BURLINGTON, Mass. and PLANO, Texas, U.S. — Keurig Dr Pepper Inc. today reported financial results for the third quarter ended September 30, 2018. During the quarter, the company successfully completed the merger of Keurig Green Mountain and Dr Pepper Snapple Group (“the merger”), effective July 9, 2018.
GAAP performance in the third quarter primarily reflected the impact of the merger, with net sales advancing 140% versus year-ago to $2.7 billion and operating income increasing 45% to $344 million. Earnings per diluted share (“diluted EPS”) of $0.11 in the third quarter of 2018 also reflected the impact of the merger and compared to diluted EPS of $0.14 in the year-ago quarter.
On an Adjusted pro forma1 basis, net sales in the third quarter grew 2.9%, while Adjusted pro forma operating income increased 14.3%, or 240 basis points on a percentage of Adjusted pro forma net sales basis. Adjusted pro forma diluted EPS grew 43% to $0.30, compared to $0.21 in the year-ago period.
Commenting on the announcement, Keurig Dr Pepper CEO Bob Gamgort stated, “We’re off to a great start as a combined company. Our new organization is working well and delivered a strong quarter, with both top- and bottom-line growth and market share strength across our major categories. We also repaid approximately $550 million of debt since the merger close. We remain confident in our outlook for 2018 and the long-term value creation framework we shared at the time of the announcement of the merger.”
During the quarter, KDP completed the acquisition of Big Red, a strong regional CSD2 brand, and entered into a definitive agreement to acquire Core®, a rapidly-growing brand that participates in the premium enhanced water segment. The Company also added Forto®, a rapidly-growing brand of coffee energy shots, to its partner portfolio and expanded its distribution relationship with Peet’s®, a premium specialty coffee company, for the expansion of the Peet’s RTD Iced Espresso line.  In late October, KDP entered into a long-term partnership with Danone Waters of America to sell, distribute and merchandise evian®, the leading global brand of premium natural spring water, across the U.S.
Third Quarter Consolidated Results
Net sales in the third quarter of 2018 more than doubled to $2.73 billion, compared to $1.14 billion in the year-ago quarter, primarily reflecting the impact of the merger. Adjusted pro forma net sales of $2.86 billion in the third quarter of 2018 grew 2.9%, driven by volume/mix growth of 3.6%, partially offset by unfavorable foreign currency translation of 0.5% and modestly lower net realized price of 0.2%.
Retail market performance, as measured by IRI, remained strong in the quarter. The Company’s CSD portfolio registered market share growth in both units and dollars, driven by strong performance of Dr Pepper and Canada Dry.  Likewise, the coffee portfolio also performed well in the quarter, driven by single-serve pod category unit growth, combined with an increase in market share of pods manufactured by KDP.
Operating income increased 45% to $344 million, compared to $238 million in the year-ago period, primarily reflecting the impact of the merger, partially offset by the unfavorable year-over-year impact of items affecting comparability. Adjusted pro forma operating income advanced 14.3% to $697 million in the third quarter of 2018, compared to $610 million in the year-ago period. This performance primarily reflected the benefit of the net sales growth, strong productivity and lower marketing expense due to timing, despite inflation in input costs and logistics. On a percentage of Adjusted pro forma net sales basis, Adjusted operating income grew 240 basis points to 24.4% in the third quarter of 2018, compared to 22.0% in the year-ago period.
Net income increased approximately 28% to $148 million, compared to $116 million in the year-ago period, largely reflecting the impact of the merger, partially offset by the unfavorable year-over-year impact of items affecting comparability.  Adjusted pro forma net income advanced 39% to $414 million, compared to $297 million in the year-ago period, primarily reflecting the growth in Adjusted pro forma operating income and a significantly lower effective tax rate, due to the Tax Cuts and Jobs Act, as well as a cash distribution from BODYARMOR, in connection with KDP’s interest in it as a unitholder. Adjusted diluted EPS increased 43% to $0.30 per diluted share, compared to $0.21 per diluted share in the year-ago period.
Since the merger close, KDP repaid approximately $550 million of debt, due to strong operating profit results and effective working capital management.
1 Adjusted pro forma metrics used in this release are non-GAAP financial measures and assume the merger occurred on December 31, 2016 and adjusts for other items affecting comparability. See reconciliation of GAAP results to Pro forma results and Adjusted pro forma results in the accompanying financial tables.
2 Refers to carbonated soft drinks.
Third Quarter Segment Results
Beverage Concentrates
Net sales for Beverage Concentrates in the third quarter of 2018 totaled $317 million. Adjusted pro forma net sales advanced 3.1% to $331 million, compared to $321 in the year-ago period, reflecting the benefits of increased volume/mix of 0.7% and higher net price realization of 2.7%, partially offset by unfavorable currency translation of 0.3%.
