Keurig Dr Pepper Inc. Q3 FY2024 earnings call

Third Quarter Results

• Constant currency net sales grew by 3.1%, with a 3.5% growth in volume/mix. U.S. refreshment beverages momentum strengthened, and international trends remained healthy.

GHOST Deal

• Agreed to purchase a majority stake in GHOST, with the remainder to be acquired in the first half of 2028. Strengthens KDP's position in the energy drink category. GHOST complements the existing portfolio and has a unique brand identity.

Segment Performances

• U.S. refreshment beverages saw sequential acceleration in revenue growth, led by the CSD portfolio. U.S. coffee drove improving volume/mix but faced pricing softness. International had strong performance with net sales growth nearing the high single digits.

Productivity and Cost Discipline

• Delivered strong savings in the third quarter, with SG&A overhead leverage reemerging. On track to exceed cost savings goals for the year.

Capital Allocation

• Generated over $500 million in free cash flow in the third quarter. Used cash for share buyback, dividend increase, and the pending acquisition of GHOST.

U.S. Refreshment Beverages

Net sales grew 5.3%, accelerating from a low single-digit rate in the second quarter. Volume/mix led the way with a 4% increase, including a growing contribution from Electrolit as volume fully transitioned to the DSD network. Base business trends strengthened, particularly led by the CSD portfolio. Pricing contributed 1.3% to the top line.

U.S. Coffee

Net revenue and operating income declined by 3.6% and 7.2%, respectively. Despite a muted coffee category, there was improving volume/mix in the third quarter with a 2.7% growth, consisting of flattish pods and 14% growth in brewer shipments. Third quarter pricing was soft, declining by 6.3%.

International

Delivered constant currency net sales growth nearing the high single digits. Gained market share across multiple regions and categories. In Mexico, market share grew in nearly every category operated in. In Canada, cold beverages performed robustly, led by Canada Dry and Dr Pepper. The international segment operating income advanced meaningfully, growing 16.6% in constant currency.

2024 Guidance

• Constant currency net sales expected to grow in the mid-single digits, with EPS growth in the high single digits. Full-year 2024 outlook includes interest expense in the range of $615 million to $625 million, an effective tax rate in the 22%-23% range, and approximately $1.37 billion diluted weighted average shares outstanding.

Q4 Outlook

• Focused on delivering a strong top-line result, but margin progress is likely to pause this quarter due to inflation and pricing not taking effect until early 2025. A modest FX translation headwind is expected for both top and bottom lines.

2025 Plan

• Preliminary thoughts on 2025 include opportunities but also risks from a subdued operating environment and inflation. However, strategic progress in 2024 provides long-tailed benefits.

Risks

• Uncertain operating environment with subdued consumer spending.
• Inflationary pressures impacting costs and pricing.
• Intense competition in beverage categories.
• Supply chain issues, such as impacts from storms on shipments.

Q: Kaumil Gajrawala with Jefferies asked about how the portfolio works together in energy, specifically C4, GHOST, Black Rifle, and Bloom.

A: Tim Cofer explained that the energy category evolves to serve distinct consumer needs, and KDP's portfolio of brands (C4, GHOST, Black Rifle, Bloom) work in complementary ways to address different needs and occasions, leveraging the scale of the DSD system.

Q: Brett Cooper with Consumer Edge Research inquired about the GHOST transaction and the scale benefit in the C-store channel.

A: Tim Cofer stated that KDP's playbook with C4 can be replicated with GHOST, adding scale in the small format to KDP's footprint and driving the DSD flywheel.

Q: Dara Mohsenian with Morgan Stanley asked about the durability of the coffee segment, offsetting headwinds, and margin expansion.

A: Tim Cofer was bullish on coffee's long-term prospects, focusing on controllables like single-serve outperformance, and Sudhanshu Priyadarshi discussed the focus on margin through productivity and pricing in 2025.

Q: Chris Carey with Wells Fargo Securities followed up on coffee shipment impacts from storms and portfolio optimization.

A: Tim Cofer mentioned that storms impacted the third quarter, and portfolio optimization involves adding high-growth assets and streamlining operations for network efficiency.

Q: Robert Ottenstein with Evercore asked about infrastructure capabilities and the GHOST distribution transition.

A: Tim Cofer stated that infrastructure is prepared, with the transition of GHOST distribution to KDP DSD beginning in mid-2025.