BURLINGTON, Mass. and PLANO, Texas, Nov. 7, 2019 /PRNewswire/ -- Keurig Dr Pepper Inc. (NYSE: KDP) today reported financial results for the third quarter ended September 30, 2019 and reaffirmed guidance for Adjusted diluted EPS1 growth of 15% to 17% for the full year.
GAAP performance in the third quarter of 2019 was impacted by the merger between Keurig Green Mountain and Dr Pepper Snapple Group, which was completed on July 9, 2018. Compared to the prior year period, net sales advanced 5.1% to $2.87 billion, operating income increased 68% to $580 million and earnings per diluted share ("diluted EPS") grew 91% to $0.21.
The net sales of $2.87 billion in the third quarter of 2019 advanced 0.5%, compared to Adjusted pro forma net sales of $2.86 billion in the prior year period, reflecting strong underlying net sales growth of 3.1%, partially offset by the unfavorable impact of changes in the Company's Allied Brands portfolio. Adjusted diluted EPS increased 6.7% to $0.32 in the third quarter, compared to Adjusted pro forma diluted EPS of $0.30 in the year-ago period.
Commenting on the announcement, Keurig Dr Pepper Chairman and CEO Bob Gamgort stated, "KDP's third quarter results continued to track well with the ambitious long-term targets we established nearly two years ago. Our underlying net sales growth in the quarter accelerated to 3.1%, with balanced contribution from volume/mix and pricing. Healthy underlying growth in all four segments, combined with margin expansion, enabled strong earnings growth, cash generation and continued debt reduction."
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1 Adjusted financial metrics used in this release are non-GAAP measures and refer to results in 2019. Adjusted pro forma financial metrics also used in this release for results in 2018 are also non-GAAP measures and assume the merger occurred on December 31, 2016 and adjust for other items affecting comparability. See reconciliations of GAAP results to Adjusted results, in the case of 2019 metrics, and to Adjusted pro forma results, in the case of 2018 metrics, in the accompanying tables.
Third Quarter Consolidated ResultsThe GAAP net sales growth of 5.1% to $2.87 billion in the third quarter of 2019, compared to $2.73 billion in the year-ago quarter, primarily reflected the impact of the merger. Compared to Adjusted pro forma net sales of $2.86 billion in the third quarter of 2018, net sales advanced 0.5%, reflecting strong underlying net sales growth of 3.1%, driven by increased volume/mix of 1.5% and higher net price realization of 1.6%. Also benefiting the quarter was a 0.3% impact from an additional shipping day. Partially offsetting these positive drivers was the unfavorable impact of changes in the Company's Allied Brands portfolio totaling 2.7%, as well as unfavorable foreign currency translation of 0.2%.
KDP in-market performance2 was solid in the third quarter of 2019, growing dollar consumption and gaining market share in several key categories, including CSDs3, premium unflavored still water, shelf stable fruit drinks and shelf stable apple juice. This performance reflected the strength of Dr Pepper and Canada Dry CSDs, CORE Hydration, Snapple juice drinks and Motts apple juice. In coffee, retail consumption of single-serve pods manufactured by KDP grew approximately 2% in IRi tracked channels, with accelerated growth continuing in untracked channels, particularly e-commerce and Canada. This performance of tracked and untracked channels is consistent with the Company's pod shipment volume growth of 6.1%. Dollar market share of KDP manufactured pods in tracked channels in the US remained strong at 81.4% in the latest 52-week period ending September.
Operating income increased to $580 million in the third quarter of 2019, compared to $345 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 operating income advanced 8.0% to $754 million in the third quarter of 2019, compared to Adjusted pro forma operating income of $698 million in the year-ago period. Driving the performance in the third quarter was the strong growth in underlying net sales, along with continued strong productivity and merger synergies, both of which benefitted cost of goods sold and SG&A. Partially offsetting these growth drivers were inflation, particularly in packaging and logistics, and the unfavorable comparison versus year-ago of the $6 million gain recorded in the third quarter of 2018 in connection with the Big Red acquisition. Adjusted operating margin advanced 190 basis points to 26.3% in the third quarter.
Net income more than doubled to $304 million in the third quarter of 2019, compared to $149 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. Diluted EPS grew 91% to $0.21 in the third quarter of 2019, compared to diluted EPS of $0.11 in the year-ago period.
