Keurig Dr Pepper Inc. (NASDAQ: KDP) today reported strong financial results for the third quarter ended September 30, 2020 and strengthened guidance for the full year.

On a GAAP basis, net sales in the third quarter of 2020 increased 5.2% and diluted earnings per share totaled $0.31, compared to $0.21 in the year-ago period. Constant currency net sales in the third quarter advanced 5.8% versus year ago and Adjusted1 diluted EPS grew 22% to $0.39.

Commenting on the announcement, Chairman and CEO Bob Gamgort stated, "Since the beginning of the pandemic, our broad beverage portfolio, unique route to market capabilities and resilient and dedicated team members have enabled KDP to successfully navigate through the challenging and volatile operating environment. In Q3, we delivered another strong quarter, marked by accelerated growth in net sales, adjusted operating income and EPS, while continuing to post strong market share growth across our portfolio and reducing our management leverage ratio. As a result, we're confident in our ability to deliver 2020 at the high-end of our guidance, while reinvesting any upside performance in brand marketing and innovation."

Third Quarter Consolidated ResultsNet sales for the third quarter of 2020 increased 5.2% to $3.02 billion, compared to $2.87 billion in the year-ago period. On a constant currency basis, net sales advanced 5.8%, reflecting strong volume/mix growth of 6.6%, partially offset by lower net price realization of 0.8%. COVID-19 continued to have a significant impact on the beverage industry, requiring KDP to navigate the challenging environment to deliver growth in the quarter. Highlights of net sales performance by segment include:

• Coffee Systems: Double-digit dollar growth in K-Cup coffee pods for at-home consumption was partially offset by weakness in the office coffee channel, as elevated work-from-home trends persisted throughout the quarter. Keurig brewers posted exceptional growth, driven by successful innovation and retailer inventory stocking ahead of the holiday season.
• Packaged Beverages: Broad-based market share expansion drove net sales in the majority of the segment's portfolio. Growth in large-format channels continued to be strong, and performance in the convenience and gas channels improved sequentially during the quarter, as consumer mobility increased.
• Beverage Concentrates: Performance improved significantly from the previous quarter, declining slightly versus the prior year, reflecting a sequential reopening of quick-serve and other fast-casual restaurants, which are serviced by the fountain foodservice component of the business.
• Latin America Beverages: Modest constant currency growth reflected sequential improvements in consumer mobility in Mexico.

KDP in-market performance2 in tracked channels for the third quarter of 2020 continued to be very strong, with market share advancing in more than 90% of the Company's liquid refreshment beverages retail base, including CSDs3, premium unflavored water, shelf stable fruit drinks, shelf stable vegetable juice and shelf stable apple juice and apple sauce. This performance reflected the strength of Dr Pepper, A&W and Canada Dry CSDs, CORE hydration and evian premium water, Snapple teas and juice drinks, Clamato vegetable juice and Motts apple juice and apple sauce. In coffee, retail consumption of single-serve pods manufactured by KDP grew 10.1% in IRi tracked channels, with dollar market share of KDP manufactured pods remaining strong at 82% and KDP's owned and licensed brand portfolio posting improving share trends.

GAAP operating income increased 29.8% to $753 million in the third quarter of 2020, compared to $580 million in the year-ago period, reflecting the benefits of the strong growth in net sales, lower discretionary expenses, including marketing, continued productivity and merger synergies. Partially offsetting these factors were higher operating expenses associated with the increased consumer demand, inflation in logistics and the unfavorable year-over-year impact of items affecting comparability, including certain COVID-19 related expenses. Excluding items affecting comparability, Adjusted operating income increased 15.9% to $874 million, compared to $754 million in the year-ago period, and Adjusted operating margin advanced 260 basis points to 28.9%. On a constant currency basis, Adjusted operating income grew 16.3%.

