Keurig Dr Pepper Inc (KDP)

• KDP's acquisition of a majority stake in GHOST, a fast-growing energy drink brand, strengthens its position in the high-growth energy drink category and leverages its proven distribution capabilities to drive significant growth, similar to its success with C4. -
• KDP's robust Direct Store Delivery (DSD) network and infrastructure are well-prepared to integrate new brands like GHOST and Bloom, supporting future growth and handling increased complexity from multiple initiatives. -
• KDP's strategic focus on portfolio optimization by adding high-growth assets like GHOST and pruning less profitable brands positions the company for stronger top-line growth and margin expansion in the long term. -

• Analysts express concerns that KDP may be overextending itself by taking on too many initiatives simultaneously, which could strain its infrastructure and execution capabilities. They point out the addition of brands like GHOST and Electrolit and question whether the system can handle the increased complexity - .
• Underperformance in the U.S. coffee segment is impacting revenue and profitability, with no immediate signs of improvement. The company admits to a soft quarter, challenges in pricing realization due to persistent promotions, and that at-home coffee category consumption remains muted - .
• The operating environment remains subdued with stretched consumers and uncertainty around inflationary pressures, posing risks to future performance. The company acknowledges that there are no immediate signs of relief for consumers, and elasticity impacts from necessary pricing actions are uncertain - .

1. Coffee Segment Outlook
   Q: Are you planning for coffee headwinds, and can you expand margins?
   A: Management remains bullish on coffee's long-term prospects but acknowledges that at-home coffee performance is sluggish and recovery is taking longer than anticipated. They are focusing on controllable factors, noting their single-serve category and brands are outperforming. They are planning prudently, have announced pricing to offset green coffee cost increases going into effect in early 2025, expecting some elasticity impact but anticipating a healthier top-line trend and continued good market share. Margins expanded in the first half but started to come under pressure in Q3, expected to continue in Q4 due to green coffee costs. In 2025, they expect coffee inflation to continue, will offset with pricing and focus on productivity, aiming to manage for operating profit growth, with opportunities to rebuild segment margin over a multiyear basis. -

2. GHOST Acquisition Benefits
   Q: How will KDP enhance GHOST's growth and impact C-store scale?
   A: Management believes they can replicate their success with C4 to significantly boost GHOST's growth. In less than 2 years, they've doubled the business with C4, increased market share by over 1 point, and doubled total distribution points in C-stores and UDS. They bring R&D capabilities, innovation, marketing strength, and commercial teams to the partnership. The addition of GHOST could add close to 20% additional scale in small format to KDP's footprint, driving their DSD system's flywheel and economics. -

3. Portfolio Optimization Strategy
   Q: How are you balancing adding growth assets and pruning your portfolio?
   A: Management is actively assessing their portfolio to determine which categories and brands to emphasize and which to prune. Adding a high-growth asset like GHOST gives them top-line flexibility going into '25 to make tough choices on portfolio optimization. While this may come with net sales trade-offs, the long-term benefit is a faster-growing portfolio with higher service levels and a more attractive cost structure, driving efficiency across the supply chain. -

4. Operational Capacity and GHOST Transition
   Q: Can your system handle the added complexity, including GHOST's transition?
   A: Management feels well-prepared to take on GHOST, citing their success with C4 and a smooth transition with Electrolit. They've invested in infrastructure—branches, DCs, warehouses—and have been acquiring territories, demonstrating confidence in their DSD system. They expect to begin transitioning GHOST's distribution from Anheuser-Busch in mid-2025 after a 6-month termination notice, then assume full distribution to ensure GHOST is available everywhere. -

5. Energy Portfolio Approach
   Q: Are there concerns about blurring lines in your energy portfolio?
   A: Management believes the energy category's maturity allows for a portfolio of brands serving distinct consumer needs and occasions. They now have 4 to 5 material brands—C4, GHOST, Black Rifle, and Bloom—that complement each other. Each brand targets different demographics and occasions, from performance-based C4 to lifestyle-focused GHOST, mainstream Black Rifle, and female-oriented Bloom. This multifaceted approach aims to generate scale benefiting their DSD system. -

Annual guidance for FY 2024:

• Net Sales Growth: Mid-single-digit growth on a constant currency basis - (no change from Mid-single-digit growth on a constant currency basis - )
• EPS Growth: High-single-digit growth on a constant currency basis - (no change from High-single-digit growth on a constant currency basis - )
• Interest Expense: $615 million to $625 million - (lowered from $625 million to $645 million - )
• Effective Tax Rate: 22% to 23% - (no change from prior guidance - )
• Diluted Weighted Average Shares Outstanding: Approximately 1.37 billion - (no change from prior guidance - )