the year. These pricing actions appeared on shelf earlier than many peers, resulting in short-term volume and mix trade-offs in Q1. As already announced, industry pricing layers in over the coming months, we expect to see more typical price gaps among key single serve brands and for the net impact of our actions to become more favorable looking out into the back half. We will continue to evaluate all available levers to offset inflation over the course of the year. These include potential additional pricing, more productivity savings, and a sharper focus on the highest returning products, channels, and households. This brings me to our second priority, fortifying our long-term growth model. We are going after premium cold and next-generation opportunities to drive Keurig’s future growth with Q1 progress across each dimension. We've been building a tier of premium and super-premium coffees anchored by brands like Lavazza, La Calombe, Philz and others. These additions resonate with higher value consumers and drive positive mix, and we've proven we can strongly accelerate these brands' growth when part of our portfolio, as an example, Lavazza, K-Cup pods, saw over 30% growth in Q1 retail sales, demonstrating significantly enhanced momentum, just a couple of quarters after we assumed the brand license last year. Another major focus area is capturing more cold occasions through a variety of total coffee formats. In Q1, we introduced new flavors to expand on 2024's successful Refreshers platform. These products are proving highly incremental at key retailers. Our La Calombe ready-to-drink coffees also continued to scale nicely in the quarter, supporting the brand's transformation into a formidable challenger in this multibillion-dollar beverage space. Our future coffee vision is also steadily progressing with behind-the-scenes work on the Keurig Alta system and plastic-free, aluminum free K-Rounds pods. Over the last few months, we advanced in home consumer testing of the new system, generating valuable insights that we will apply as we expand the trial to even more households, as well as plan for future commercialization. These examples illustrate how we are balancing our U.S. Coffee activities this year between inflation mitigation and long-term growth initiatives. Though segment performance is likely to remain subdued in 2025, we are laying the groundwork for stronger and more multifaceted growth in the years ahead. Moving to international, Q1 sales grew in the mid-single-digits. We're pleased with KDP's relative trends across our primary countries and will continue to lean in to bolster our momentum as the year progresses. In Q1, we saw strong growth in liquid refreshment beverages, driven by Penafiel and our CSD portfolio, in particular Dr Pepper and Crush. Inflation-related pricing also started to flow through late in the quarter and supported top-line gains across the international portfolio. We expect segment growth to accelerate over the balance of 2025, reflecting increased price realization and the activation of exciting commercial plans, highlighting our key international brands, many of which enjoy strong local identities. To wrap up, our dawn-to-dusk beverage portfolio is delivering strong enterprise results, while continuing to evolve towards faster-growing spaces. Simultaneously, we are capably managing through changing economic conditions and mitigating associated risks. As we move through the year, we will remain flexible and proactive, as we work towards delivering on our 2025 financial commitments and advancing our long-term strategic priorities. I'll now turn the call to Sudhanshu and will return at the end with some closing thoughts.