The COVID-19 related operating costs incurred in the third quarter of 2020 totaled $49 million, all of which were recognized as items affecting comparability, consisted of temporary compensation increases and incentives for front-line employees, as well as incremental safety and sanitation expenses.

GAAP net income in the third quarter of 2020 increased 45.7% to $443 million, or $0.31 per diluted share, compared to GAAP net income of $304 million, or $0.21 per diluted share, in the year-ago period, reflecting the strong growth in operating income, lower interest expense and a lower effective tax rate reflecting comparison to favorable discrete tax items and valuation adjustments in the prior year period, as well as the favorable year-over-year impact of items affecting comparability, which included a $12 million non-cash impairment on equity investments in the current quarter. Excluding items affecting comparability, Adjusted net income advanced 23.5% in the third quarter of 2020 to $557 million, compared to $451 million in the year-ago period. This performance reflected the growth in Adjusted operating income, continued deleveraging and a lower Adjusted effective tax rate. Adjusted diluted EPS advanced 22% to $0.39, compared to $0.32 in the year-ago period.

The Company generated strong free cash flow totaling $525 million in the third quarter of 2020, enabling KDP to reduce bank debt by approximately $225 million. The Company's management leverage ratio declined from 4.8x at the end of the third quarter of 2019 to 3.8x at the end of the third quarter of 2020, primarily driven by ongoing debt reduction and earnings growth. Since the close of the merger in July 2018, KDP's management leverage ratio has declined 2.2x.

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1 Adjusted financial metrics used in this release are non-GAAP. See reconciliations of GAAP results to Adjusted results in the accompanying tables.
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 2020 increased 3.0% to $1.10 billion, compared to $1.07 billion in the year-ago period, primarily reflecting higher volume/mix of 6.0%, partially offset by lower net price realization of 2.8%, primarily due to strategic pricing for pods. Also impacting the net sales performance was unfavorable foreign currency translation of 0.2%. On a constant currency basis, net sales increased 3.2% in the quarter.

The volume/mix increase of 6.0% in the quarter reflected pod volume growth of 2.4%, driven by double-digit at-home consumption, significantly offset by continued softness in the away-from-home business, as return to offices and hospitality remained depressed. Brewer volume was exceptionally strong, increasing 34% in the quarter. Driving this performance were successful innovation introduced over the past two years and continued marketing focused on growing household penetration, as well as increased brewer shipments to retailers for the upcoming holiday season.

Operating income increased 3.2% to $320 million in the third quarter of 2020, compared to $310 million in the year-ago period, reflecting the benefits of the net sales growth and continued productivity and merger synergies, partially offset by unfavorable margin mix related to the exceptionally strong brewer growth and the unfavorable year-over-year impact of items affecting comparability, including costs totaling $12 million related to COVID-19. Excluding these and other items affecting comparability, Adjusted operating income in the quarter increased 1.6% to $373 million, compared to $367 million in the year-ago period, and Adjusted operating margin declined 50 basis points to 34.0%.

Packaged Beverages

Net sales for the third quarter of 2020 advanced 10.7% to $1.45 billion, compared to $1.31 billion in the year-ago period, reflecting strong volume/mix growth of 11.4%, partially offset by lower net price realization of 0.7%. The net sales performance was driven by market share growth across the portfolio with particular strength in CSDs, premium unflavored water, juice and juice drinks, apple sauce and mixers, partially offset by enhanced flavored premium water, due to continued softness in convenience and gas channels.

Driving the net sales performance in the quarter were Dr Pepper, including the recently launched Dr Pepper & Cream Soda, and Canada Dry, including the recently launched Canada Dry Bold. Also contributing to the net sales growth were A&W, Snapple, Motts, 7UP, CORE, Sunkist, Squirt, Clamato, Real Lemon and mixers, partially offset by a decline in Bai.