Adjusted net income advanced 8.2% to $451 million in the third quarter of 2019, compared to Adjusted pro forma net income of $417 million in the year-ago period. This performance primarily reflected the growth in Adjusted operating income, a lower effective tax rate and reduced interest expense due to lower outstanding indebtedness, partially offset by the unfavorable comparison versus the year-ago benefit of a $24 million pre-tax gain from Bodyarmor. Excluding this gain as well as the aforementioned $6 million gain related to the Big Red acquisition, Adjusted net income grew by approximately 14%. Adjusted diluted EPS increased 6.7% to $0.32, compared to Adjusted pro forma diluted EPS of $0.30 in the year-ago period, reflecting the growth in Adjusted net income, partially offset by an increase in diluted shares outstanding, largely due to the acquisition of Core Nutrition LLC in November 2018 which was primarily financed through the issuance of additional shares. Excluding the aforementioned gains on Bodyarmor and Big Red in the third quarter of 2018, Adjusted diluted EPS advanced 13%.
Free cash flow was again strong in the quarter, due to growth in operating income and ongoing effective working capital management, enabling the Company to pay down $423 million of structured payables and reduce outstanding debt by $71 million, for a total of $494 million in net repayments in the quarter. For the first nine months of 2019, free cash flow totaled $1.6 billion and the Company reduced outstanding debt by $788 million and paid down $432 million of structured payables, bringing the structured payables balance to $338 million at the end of the third quarter.
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2 In-market performance (retail consumption; market share) based on Keurig Dr Pepper's custom IRi category definitions.
3 CSD refers to "Carbonated Soft Drink".
Third Quarter Segment Results
Coffee Systems Net sales for the third quarter of 2019 increased 1.1% to $1.07 billion, compared to $1.05 billion in the year-ago period, reflecting higher volume/mix of 3.1%, partially offset by lower net price realization of 1.9% and unfavorable foreign currency translation of 0.1%. The volume/mix increase of 3.1% reflected strong pod volume growth of 6.1%, despite the previously-disclosed shift of certain pod shipments from the third quarter of 2019 into the second quarter, as well as strong brewer volume growth of 8.0%. Partially offsetting the strong pod volume growth was unfavorable pod sales mix, primarily reflecting the mix impact of higher shipments to branded partners in the third quarter of 2019 versus year-ago.
Operating income for Coffee Systems declined 7.2% to $310 million in the third quarter of 2019, compared to $334 million in the year-ago period. Adjusted operating income in the quarter declined 3.4% to $367 million, compared to Adjusted pro forma operating income of $380 million in the year-ago period, primarily reflecting unfavorable mix and pricing, inflation in packaging and logistics and higher brewer investments. Partially offsetting these drivers were the strong volume growth, productivity and merger synergies. Adjusted operating margin declined 160 basis points versus year-ago to 34.5%.
On a nine month basis, which excludes the quarter-to-quarter timing impacts referenced above, net sales versus year-ago advanced 2.5% and operating income advanced 2.9%. On an Adjusted pro forma basis, net sales advanced 2.3% and Adjusted operating income advanced 3.7%.
Packaged Beverages Net sales for the third quarter of 2019 increased 5.6% to $1.31 billion, compared to net sales of $1.24 million in the year-ago period, primarily reflecting the impact of the merger. Compared to Adjusted pro forma net sales of $1.34 billion in the third quarter of 2018, net sales decreased 2.2%, reflecting underlying net sales growth of 3.1%, driven by higher net price realization of 2.7% and increased volume/mix of 0.4%. Also benefiting the comparison was a 0.6% impact from an additional shipping day in the third quarter of 2019. More than offsetting these growth drivers was the unfavorable impact of changes in the Allied Brands portfolio totaling 5.8% and unfavorable foreign currency translation of 0.1%.
Driving the underlying net sales growth in the quarter were CORE Hydration, Canada Dry, Dr Pepper, Motts, Sunkist and A&W, while Bai declined. Contract manufacturing also grew in the quarter.
Operating income for Packaged Beverages was $196 million in the third quarter of 2019, compared to $61 million in the year-ago period. Adjusted operating income in the quarter advanced 23% to $201 million, compared to Adjusted pro forma operating income of $164 million in the year-ago period, largely reflecting strong productivity and merger synergies, the growth in underlying net sales and lower marketing expense due to timing. Partially offsetting these positive drivers was inflation, primarily in packaging, ingredients and logistics. Adjusted operating margin grew 310 basis points versus year-ago to 15.4%.
The full report may be viewed here.