Thanks, Tim. And good morning, everyone. We had a strong start to 2025. Our business has momentum, we are executing well, and we are operating with discipline and agility. Together, these factors give us confidence in our ability to continue to deliver solid results over the balance of the year. First quarter net sales grew 6.4% in constant currency. Our top line was driven by strong double-digit gains in U.S. refreshing beverages and healthy trends in international, which more than offset a challenging quarter for U.S. coffee. On a consolidated basis, the group was supported by multiple net sales drivers. Net price realization increased 2.8%, sequentially strengthening across each of our segments. This primarily reflected actions taken in response to inflation as well as some targeted trade spend refinements. Volume mix advanced 3.6% in the quarter which included solid base business growth, particularly in liquid refreshment beverages. The addition of cost to the KDP portfolio also contributed 2.9 percentage points to the top-line. Gross margin contracted 170 basis points versus the prior year. We expected this pressure given a difficult comparison and escalating inflation. Pricing and productivity should build in the coming quarters, and our labs become easier, which will help us better manage expected headwinds. SG&A leveraged 90 basis points. Disciplined expense management is an ongoing focus, but is taking on even greater importance in today's less certain economic enrollment. We are constructively cushioning our processes streamlining where it makes sense and arriving at more efficient ways of working. These efforts will continue to bear fruit over the coming quarters driving operating leverage as we grow. In total, operating income increased 3.9%. This translated to 10.5% EPS growth which was enhanced by below-the-line leverage, including a realized gain on the sale of our minority stake in Vita Coco. This transaction is testament to the merits of our flexible capital allocation approach, which I will discuss in more detail shortly. Moving to the segments. U.S. refreshment beverages posted another set of impressive quarterly results. Net sales growth accelerated to 11%. Volume mix was the primary driver, increasing 8%, including a 4.8 percentage point contribution from GHOST. Base business momentum was also strong, driven by CSDs and key partnerships. Net price realization contributed 3 points to segment net sales, primarily reflecting CSD pricing. Segment operating income grew 8.7%, as net sales momentum and productivity savings more than offset inflation. This growth also came, despite a sizable net headwind from lapping a larger C4 performance incentive in the year-ago period. In The U.S. Coffee segment, net sales declined 3.7% in the first quarter. As expected, net price realization inflected positively contributing 1.5 points of growth, as pricing actions on our owned and licensed brands began to flow through. However, this was more than offset by a 5.2% decline in volume mix. Part of the pressure reflected industry pricing layering in at different rates across the single subcategory, which contributed to short term volume and mix impacts. We also saw some retailers more closely managing trade levels as price increased. Segment operating income declined 12.5%. In the first quarter, net price realization and productivity proved insufficient to fully cover green coffee inflation and lower volume mix. We expect both revenue and operating income pressure to ease in the back half, as the balance between pricing, productivity and inflation improves and as mix effects normalize. In international, net sales grew 5.4% with growth across regions and categories. Growth was led by favorable net price realization of 4.1%. Volume mix was also up 1.3%, driven by particular strength in liquid refreshment beverages in both Canada and Mexico. Segment operating income declined 4.6%. Similar to last quarter, this reflected the phasing of DSD investments in Mexico, as well as an imbalance between pricing, productivity and inflation. Both factors were primarily a function of timing. For the full year, our International segment should remain a strong top and bottom line growth contributor. Moving to cash flow and capital allocation. We generated $102 million in free cash flow in the first quarter. Notably, this result included the known impact from a one-time $225 million GHOST distribution transition payment. So, on an underlying basis, our performance was even stronger. Our business model remains highly cash generative and we continue to expect a healthy free cash flow year in 2025. Our dynamic capital allocation strategy was on display during the first quarter, as we monetized our multi-year equity stake in Vita Coco. This was a clear demonstration of the mutual value that our partnership model creates. Since we began working with Vita Coco, we have helped to establish the brand as the clear leader in the vibrant coconut water category. The partnership has also generated attractive financial returns for KDP, including the realized gain in the first quarter from the sale of our minority investment in the company. Shifting now to our 2025 guidance. Our constant currency outlook is unchanged. We expect mid-single-digit net sales growth with a bias towards the high end of the range and high single-digit earnings per share growth. Based on current rates, we now anticipate that FX will represent approximately a 1 percentage point top and bottom line headwind for the full year. Our below-the-line assumptions remain the same as our prior guidance. Specifically, we expect interest expense in a $680 million to $700 million range, an effective tax rate of approximately 22% to 23% and approximately $1.37 billion diluted weighted average shares outstanding. Based on what we know today, anticipated tariff impacts in 2025, appear manageable relative to our guidance. While we are not immune to the effects of these tariffs, multiple counterbalances should keep us on track to deliver the year. These include a series of mitigation steps that we are pursuing, flexibility from first quarter over delivery and other in-year opportunities. Having said that, we recognize that some external elements, like future trade policy and potential consumer response are outside of our control. As a result, we will need to remain agile as we seek to deliver responsible and sustainable outcomes for KDP and for our consumers. In closing, we are pleased with the business momentum and a strong execution that powered our first quarter results. With our singular focus on beverages, scaled North American operations, and challenge our mindset. KDP is well-suited to navigate today's very dynamic economic landscape while delivering consistently. With that, I will turn the call back to Tim for closing remarks.

