Keurig Dr Pepper reports strong Q3 2022 results and reaffirms guidance for the year
Source Keurig Dr Pepper Inc.
Keurig Dr Pepper Inc. reported strong results for the third quarter ending September 30, 2022, and reaffirmed its full-year guidance for constant currency net sales growth in the low-double-digit range and adjusted EPS growth in the mid-single-digit range.
CEO Ozan Dokmecioglu stated in the announcement, "The third quarter was another strong one for KDP, as we again demonstrated the advantages of our all-weather business model, which has proven adept at performing well in an evolving macro environment to meet the needs of consumers. While the macro landscape remains challenging, our cold beverages portfolio continues to perform exceptionally well, with strong in-market execution and increased marketing investment driving consistent growth in LRB market share. At the same time, our coffee business has steadily recovered from the significant supply chain disruption earlier this year and is poised to deliver strong sales and earnings growth in the fourth quarter."
Third-quarter consolidated results
Net sales for the third quarter of 2022 increased 11.4% to $3.62 billion, compared to $3.25 billion in the year-ago period and, on a constant currency basis, net sales advanced 11.8%. All four segments grew sales during the quarter. Driving the consolidated net sales growth was favorable net price realization of 12.1%, only slightly offset by lower volume/mix of 0.3%, reflecting the strength of the portfolio and continued strong in-market execution.
KDP in-market performance in the Liquid Refreshment Beverages (LRB) category remained strong in the quarter, with retail dollar consumption advancing 11.2% and total LRB dollar share posting another quarter of growth, largely reflecting strength in premium unflavored waters, seltzers, teas, apple juice and fruit drinks, combined with continued solid performance in CSDs3. This performance was driven by CORE Hydration, Polar seltzers, Snapple, Mott's, Hawaiian Punch and Dr Pepper, Crush, Canada Dry, A&W and Squirt CSDs.
In coffee, retail dollar consumption of single-serve pods manufactured by KDP increased 4.0% in IRi tracked channels, led by higher pricing in both KDP owned and licensed and partner brands, with stronger growth registered in untracked channels. KDP Manufactured share remained strong at 81.7% in the quarter.
GAAP operating income in the third quarter of 2022 decreased 50.4% to $394 million, compared to $795 million in the year-ago period, primarily reflecting a $311 million non-cash impairment charge in the current quarter on the Bai brand. Also impacting results in the quarter was higher gross profit, partially offset by continued broad-based inflationary pressures and increased marketing investment.
Adjusted operating income increased 2.0% in the quarter to $947 million, fueled by 8.6% growth in adjusted gross profit, partially offset by continued broad-based inflationary pressures in transportation, warehousing and retail labor, as well as increased marketing investment. On a percent of net sales basis, adjusted operating income was 26.1%.
GAAP net income in the third quarter of 2022 decreased 66.0% to $180 million, or $0.13 per diluted share, compared to $530 million, or $0.37 per diluted share, in the year-ago period. This performance primarily reflected the unfavorable year-over-year impact of items affecting comparability.
Adjusted net income in the quarter advanced 4.3% to $656 million, driven by the growth in Adjusted operating income and reduced interest expense. Adjusted diluted EPS in the quarter increased 4.5% to $0.46, compared to $0.44 in the year-ago period.
Operating cash flow in the third quarter of 2022 declined slightly to $759 million, while free cash flow increased slightly to $686 million.
On September 14, 2022, the company announced a 6.7% increase in its annualized dividend rate to $0.80 per share, from $0.75 per share, effective with the company's regular dividend that was payable on its common stock on October 14, 2022.
Third-quarter segment results
Coffee Systems
Net sales for the third quarter of 2022 increased 4.7% to $1.21 billion, compared to $1.16 billion in the year-ago period and, on a constant currency basis, net sales advanced 5.2%. The constant currency net sales growth was driven by a 7.8% increase in net price realization, partially offset by a 2.6% decrease in volume/mix.
