Keurig Dr Pepper (KDP) enjoyed increases in net sales and operating income in the third quarter, during which the company also completed its merger of Keurig Green Mountain and Dr Pepper Snapple Group.
Net sales were up 140 percent year-over-year, primarily due to the merger; on an adjusted pro forma basis, net sales grew 2.9 percent during the quarter, with a 3.6 percent increase in overall volume and mix. Adjusted pro forma operating income was also up 14.3 percent to $344 million.
Adjustments include “resetting the transaction date as if it were consummated on December 31, 2016, eliminating one-time merger-related costs and expenses, and normalizing any accounting differences between the two companies,” according to a press release.
Canada Dry enjoyed “double-digit shipment volume growth” in the quarter, which was credited in part to the brand’s new innovations, while Core, Bai and BodyArmor also contributed to the rise in net sales, the company said.
Net sales at KDP’s Beverage Concentrates unit, representing sales of concentrates to bottlers and fountain customers, grew 3 percent during the quarter, which the company credited to strong performance from Dr Pepper, A&W and Crush brands. Operating income within the segment was flat compared to the same period last year.
Within packaged beverages, volume and mix increased by 6 points, offset by a decline in net pricing for Bai and BodyArmor and an increase for carbonated soft drinks (CSDs). During the Q&A, according to a transcript of the call, KDP CEO Bob Gamgort noted that CSD pricing was up nearly 2 percent, which he said was reflective of inflationary pressures impacting the entire industry.
“On year-to-date basis, our price is up across our portfolio of CSDs about 1.9 percent,” Gamgort said. “In the latest 13 weeks, it’s up 3.3 percent. That still lags the category but we’re now catching up. And that’s really what’s required for us to close that margin gap on the [packaged beverage] side of the business.”
Since the closing of the merger in June, KDP has been active in bringing new brands into its orbit, even as others have departed. The company acquired Texas-based beverage maker Big Red and agreed to purchase CORE Nutrition, one of its stronger performing allied brands, for $525 million in August. KDP has also brought a variety of brands into its distribution network, from established names (evian, Peet’s) to emerging players, like FORTO. In the meantime, Fiji and BodyArmor have exited from the scene, the former shifting to self-distribution and the latter joining The Coca-Cola Company’s distribution network.
Discussing KDP’s recently announced partnership with Danone Waters of America (DWA) to distribute evian in the U.S., Gamgort lauded the French brand as “the largest premium water brand in the world.” He added, “It’s a gap that we wanted to fill and we are excited about the growth prospects of getting it back up for where it once was as the leading premium water brand in the country.”
In response to a question about KDP’s strategic approach to its allied brands portfolio, Gamgort said the company deploys those brands to target gaps in its portfolio and grow incremental volumes. He reiterated KDP is seeking long-term relationships that include equity investment with a path to ownership.
A 7-point increase in single-serve category unit sales helped grow KDP’s coffee portfolio during the quarter. The company also saw an increase in unit and dollar market share of coffee pods.
KDP’s Coffee Systems segment reported net sales increase of 0.4 percent ($1.05 billion) and volume mix growth of 2.5 percent, along with a 26 percent increase in operating income. Iconic Canadian coffee brand Tim Horton’s and bakery chain Panera, which is owned by KDP’s largest shareholder, JAB Holdings Company, each joined as licensed partner brands in the Keurig system.
The increase in volume mix was offset by lower net pricing, which fell by 1.7 percent. In response to a question about the segment, Gamgort said KDP has been strategic in taking pricing down on its pods, which he cited as the primary consumer barrier to entry over the last two years. KDP represents an 80 percent share of the pod market, which grew 3 percent in volume in the third quarter.
Bonnie Herzog, managing director of equity research at Wells Fargo Securities, wrote that the “moderation in pod net price declines” was encouraging news, as were better-than-expected operating margins. She noted that opportunities for growth and for consolidation of projected $600 million in synergies, along with management’s success with recent partnerships like Tim Horton’s and evian, helped offset concerns that rising input costs and transportation fees could constrain expansion.