Thank you, Sudhanshu. This morning, we also highlighted the continued evolution of KDP's Board of Directors to help steward our next stage of growth. First, following a rigorous and extensive recruitment process, we appointed two new independent directors, Mike Vandeven, and Lawson Whiting. These highly qualified, seasoned executives will bring valuable and complementary perspectives to our board. Second, Bob Gamgort's role is transitioning from Executive Chairman to non-executive Chairman of the Board, another natural next step in our governance. Having joined KDP more than 18 months ago and assuming the CEO role a year ago, I can say with confidence that KDP has entered an exciting new chapter in our time as a public company. Our Board is refreshed and energized, as is our executive leadership team. Together, we look forward to executing on the compelling growth and value creation agenda ahead. With that, we're now happy to take your questions.

We will now begin the question-and-answer session. [Operator Instructions]. At this time, we'll pause momentarily to assemble our roster. The first question comes from Dara Mohsenian with Morgan Stanley. Please go ahead.

Hey, good morning. So, first, just a clarification on the fiscal '25 guidance. There's obviously a lot of moving pieces. Just can you discuss high-level, your level of confidence in maintaining the local FX guidance in 2025? How much flex do you think you have to manage through a difficult environment that's caused most of your peers to have the lower guidance? Sudhanshu, the comments on tariffs were helpful. Can you give us a bit more detail on your exposure there and the potential offsets in the guidance? And then, just separately, we've seen very healthy level of organic sales growth in U.S. Refreshment in the last couple of quarters, driven by strong pricing as well as market share gains for your portfolio. Can you just discuss the sustainability of those drivers going forward, particularly in the context of a weaker consumer environment? A, on pricing, what are you seeing competitively, the willingness of retailers and consumers to stomach the additional pricing? And then B, just level of confidence that the market share gains will continue, particularly on the CSD side? Thanks.

Good morning, Dara. So, let me talk to you about the, I'm assuming you meant EPS guidance. So, our philosophy is to issue a balanced guidance that includes both risk and opportunities. But based on what we see today, we continue to expect high single-digit constant currency EPS growth. The primary drivers in that guidance, we're assuming good profit flow through from top line momentum in U.S. Refreshment Beverages and international, plus it's also including GHOST accretion as distribution is building and a strong productivity and disciplined expense management, which will support continued healthy brand investments level. As you know, there are incremental pressure points that has emerged even since February. Current tariffs now represent an additional headwind versus initial plan, slower than expected start in U.S. Coffee with improvement expected in second half. We believe we have identified these appropriate steps to offset these impacts. And now, we just have to execute. This include pushing hard on cost savings, evaluating additional pricing and mix management and pursuing alternate sourcing. Our Q1 EPS upsides also provides us some flexibility to absorb headwinds over balance of year. But as you said, it remains a fluid in movement, future trade policy and consumer health or watch points. These drive a wider range of outcome that is not always predictable. Having said that, we feel good about our ability to influence the factors within our control in 2025, which is why we have reaffirmed our outlook today.

