Buoyed by strong third quarter earnings results this week, Keurig Dr Pepper (KDP) has raised its 2021 net sales growth guidance from 7% to 8% for the year as the company benefits from increased consumer mobility and approaches the end of its three-year post-merger period.
In its Q3 earnings report yesterday, KDP announced a net sales increase of 7.6% in the quarter to $3.25 billion, up from $3.02 billion last year, with all areas of the business contributing to the growth. On a constant currency basis, net sales increased 6.8% with a higher volume/mix of 3.2% and net price realization of 3.6%. On a two-year basis, constant currency net sales grew 13.3% compared to the first three quarters of 2019.
Adjusted operating income was up 6.5% to $931 million (versus $874 million last year), fueled by a 50 basis point jump in adjusted gross margin. Adjusted operating margin was 28.6% of net sales, down from 28.9% last year.
“In the quarter, we continued to effectively manage through macro challenges to deliver strong and balanced results,” KDP CEO Bob Gamgort said in pre-prepared statements. “We are now entering the final quarter of our three-year, post-merger period with excellent top-line momentum and are on track to deliver or exceed our original merger commitments. Our outlook for the business remains strong, as we look forward to our next chapter of transformation and growth.”
Packaged beverages grew 6.9% in Q3 to $1.55 billion, up from $1.45 billion year-over-year, and was up 6.8% on a constant currency basis with volume/mix of 1.5% and net price realization of 5.3%. CSDs drove much of the growth, particularly from zero sugar offerings and the Dr Pepper and Sunkist brands, both of which reported double-digit increases, according to Gamgort. The company also reported growth from Bai (+15%), Mott’s and Evian, as well as strong showings from distributed brands like Polar (up to 3.7% market share and 60% ACV in KDP-controlled regions) and Vita Coco (in which KDP has agreed to purchase $20 million worth of stock).
However, Snapple faced declines due to supply chain disruptions and Hawaiian Punch also showed “softness,” according to the company. Meanwhile, net sales for beverage concentrates (+11.4% to $392 million) and Latin America beverages (+25.8% to $156 million) were both strong.
The company’s Coffee Systems division, which houses the Keurig brand appliances and K-Cup pods, reported a 5.3% increase to $1.16 billion, up from $1.10 the year prior. On a constant currency basis, net sales for the division grew 4.6% with higher volume/mix of 5.7% and a lower net price realization of 1.1%. The volume/mix was driven by a 6.3% increase in pod volume sales and 2.2% volume growth in appliances (which was still up despite lapping 34% appliance volume growth last year). While the company said the away-from-home business for the division is still below pre-pandemic levels, at-home sales continue to generate growth for both pods and devices.
Analysts responded positively to the results, with Goldman Sachs Equity Research noting that “better-than-expected results” in three out of the four main divisions suggests “KDP’s momentum is building behind the recovery in consumer mobility.”
Speaking to analysts and investors during an earnings call yesterday, Gamgort said much of the top line growth has come from “new tools and capabilities, robust innovation and the right team and culture.” He added that KDP is nearing its targeted leverage ratio, which will allow the company to begin shifting cash on hand away from debt reduction and towards new growth opportunities and initiatives. Gamgort previously announced during KDP’s Investor Day meeting last month that the company has a $20 billion capacity for M&A opportunities and is seeking to fill whitespace in its portfolio.
Despite the strong quarterly results, Gamgort noted that the company has faced headwinds from the ongoing supply chain disruptions impacting global industry. He cited cost inflation, labor shortages and transportation constraints as issues offsetting revenue. Like many of its competitors, KDP has responded to the crisis by raising prices across its portfolio and has stepped up production and fortified its supply chain by finding alternate sourcing options.
Speaking during the call’s Q&A portion, Gamgort noted that some of the company’s supply issues have already been handled, notably a shift from glass to PET packaging for Snapple. However, he noted that transportation and labor remain among the biggest current challenges.
“Customer pickups, as well as shipments that we make that are not through our own fleet are increasingly challenged where pickups don’t happen as scheduled and transportation is unreliable, as well as incredibly costly,” Gamgort said. “And then again, like everybody, we’re facing some rolling labor issues as well that are not adequate from time to time to be able to service the demand. So, our supply chain team has done incredibly well in navigating through all of these.”
Gamgort also commented on the recent push by competing beverage strategics into the alcohol space. As The Coca-Cola Company expands distribution for its Topo Chico Hard Seltzer and PepsiCo prepares to launch a Hard MTN Dew line, Gamgort said KDP has considered the U.S. alcohol sector (the company operates an alcohol business in Canada), but issues with distribution have led the company to hold off from an American launch. However, Gamgort said he believes “our brands can play in alcohol nicely,” noting KDP is the “number one mixer company” that has already positioned it within liquor stores and bars and restaurants.
“In short, there’s a lot of complexity to do this in the U.S.,” he said. “ It’s interesting to see how others are looking at it. We look at beverages holistically, and so it’s certainly on our radar screen. It’ll be something in the broadest sense that we’ll be talking about in the future.”