The higher net price realization of 7.8% in the quarter was primarily driven by pricing actions taken in late 2021 and the second quarter of 2022, while the volume/mix decrease of 2.6% was due to pod shipment growth of 3.5%, more than offset by a brewer shipment decline of 15%. The brewer performance is consistent with the company's expectation of returning to its long-term target of adding two million new households into the Keurig system in 2022, which now requires selling fewer brewers than the COVID-driven, elevated level of three million new households having been added in each of the prior two years.
GAAP operating income in the third quarter of 2022 decreased 19.2% to $295 million, compared to $365 million in the year-ago period. This performance largely reflected broad-based inflationary pressure, primarily in green coffee costs, which reached the highest level of the year for KDP due to timing of the Company's hedges. Also impacting the results was the unfavorable year-over-year impact of items affecting comparability. Partially offsetting these factors were the benefits of the net sales growth and productivity. Adjusted operating income decreased 15.7% to $343 million and, on a percent of net sales basis, totaled 28.4%.
Packaged beverages
Net sales for the third quarter of 2022 increased 13.5% to $1.76 billion, compared to $1.55 billion in the year-ago period and, on a constant currency basis, net sales advanced 13.6%. This strong and balanced performance was driven by higher net price realization of 13.6%, with volume/mix even with year-ago, reflecting the strength of the portfolio and continued strong in-market execution. Broad-based strength across the portfolio was led by CSDs, Snapple, Mott's, CORE Hydration, Hawaiian Punch, Evian and Polar seltzers.
GAAP operating income in the third quarter of 2022 decreased 96.6% to $10 million, compared to $291 million in the year-ago period, primarily reflecting the unfavorable year-over-year impact of items affecting comparability, including the aforementioned $311 million non-cash impairment charge on the Bai brand. Also impacting the performance was the strong net sales growth and productivity that more than offset broad-based inflation and significantly higher marketing investment in the period. Adjusted operating income increased 7.9% to $340 million and, on a percent of net sales basis, totaled 19.4%.
Beverage concentrates
Net sales for the third quarter of 2022 increased 17.1% to $459 million, compared to $392 million in the year-ago period and, on a constant currency basis, advanced 17.3%. This strong and balanced net sales performance was driven by higher net price realization of 16.6% and favorable volume/mix of 0.7%, reflecting the ongoing strength of the portfolio.
Total shipment volume was essentially even with the year-ago period, reflecting increases in Dr Pepper and Crush, largely offset by declines in Schweppes and A&W. Bottler case sales volume in the quarter declined 1.0% versus the year-ago period.
GAAP operating income in the third quarter of 2022 increased 20.9% to $347 million, compared to $287 million in the year-ago period, primarily reflecting the strong net sales performance and lower marketing, partially offset by broad-based inflation. Adjusted operating income increased 21.0% to $350 million and, on a percent of net sales basis, totaled 76.3%.
Latin America beverages
Net sales for the third quarter of 2022 increased 26.9% to $198 million, compared to net sales of $156 million in the year-ago period and, on a constant currency basis, advanced 28.8%. This strong and balanced performance was driven by higher net price realization of 17.3% and increased volume/mix of 11.5%, reflecting the strength of the portfolio and continued strong in-market execution. Leading the net sales growth were Peñafiel, Clamato, Mott's and Squirt.
GAAP operating income in the third quarter of 2022 increased 5.4% to $39 million, compared to $37 million in the year-ago period, reflecting the strong net sales growth and productivity, partially offset by broad-based inflationary pressures, significantly higher marketing investment and the unfavorable year-over-year impact of items affecting comparability. Adjusted operating income increased 13.5% to $41 million and, on a percent of net sales basis, totaled 20.7%.
During the quarter, KDP announced a strategic partnership with Red Bull, the iconic global energy brand, to sell and distribute Red Bull in Mexico. The partnership leverages KDP's powerful distribution network in Mexico to expand availability of Red Bull in the country. This agreement furthers KDP's commitment to win-win partnerships and is expected to strengthen the company's energy category position, improve its go-to-market scale and drive efficiencies over time.
KDP 2022 guidance
KDP reaffirmed its 2022 guidance for constant currency net sales growth in the low-double-digit range and adjusted EPS growth in the mid-single-digit range.