Yes. And Dara, I'll take the question on U.S. refreshment beverage. And as I said in my commentary, I mean, no doubt, we're pleased with the performance that we saw in the category. And it starts with, obviously, CSDs. And CSDs, the category itself continues to be very healthy. I think there is strong consumer value and appeal in that category overall, and continued price and mix opportunity for us. Within a healthy category, KDP is outperforming. I mentioned Dr Pepper, which remains very strong. We're very happy with the Blackberry launch, continued expansion of the zero platform and distribution gains. Canada Dry gained share in the quarter, 7UP is back to share growth, given a brand refresh and launch of Tropical. So CSDs are really firing on all cylinders for us. Second, in energy, we had a strong quarter of energy. I think our portfolio of energy brands is starting to show. C4 has maintained momentum as it enters year 3, the partnership, we expect continued growth there. GHOST, it was a good start on GHOST in Q1. The distributions transitioned over to us, and you saw a good growth there. And Bloom is scaling very nicely, very quickly in this female forward subsegment. I go to sports hydration, Electrolit, very pleased, growing strong double digits. We expect robust growth on the year for Electrolit. We've just lapped our initial introduction of Electrolit into the portfolio. and believe that with our DSD execution, we can really magnify that growth opportunity, scale it nationwide, bring it into mainstream aisle bring some innovation to market. Overall, I think as you look at US RV, a great quarter, robust innovation, marketing, strong DSD activation, and we continue to be bullish on the year. As you spoke specifically at the tail end of your question on pricing in US RV, we see our growth largely driven by base business volume and mix gains and obviously goes contribution. Pricing will be a contributor this year. It's primarily CSDs. We announced our, what you call, typo CSD price increase that took effect at the beginning of the year, that's filtering through the P&L. And I think, as I said earlier, it's clear from the overall category resilience that consumers continue to see great value in the CSD category relative to LRBs. Now that tariffs are in the picture, it does introduce another dimension that we'll need to think through. CSDs, like our other categories, are at least in part reliant on some aspects of a global supply chain. And so, as that develops, we'll consider all potential mitigations which could include additional pricing actions late in the year to protect our long-term ability to invest and keep this business as healthy as we've seen it in Q1.

The next question comes from Lauren Lieberman with Barclays. Please go ahead.

Great. I wanted to talk a little bit about coffee and elasticity. I know, Tim, you mentioned in your prepared remarks some dynamics around timing of when the various players in the category put through pricing. But you have spoken in the past about, needing to manage affordability broadly. But if we're thinking about a kind of potentially constrained or already seeing a constrained consumer environment, where you stand on some of that messaging to really promote the idea of at home coffee being an affordable solution, et cetera, et cetera? And just kind of how you're thinking about elasticity, as the industry kind of gets more coordinated, if you will, on pricing for the green coffee inflation? Thanks.

Absolutely, Lauren. So, no doubt in this inflationary environment that we find ourselves here in '25. As I said, we've got two main priorities on the coffee business this year. The first is mitigating that green coffee inflation, including now tariff-related impacts. And the second is making sure we are playing the long game and we're advancing long-term initiatives, specifically for us. That means cold, that means premium and next generation propositions. We implemented a pod price increase in January on our owned and licensed portfolio. And as we look at the Q1 marketplace dynamics and the data that you see, we did, I think its clear competitor pricing layered in at different rates across brands and channels. And so far at a category level, the elasticity is certainly manageable and not particularly surprising. But the slower-than-expected pacing across competitive dynamics did weigh on our volume and mix performance in Q1. And I would say that the price gaps weren't normal or consistent with historical norms. So, we were under some pressure, therefore in Q1, and quite honestly, I'd expect those pressure points will persist likely into Q2, but we do expect it to ease looking into the second half. And we're already seeing evidence that competitive pricing is starting to accelerate across the category, especially if you look at the last few weeks of data. So, in the guidance that Sudhanshu and I provided, we've calibrated for that reality, and we can stay patient as this plays out. As you go into the back half, we will consider additional inflation mitigation steps in response to both green coffee and tariffs. Additional pricing could be one of the levers, but there are others as well, productivity mix and a broader cost base. As you think about the other part of your question, talking about affordability, no doubt, particularly in this macro environment, consumer affordability is critical, and really demonstrating value to consumers is important in this inflationary environment. And we've talked in the past, Lauren, that at-home coffee, given its multi-serve nature, is more exposed on a total dollar outlay. And so, to address this, we are focusing in two areas. One is making sure we've got the right price pack options. And I remind you and others that last year we actually did a price pack adjustment that I think will serve us well in this environment to hit a lower total dollar outlay per pack. So, think 12 to 10 or at club, 100 to 80 count. And the other to your question is emphasizing the relative value of our proposition relative to at-home coffee. And we think that that can play well. And even on the premium end, you can have that incredible cup of Lavazza, La Calombe, Kicking Horse, Philz Coffee, all the quality, all the value, all the convenience at a fraction of the coffee shop alternative price point. So, that is certainly something we will leverage in this inflationary environment.

