Keurig Dr Pepper Inc. reported results for the first quarter ending March 31, 2023, and reaffirmed its guidance for full year constant currency net sales growth of 5% and adjusted diluted EPS growth of 6% to 7%.
Commenting on the announcement, chairman and CEO Bob Gamgort stated: "Our overall performance in the quarter demonstrated the resilience of KDP as we delivered on our commitments in a dynamic macro environment. Our results were led by strong revenue growth, supported by successful innovation, increased marketing and modest brand elasticities. The U.S. Refreshment Beverages and International segments exhibited standout performance and, as expected, U.S. Coffee had a slower start to the year. Though the at-home coffee category is still cycling through mobility-related changes relative to last year, single serve continues to gain volume share of the U.S. category. On a consolidated basis and against the backdrop of persistent inflation, we are driving healthy bottom-line growth while reinvesting in our business, and we remain confident in our 2023 outlook."
First-quarter consolidated results
Net sales for the first quarter of 2023 increased 8.9% to $3.35 billion, compared to $3.08 billion in the year-ago period and, on a constant currency basis, net sales also advanced 8.9%. Driving the consolidated net sales growth was favorable net price realization of 9.9%, only slightly offset by lower volume/mix of 1.0%, reflecting the strength of the company's brand portfolio and continued modest elasticities across most categories.
KDP in-market performance in the U.S. Liquid Refreshment Beverages (LRB) category remained strong, with retail dollar consumption advancing 13.6% and KDP growing market share in categories representing approximately 88% of its cold beverage retail sales base. The performance reflected strength in carbonated soft drinks (CSDs), seltzers, coconut waters, energy, apple juice and fruit drinks and was driven by Dr Pepper, Canada Dry, A&W, Sunkist, Squirt and Crush CSDs, as well as Polar seltzers, Vita Coco, C4 Energy, Mott's and Hawaiian Punch.
Total at-home coffee category trends continued to be impacted in the quarter by greater consumer mobility versus the prior year, with the single-serve pod segment gaining volume share of the category. U.S. retail dollar consumption of KDP Manufactured pods decreased 0.5% in IRi tracked channels in the quarter, while KDP Manufactured share remained healthy at approximately 81%.
GAAP operating income for the quarter decreased 39.5% to $584 million, compared to $966 million in the year-ago period, primarily reflecting the unfavorable year-over-year impact of items affecting comparability, including the gain on the Body Armor litigation settlement in 2022, as well as the comparison to year-ago benefits related to the company's strategic asset investment program, a change in accounting for non-cash stock compensation expense and a recovery of legal fees, which collectively represented an $88 million unfavorable impact in the quarter. Also impacting the comparison was growth in GAAP gross profit, as continued broad-based inflation was more than offset by the strong net sales performance and higher productivity.
Excluding items affecting comparability, adjusted operating income decreased 4.5% to $699 million, despite the strong growth in net sales and adjusted gross profit, primarily due to the comparison to year-ago benefits, broad-based inflationary pressure, as well as increased marketing investment. On a percent of net sales basis, adjusted operating income was 20.8%.
GAAP net income for the quarter decreased 20.2% to $467 million, or $0.33 per diluted share, compared to $585 million, or $0.41 per diluted share, in the year-ago period. This performance reflected the unfavorable year-over-year impact of items affecting comparability and the decline in adjusted operating income, partially offset by the benefits of Nutrabolt equity method earnings, a lower effective tax rate and lower diluted shares outstanding. Excluding items affecting comparability, adjusted net income for the quarter advanced 0.6% to $479 million, and Adjusted diluted EPS increased 3.0% to $0.34.
First-quarter segment results
U.S. Refreshment Beverages
Net sales for the first quarter increased 12.7% to $2.01 billion, compared to $1.78 billion in the year-ago period, reflecting favorable net price realization of 12.5% and a 0.2% increase in volume/mix. Driving this exceptional performance was strong traction from recent innovation, most notably Dr Pepper Strawberries & Cream, and effective in-market execution, as well as the contribution from our recently announced sales and distribution partnership for C4 Energy.
GAAP operating income decreased 30.4% to $490 million, compared to $704 million in the year-ago period, largely reflecting the unfavorable year-over-year impact of items affecting comparability, including the gain on the Body Armor litigation settlement in 2022. Also impacting the performance was continued broad-based inflationary pressure and a net $32 million year-over-year headwind from the company's strategic asset investment program, partially offset by the strong net sales growth and productivity. Excluding items affecting comparability, adjusted operating income increased 11.6% to $508 million and, on a percent of net sales basis, totaled 25.3%.
U.S. Coffee
Net sales for the first quarter decreased 1.3% to $931 million, compared to $943 million in the year-ago period. This performance reflected higher net price realization of 5.3%, more than offset by a 6.6% decline in volume/mix.
At-home coffee consumption in the quarter continued to normalize post the pandemic. Pod revenue grew 2.9%, including a shipment decline of 1.9% due primarily to greater mobility versus the prior year. On a trailing 12-month basis versus the pre-pandemic Q1 2019 period, at-home pod shipments grew 22.8%, representing a mid-single digit compound annual growth rate (CAGR).
Brewer shipments totaled 10.2 million for the twelve months ending March 31, 2023, representing a 9.8% decline year-over-year. Compared against pre-pandemic levels represented by the 12 months ending March 31, 2019, brewer shipments grew 25.6%, representing a mid-single digit CAGR.
GAAP operating income decreased 9.0% to $232 million, compared to $255 million in the year-ago period, largely reflecting the decline in volume/mix, broad-based inflationary pressure and an unfavorable year-over-year impact of items affecting comparability, partially offset by higher net price realization and productivity. Excluding items affecting comparability, adjusted operating income decreased 5.3% to $285 million and, on a percent of net sales basis, totaled 30.6%.
International
Net sales for the first quarter increased 17.2% to $415 million, compared to $354 million in the year-ago period and, on a constant currency basis, net sales advanced 16.7%. This strong and balanced performance was driven by higher net price realization of 9.0% and volume/mix growth of 7.7%, and reflected strength in Peñafiel and growth in K-Cup Pods in Canada.
GAAP operating income increased a strong 25.0% to $80 million, compared to $64 million in the year-ago period, largely reflecting the benefits of the double-digit increase in net sales and productivity, as well as items affecting comparability, partially offset by broad-based inflationary pressure. Excluding items affecting comparability, adjusted operating income increased 18.3% to $84 million and, on a percent of net sales basis, totaled 20.2%.
2023 guidance
The 2023 guidance provided below is presented on a constant currency, non-GAAP basis. The company does not provide reconciliations of such forward-looking non-GAAP measures to GAAP measures, due to the inability to predict the amount and timing of impacts outside of the Company's control on certain items, such as non-cash gains or losses resulting from mark-to-market adjustments of derivative instruments, among others.
On a constant currency basis, KDP continues to expect net sales growth of 5% and adjusted diluted EPS growth of 6% to 7% in 2023, with foreign currency translation expected to be an approximate one-half of 1 percentage point headwind to both metrics.
