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4 Things Keurig Dr Pepper Management Wants Investors to Know

By Daniel B. Kline – Nov 10, 2018 at 11:54AM

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The company has reported its first full quarter of results since the merger closed.

The merger that created Keurig Dr Pepper (DPS) has not yet resulted in a soda-flavored coffee pod. It has, however, met the expectations set forth by management when the two companies announced their deal. CEO Bob Gamgort began the company's third-quarter earnings call -- its first full report since the merger -- with an update on how the two companies have come together.

"The integration management team established shortly after the merger was announced in January, successfully transitioned the two companies into one," he said during the call, which was transcribed by Seeking Alpha (registration required). "We announced the new leadership team in June, implemented new decision and governance processes soon thereafter, and have cascaded our new combined structure throughout the organization."

Some of the Keurig Dr Pepper brands

Keurig Dr Pepper owns and distributes a wide range of brands. Image source: Keurig Dr Pepper.

1. Smooth sailing so far

In many cases, even successful mergers have some major bumps in the road. Gamgort made it clear that has not happened in this case.

"We continued the strong momentum of both legacy businesses and have had no disruptions in customer service or systems, an accomplishment that none of us, who are experienced in acquisition integrations, ever take for granted," he said.

That does not mean that all the integration work has ended. The CEO assured investors that the merger process is ongoing.

"Most importantly, the KDP organization is learning to work together. We are energized by the unique opportunity that KDP represents," he said.

2. Coffee remains critical

Single-serve coffee sales rose by 7% in Q3 and operating income for coffee systems (the company's various coffee brewing machines) was up by 26%. In Q3 the company launched three different brewers -- the K-Cafe and the K-Latte, which let consumers make lattes and cappuccinos, and an updated K-Mini with a more modern, sleeker design.

"We will drive consumer demand for our brewer innovation with a strong investment behind the second year of our Brew the Love campaign, featuring a talented and energetic James Corden as our brand ambassador," said Gamgort. "The campaign running this quarter highlights the K-Café brewer and its ability to make every house a coffeehouse."

3. Partnerships are essential

The CEO made it clear that partnerships and acquisitions will be a core part of the company's strategy. He laid out all the moves it had made since the merger closed.

"We acquired Big Red and agreed to acquire CORE Hydration, bringing these two partner brands into our owned portfolio," he said. "We also added Forto Coffee Shots as a new partner and expanded our distribution relationship with Peet's for ready to drink iced espresso. In addition, just last week, we entered into a long-term partnership to sell, distribute and merchandise the iconic Evian brand across the U.S."

The company also made a deal with Tim Hortons and Panera as Keurig partners. Keurig Dr Pepper dropped FIJI Water and the BODYARMOR drink brand as part of its effort to reset its portfolio.

4. Older brands can grow

While much of the call focused on innovation and new partnerships, Gamgort explained that he still has high hopes for some of the company's legacy brands. He specifically called out Canada Dry, which added a ginger ale/lemonade flavor this year.

"That business -- if I take a look at -- take a look at on a year-to-date basis that business is up about 16%," the CEO said. "It's up actually stronger than that in the latest four weeks. So, I think that is a really good proof point of how some strong marketing and some nice renovation on top of an existing business can really generate growth."

It's still very early

As Gamgort noted above, the merger is still new and the combined companies still have a lot to sort out. That's likely to produce further efficiencies and more changes to the company's portfolio of owned and distributed drinks. It's encouraging, however, that things have gone well so far, and that suggests that the management team has the right makeup to handle any short-term issues that may arise.

Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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