The next question comes from Nik Modi with RBC Capital Markets. Please go ahead.

Thanks, good morning, everyone. Just two quick ones for me. Just, Tim, I'd love your perspective on activity amongst Hispanic Latino consumers here in the U.S. I mean, obviously, it's a lot of immigration news and a lot of suppression, I think, of activity, but it's been pretty volatile. We're hearing in April, for instance, very high Hispanic populated areas and brands leveraged to those areas are actually doing much better. So, I would just love your thoughts on kind of what you're seeing in the market and kind of how you think this will play forward. And then just one question on Snap, given all these state-level initiatives, what exactly is the industry's response or can the industry's response be from a legal perspective just given that there's a lot of arguments to be made against actually banning soda from Snap, for instance, juice drinks, some of them have more sugar than CSDs just as an example. So, I just would love your thoughts on that.

Yes, Nik. So, we'll start with Hispanic. As you well know, the Hispanic consumer is the second largest demographic group here in the U.S. and accounts for a meaningful percentage of our business and broader CPG purchases. And we have many great brands that appeal to Hispanic consumers. But I would say our exposure to this group is in line with our peers and the overall category dynamic. Over the last couple of months, our data certainly is aligned with yours in terms of seeing softening trends among Hispanic consumers relative to the broader population. And when you dig into that, you see that manifesting both in terms of fewer trips and spend per trip. Having said all that, I would say that the slowdown year-to-date that we're seeing in the Hispanic consumer purchase dynamic is not yet sufficient to move the needle on our enterprise trends. And I think you see that overall in the total enterprise results that we printed here for Q1. So, the way I'd characterize it is a watch point I think it's contributing to the overall dampened consumer sentiment you're seeing in the U.S., we are seeing some modest changes in consumer behavior and overall signs you see that external and macro factors are starting to have an impact. in terms of consumer sentiment. But it's not yet sufficient to move the needle. And I think on sales trends in our core categories show that we remain resilient. Then to your second question on Snap, I'd start with a couple of facts for you and others on the call. And that is, when you look at the grocery bill receipts of SNAP recipients and non-SNAP households, they're actually strikingly consistent, and you see beverages playing an equally permanent role in both set households. Second thing I'd say is SNAP recipients fund part of their grocery bill through Snap subsidies and part of their grocery bill with their own money. And I think all this tends to suggest that should there be change in Snap, you could see a shift of kind of sort of funds from left pocket to right pocket. But I'm not sure -- and we would not expect a significant change to our categories. You ask about our position as an industry, and we certainly stand with our industry colleagues to advocate for consumers' freedom of choice and giving SNAP recipients, treating them with the same dignity as anyone else to give them the choice to buy the food and beverage brands that they'd like. And of course, providing transparency on our ingredients. And I think as a beverage industry, we've actually done a great deal. You might say more than anyone else to reduce total caloric load in the U.S., calories from beverages are actually down 40%, since 2000, and 60% of the beverage portfolio in the industry and here at KDP are lower no calories and zero sugar. So, we've done a lot here. We will continue to work with the administration and our industry colleagues to advocate for consumers. And the last thing I'd say is, to the extent there is any exposure here, KDP exposure would be similar to our peers.

The next question comes from Chris Carey with Wells Fargo Securities. Please go ahead.

Hi, good morning, everyone.

Yes.

I wanted to ask about free cash flow. So, obviously, it was a noisy quarter with GHOST, but we're getting to this point where free cash flow is going to be less impacted by the payables program. Obviously, we've got this hit in Q1. You've kind of talked about capital allocation in the quarter, or as a general concept today. Can you maybe just help us frame how you would view, maybe with a bit more specificity your free cash flow development as we go through this year and really into 2026, and perhaps comment on how we should be thinking about free cash flow conversion. I'm conscious that free cash flow has been a major debate on the company, but the payables program paying it down was a meaningful part of that. And so, just trying to understand the path to a more tangible free cash flow inflection and what you would intend to do with that cash, as it starts coming through in a more meaningful way? Thanks.