Operating income increased 32.7% to $260 million in the third quarter of 2020, compared to $196 million in the year-ago period, reflecting the strong net sales growth, lower discretionary expenses, including marketing, and continued productivity and merger synergies. These growth drivers were partially offset by higher operating costs to meet the strong consumer demand and inflation in logistics, as well as the unfavorable year-over-year impact of items affecting comparability, including costs totaling $36 million related to COVID-19. Excluding these and other items affecting comparability, Adjusted operating income increased 51% to $304 million, compared to $201 million in the year-ago period, and Adjusted operating margin advanced 560 basis points to 21.0%.

Beverage Concentrates

Net sales for the third quarter of 2020 decreased 2.2% to $352 million, compared to $360 million in the year-ago period, reflecting unfavorable volume/mix of 4.8%, partially offset by higher net price realization of 2.6%.

The volume/mix performance, while still negatively impacted by COVID-19, improved significantly on a sequential basis in the quarter, reflecting a modest reopening of quick-serve and other fast-casual restaurants.

Total shipment volume versus year-ago declined 3.9% in the third quarter of 2020, primarily reflecting the impact of COVID-19 on the fountain foodservice business, with Dr Pepper and Crush the most impacted. Bottler case sales decreased 1.6% in the third quarter of 2020.

Operating income increased 6.9% to $262 million in the third quarter of 2020, compared to $245 million in the year-ago period, reflecting lower discretionary expenses, including marketing, partially offset by the net sales performance and the unfavorable year-over-year impact of items affecting comparability. Excluding items affecting comparability, Adjusted operating income increased 8.6% to $265 million, compared to $244 million in the year-ago period, resulting in Adjusted operating margin growth of 750 basis points versus year-ago to 75.3%.

Latin America Beverages

Net sales for the third quarter of 2020 decreased 10.1% to $124 million, compared to net sales of $138 million in the year-ago period, primarily reflecting the unfavorable impact of foreign currency translation. On a constant currency basis, net sales increased 0.7% in the quarter, reflecting net price realization of 5.2%, partially offset by a 4.5% decline in volume/mix, largely related to COVID-19.

Operating income of $25 million in the third quarter of 2020 was even with year-ago, reflecting continued productivity and lower marketing expense, offset by foreign currency transaction expense. Operating margin increased 210 basis points versus year-ago to 20.2%. On a constant currency basis, Operating income increased 12.0% over the year-ago period.

KDP Outlook for 2020
KDP net sales and Adjusted diluted EPS growth for the first nine months of 2020 were 3.8% and 16%, respectively. As a result, KDP expects constant currency net sales growth for the full year at the high end of its 3% to 4% guidance range. The Company also expects Adjusted diluted EPS growth for the full year at the high end of its 13% to 15% guidance range, or $1.38 to $1.40 per diluted share. The Company intends to invest any upside performance in marketing and innovation. Finally, the Company now expects its management leverage ratio in the middle of its of 3.5x to 3.8x range by year end 2020 and continues to expect its management leverage ratio to be below 3.0x within two to three years of the July 2018 merger closing.

About Keurig Dr Pepper

Keurig Dr Pepper (KDP) is a leading beverage company in North America, with annual revenue in excess of $11 billion and nearly 26,000 employees. KDP holds leadership positions in soft drinks, specialty coffee and tea, water, juice and juice drinks and mixers, and markets the #1 single serve coffee brewing system in the U.S. and Canada. The Company's portfolio of more than 125 owned, licensed and partner brands is designed to satisfy virtually any consumer need, any time, and includes Keurig®, Dr Pepper®, Green Mountain Coffee Roasters®, Canada Dry®, Snapple®, Bai®, Mott's®, CORE® and The Original Donut Shop®. Through its powerful sales and distribution network, KDP can deliver its portfolio of hot and cold beverages to nearly every point of purchase for consumers. The Company is committed to sourcing, producing and distributing its beverages responsibly through its Drink Well. Do Good. corporate responsibility platform, including efforts around circular packaging, efficient natural resource use and supply chain sustainability. For more information, visit, www.keurigdrpepper.com.