The Adjusted pro forma net sales growth in the quarter was fueled by higher net pricing across the portfolio, as well as shipment volume growth of 0.5%. The increase in net sales was driven by Dr Pepper and A&W, partially offset by Sunkist, while the increase in shipment volume was driven by Canada Dry, due to product innovation and continued growth in the ginger ale segment, as well as growth of Crush and Hawaiian Punch, partially offset by Dr Pepper and Sunkist.
Bottler case sales volume increased 0.8%, driven by growth in Canada Dry, partially offset by a decline in Sunkist. Dr Pepper case sales volume was even with year-ago in the quarter, with growth in regular offset by a decline in diet. Fountain foodservice volume increased 1.7% in the quarter, led by Dr Pepper and Hawaiian Punch.
Operating income for Beverage Concentrates in the third quarter of 2018 was $193 million.  Adjusted pro forma operating income of $204 million was even with year-ago, primarily reflecting the benefit of the net sales growth offset by higher SG&A, largely due to increased performance-based compensation and inflation in input costs and logistics.
Packaged Beverages
Net sales for Packaged Beverages in the third quarter of 2018 totaled $1,238 million. Adjusted pro forma net sales advanced 4.9% to $1,336 million, compared to $1,273 million in the year-ago period, reflecting higher volume/mix of 5.7%, partially offset by lower net price realization of 0.7% and unfavorable foreign currency translation of 0.1%.
The Adjusted pro forma net sales growth in the quarter was fueled by shipment volume growth of 4.5%, due to increases in contract manufacturing and growth in Canada Dry, BODYARMOR, Core and Bai, partially offset by lower shipment volume of 7UP and Dr Pepper.
Operating income for Packaged Beverages in the third quarter of 2018 totaled $61 million. Adjusted pro forma operating income declined 16% to $164 million, compared to $195 million in the year-ago period. This performance reflected the strong growth in Adjusted pro forma net sales and productivity, more than offset by inflation in input costs and logistics not yet fully covered by pricing actions taken during the quarter. Also impacting the performance was investment behind the Company’s front-line sales, delivery and merchandising workforce.
Latin America Beverages
Net sales for Latin America Beverages in the third quarter of 2018 totaled $124 million. Adjusted pro forma net sales increased 2.3% to $136 million, compared to $133 million in the year-ago period, reflecting higher net price realization of 8.7%, partially offset by lower volume/mix of 0.6% and unfavorable currency translation of 5.8%.
Operating income for Latin America Beverages in the third quarter of 2018 totaled $15 million. Adjusted pro forma operating income more than doubled in the third quarter of 2018 to $27 million, compared to $11 million in the year-ago period. This performance reflected the benefit of the Adjusted pro forma net sales growth and the favorable impact of comparison to the prior year write-off of prepaid resin inventory, partially offset by inflation in input costs and logistics.
Coffee Systems
Net sales for Coffee Systems were $1,053 million in the third quarter of 2018, compared to $1,140 million in the year-ago period which included an extra shipping week.  Adjusted pro forma net sales grew 0.4% to $1,053 million in the third quarter of 2018, driven by volume/mix growth of 2.5%, almost entirely offset by lower net price realization of 1.7%, which continued to moderate significantly on a sequential quarterly basis, and unfavorable foreign currency translation of 0.4%.
The net sales growth in the third quarter was fueled by volume growth of approximately 3% for pods and 8% for brewers, as well as higher brewer pricing due to innovation, partially offset by the aforementioned strategic pod pricing investment, which continued to moderate, as expected.
During the third quarter of 2018, the Coffee Systems segment added Tim Horton’s®, an iconic coffee brand in Canada, and Panera®, a successful bakery-café brand, as new Keurig system partners. In addition, KDP launched its new coffeehouse brewers—namely the K-Café and the K-Latte—enabling consumers to make lattes and cappuccinos at home using any K-Cup pod. The Company also launched its updated K-Mini platform, with new features and a modern, sleek design. The new innovations, designed to drive household penetration of the Keurig system, are performing well in the market, with each of the new brewers receiving strong consumer reviews.
Operating income for Coffee Systems in the third quarter of 2018 advanced 16% to $334 million, compared to $288 million in the year-ago period.  Adjusted pro forma operating income advanced 22% to $380 million, compared to $312 million in the year-ago period, primarily reflecting the net sales performance, strong productivity and lower marketing expense due to timing, despite inflation in input costs and logistics.
KDP Adjusted Pro forma Outlook
The Company’s outlook for Adjusted pro forma diluted EPS in 2018 remains unchanged in the range of $1.02 to $1.07, after the impact of preliminary Purchase Price Accounting adjustments currently estimated at $0.04 per diluted share.
In addition, KDP continues to expect merger synergies totaling $600 million over the 2019-2021 period, with $200 million in savings expected each year, as well as ongoing productivity across the business. The Company also continues to expect significant cash flow generation and rapid deleveraging, with a targeted leverage ratio below 3.0x in two to three years from the closing of the merger. Finally, KDP continues to expect to achieve average annualized growth of 15-17% in Adjusted pro forma diluted EPS from 2018 to 2021.