Good morning, Chris. As you know, cash generation is a hallmark of KDP. As you said, we deliberately took a step back over the last couple of years. And now, we are on a clear path of returning to the structured conversion level. You can see our free cash flow profile is accelerating, and we made significant progress in 2024. And we plan to have a further improvement in 2025. Quarterly cash flow can be lumpy. We talked about Q1, but we had a good start in Q1. And it was up year-over-year, even with the high one-time gross distribution termination fee. In the long run, we are on track to restore business to the long-term target conversion level over the next couple of years. Our goal remains, which I've said before, to return to the conversion level that are commensurate with our largest peers. It will take us couple of years, but you will see 2025 more half, second half weighted, but it should be better than 2024, especially after you take into account the $225 million distribution payment. Your question on capital allocation. We are highly focused on deploying this cash, as we generate, the cash we generate in a smart, disciplined and dynamic way. Our long-term capital allocation priorities are unchanged. They include internal investments, partnership M&A, steady dividend growth and opportunistic share repo, and we strive to keep our leverage below 2.5 times. In the current environment, deleveraging is the priority, but we'll continue to consider opportunities to invest in growing -- grow the business while staying disciplined on our capital returns.

The next question comes from Peter Grom with UBS. Please go ahead.

I wanted to ask about GHOST. The performance for the brand was very strong, but I think the expectation was that the contribution would be the smallest in the first quarter and then build from here. Is that still the right expectation as we think about the model moving forward? And then just second, a lot of discussion on moderating category growth across many of your categories. But energy drinks seems have gone the other direction year-to-date. So just a little bit curious what you think is driving the improvement and whether you would anticipate growth to kind of continue to accelerate, particularly as the industry starts to cycle easy or easier comparisons in the summer here? Thanks.

Yes, Peter. So, let's address both parts of your questions, and I might even take it in reverse order. But it's been a fast start out of the gate in Q1 for us on our energy platform broadly. And it's exciting to see already our platform of brands winning and showing up as anticipated in terms of very complementary and incremental to one another. At a category level, to the second part of your question, energy, as you said, is 1 of the fastest-growing categories within liquid refreshment beverage. You saw a little bit of softness kind of last summer, Q3, et cetera. You saw it start to pick up in and year-to-date retail sales are in the high single digits. And like you, we look at scanner data every week, and I think you've seen robust growth the last 7 weeks, 8 weeks in a row double digit. So, feeling good about the category, feeling good about the fact that it serves that universal need feeling good even as we go into the back half and we lapped some of the softness that you saw in 204, those are good comps at a category level. Then talking KDP specifically, our portfolio has great momentum. And I mentioned, and I'll cover the other three and then get into GHOST. But C4, we're now entering year 3 of the partnership, big strong player in the performance subsegment and performing very well. Bloom Energy off to a red-hot start strongly resonating with women still a young brand already captured more than 0.5 point. And Black Rifle Energy just beginning to hit shelves. And then you get to GHOST. And you see us growing double digits at a retail level. I'm very happy with our progress year-to-date. And I'd highlight a few points. Number 1 is we've got a great working relationship with the GHOST team. We're aligned on our vision and their vision. We've got strong coordination. We've got complementary cultures. It's working kind of at the people and team level. Second, we're well into transitioning to distribution and setting in motion our joint commercial plans. The process is going smoothly so far. It's on schedule. The handovers are going well. And now that we've got greater control over the brand, all the way to that point of buying, I think you're seeing those marketplace trends accelerating. Obviously, our focus on maximizing distribution, TDPs, total points of distribution, cooler space, displays, et cetera. And third, and I think most importantly, we are on track to deliver on our plan and our expectations for 2025 and the long-term. And yes, to your question, we do believe we will continue to build momentum in the balance of the year.

The next question comes from Brian Spillane with Bank of America. Please go ahead.

Hey, good morning. It's Pete Galbo. Can you hear me?

Hey, Pete. We hear you.

Hey, guys. How are you? Thanks for taking the question. Appreciate it. Just maybe one clarification and then one kind of broader question. But Sudhanshu, maybe you can just help us a bit more, I think it was about $0.04 of upside on the quarter relative to consensus. Obviously, you're not changing the guide and you've outlined that related to tariff and maybe the consumer environment. But maybe you can just help us a little bit with the phasing and how you're thinking about the build of EPS over the rest of the year from a cadence perspective?

So, Pete, the beat in Q1 was some was driven by Vita Coco sale. We sold Vita Coco stake with a very successful stake, and we had a gain of close to like $0.015 if you think about it. So, obviously, this giving us flexibility in balance of year to manage all the consumer headwind and tariff. We guide for the year and we're reaffirming the guide that it will be MST sales to the buyers towards the higher end of sales and the EPS mid-single-digit. Obviously, Q1 was a double-digit growth, but you saw the below-the-line helped. So, that's what I would say. I don't want to guide by quarter, but you can think about full year will be adjusted EPS, and Q1 is giving us flexibility to manage through all the headwinds, whether it's trade, tariff or consumer. And IR can help you more towards modeling, if you have more questions.

The next question comes from Kaumil Gajrawala with Jefferies. Please go ahead.

Hey, guys. Good morning. It's bring your kid to work day at Jefferies. So, I'm going to have my son, Cameron, ask a question. Longwood top for Blackberry is already 1% market share and was only lost in February. How big of a contributor will it be for the year? You guys get that?

Wow, fantastic. I think it's my first ever question from a young person, and I appreciate it, Cameron. And I hope Cameron is a big fan of Dr Pepper Blackberry. Indeed, to his question, we're really, we're pleased with brand Dr Pepper and the results in Q1. This is, as you know, the number two CST brand by volume now for two straight years and it's our, we are on track for our eighth consecutive year of market share growth. We think that we've got continued runway for growth through our strategy of bringing great flavors like Dr Pepper Blackberry into the portfolio. We think we can grow through closing distribution gaps, and we think we can also grow through the Zero platform, which continues to grow at a double-digit rate. Specifically, to Cameron's question on Dr Pepper Blackberry, it's on par already with some of the strongest innovations over the last few years. We launched this one new this year across formats varieties, which means not only bottles and cans, but also in fountain and in frozen. And we're just 8 weeks into the launch, and we've achieved nearly 1 point of market share. You'll see us supporting. If you haven't seen our advertising and marketing, it's great. It's up there, full funnel marketing activation across all the different digital, social and linear channels. And I think you'll see continued strength of Dr Pepper year to go. Thanks, Cameron.

The next question comes from, and the last question today comes from Filippo Falorni with Citi. Please go ahead.

Good morning, everyone. I was wondering if you can provide a little bit more color on kind of the cadence of coffee going forward. I know you mentioned there were puts and takes in Q1 and you're expecting some sequential improvement, but maybe some direction on the improvement there? And then specifically on the tariff side, still in coffee, can you remind us, like the implication both on the brewers and the raw material impact, how you're -- you should impact the P&L and how you're planning to mitigate it? Thank you.

I'm assuming you meant -- I'm giving you answer more of the OI operating income. So, we had a soft Q1 OI and both revenue and why, and we anticipated a muted start of the year, but it was worse than what we expected in quarter 1, and Tim gave the reasons. It was mainly driven by timing of industry pricing phasing into market was slower than what we anticipated. We continue to think that 2025 will have sales and OI pressure in U.S. coffee relative to our initial planning strength, we have tempered our segment outlook to reflect two factors: first, what we saw in Q1, we will continue. It will be Q2 to walk through some of this volume mix headwind. And then the second of your question on incremental impact of tariff that is currently in place. It applies to green coffee and it's also applies to brewer. We already announced a grower price increase in the market. So, we're trying to manage for profit dollar for the year. But we feel that whatever coffee does this year, it will continue to be subdued. We feel good about our full year guidance of sales and HSST enterprise level.

This concludes our question-and-answer session. I would like to turn the conference back over to management.

Thanks so much, Drew, and thank you, everyone, for joining us on a busy morning. The IR team is here all day to answer any follow-ups you may have, and we appreciate the interest. Thank you.

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