Q3 2019 Earnings Call
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The dry.
Core hydration, the latter which continues to register very strong growth within over 30% increase in retail sales in the trailing 52 weeks.
Indicates a candidate dry double digit net sales growth was driven by successful innovation launched earlier this year as well as strength in the core brands.
Advanced go College football campaign behind Dr. Pepper is also in full swing delivering strong results for our flagship CSD brands.
The campaign is resonating well with consumers and is driving additional in store displays higher inventory on display retail dollar growth and volume performance that continues to outperform the category.
As we entered the championship drive of the college football season. The campaign will feature new media content on pack consumer offer strong in store execution digital and social media as well as the return of our college tuition give away program.
We're also rolling out our green bottle campaign, but a handful of brands, including Canada dry in conjunction with the holidays.
His campaign is always well received the retail and we expected to provide good support behind our brands during a key selling season.
Also contributing to underlying sales growth in the quarter, where must sunkist and am W. As well as contract manufacturing.
As mentioned earlier, there were a few areas, where we see performance trailing our expectations by Snapple Ti in some of the new additions to our Allied brands.
By performed below the category in the quarter and we are implementing a number of programs to address performance, which we will share with you early in the new year.
While we have gained regained by distribution that had been lost in Q2 of 2018 were not experiencing the lift in velocity expected behind our marketing programs.
With regard to snapple, the juice drink portfolio grew retail consumption by double digits and continued to gain share. However, snapple team has been underperforming the category as we close out this year and head into 2020, our focus behind Snapple team will be on brand renovation.
And finally, let me touch briefly on our Allied brands portfolio.
To refresh everyone's memory, we had a significant changes in the allied brands portfolio at the time of the merger, hence our discussion since that time of the concept of underlying net sales.
As we said on previous calls the negative comparison to year ago Allied brands turns to a tailwind in Q4 and is no longer a factor as we enter 2020, which will enable us to drop the discussion of reported versus underlying growth.
Our total allied brands portfolio generates approximately 350 million in retail consumption and represents 3% of our cold beverage sales.
Well not large in the absolute we expect these brands to provide access to higher growth segments.
To that point, the ramp up of the new brands to the.
Portfolio is progressing slower than expected.
The reasons are slightly different for each brand, but in total we see a delayed response and realizing the full growth potential these brands.
As a result, we now expect the year over year net changes in the Allied brands portfolio to result in a headwind to total KDP net sales of approximately 200 basis points versus the 100 basis points forecasted at the beginning at the year.
The Great News is we expect KDP total underlying net sales growth to approximately reached 3% for the year, which is at the high end of our targets driven by very strong growth on our own brand that has been able to offset the slower start on allied brands.
We also continue to plant seeds to support future growth such as a shock smart energy drinks, which while still quite early is performing well in the market will discuss more about that in early 2020.
Operating income for packaged beverages in the third quarter advanced a strong 23%.
Largely reflecting the growth in underlying net sales strong productivity and merger synergies.
As well as the timing of marketing spending partially offset by inflation, particularly in packaging ingredients and logistics.
And finally, we expect to exit the fourth quarter. This year with strong sales growth that will fuel our momentum into 2020.
Turning now to the beverage concentrate segments, which represent sales of concentrates to bottled waters and syrups to fountain customers.
Net sales were up nearly 9% in the quarter driven by both net price realization and volume mix growth.
The strong volume performance was driven in part by our fountain foodservice business and is reflective of the strength in our core brands such as Dr. Pepper, Canada, dry sunkist and big Red.
Operating income for beverage concentrates advanced a strong 20% in the quarter.
Primarily reflecting the strong growth in net sales as well as merger synergies and productivity.
And finally, turning to Latin America beverages net sales for the segment increased 1.5% in the third quarter and operating income of $25 million declined slightly resulting from higher marketing spending and inflation.
With that I'll hand, it over to Oman.
Thanks, Bob and good morning, everyone.
I will discuss with a review of the financials for the first quarter.
This was a good ones for KDP.
Hi, Valencia into our outlook for the balance of the year.
Continuing on an adjusted basis.
Net sales for the fourth quarter increased 0.5%.
$2.87 billion compared to $2.8 billion to $6 billion in the priority.
This performance reflected strong underlying net sales growth of 3.1%.
Driven by higher volume mix of 1.5% and favorable net price realization of 1.6%.
Also in the quarter.
We have the additional shipping day packaged beverages segment.
Added 0.3% of the growth.
Partially offsetting the underlying net sales growth and the extra shipping day was the unfavorable impact of 2.7% from changes in our allied brands portfolio.
As well as unfavorable foreign currency translation of 0.2%.
On a constant currency basis.
Underlying net sales increased 3.3%.
Operating income in the quarter increased 8% to $754 million.
Compared to $698 million in the prior year.
This increase reflected strong underlying net sales growth and continued productivity and merger synergies in both cost of consoles and SGN.
These growth drivers were partially offset by inflation.
Let by packaging and logistics.
And the unfavorable companies on versus you. They go to the one time $6 million gain related to the acquisition of because.
Operating margin up loans 190 basis points in the quarter to 26.3%.
In terms of our segment performance for the fourth quarter that on an adjusted basis.
Net sales for coffee systems increased 1.1% to $1.7 billion in the quarter.
Compared to $1.5 billion in the prior year.
This performance reflected higher volume mix of 3.1%.
Which was partially offset by lower net price realization of 1.9%.
Hi, New mixed performance was driven by strong grew volume growth of 8% and pot volume growth of 6.1%.
Despite the previous to discuss shift of certain plus shipments from the third quarter of 2019 into the second quarter.
As Bob discussed earlier, the strong pulp volume growth was partially offset by unfavorable mix, reflecting the impact of higher pulp shipments to our branded partners in the quarter.
Unfavorable foreign currency translation of 0.1% also impacted net sales in the quarter.
Coffee systems operating income was down in the quarter as expected specifically operating income declined 3.4% to $306 million to $7 million.
Compared to $380 million in the Payor, yes.
Selecting unfavorable mix lower pricing inflation in packaging and logistics and higher grew would investments, including media market research and innovation development costs.
We are also lapping the timing of certain adjustments in the prior to year relate to legacy acuity, good in mountains, yens, including bonus and stock compensation.
Partially offsetting these factors were going to strong volume growth as well as continued productivity and merger synergies.
Operating margin in the quarter was 34.5%.
Moving to packaged beverages.
Net sales for the segment decreased 2.2% in the core that to one point for the $1 billion compared to one point for the $4 billion in the prior years.
This performance reflected strong underlying net sales growth of 3.1%.
Driven by the higher net price realization of 2.7% and increased volume mix off 0.4%.
Additionally, the extra shipping day in the quarter had a favorable impact of 0.6%.
More than offsetting these growth drivers was the unfavorable impact in the core that off 5.8% from changes in the allied brands portfolio and unfavorable foreign currency translation of 0.1%.
Operating income for packaged beverages increased 22.6% to $201 million in the fourth quarter.
Compared to $164 million in the year ago period.
The pet foremost lasted reflected continued productivity and merger synergies strong growth in underlying net sales and the timing of marketing investments.
These positive drivers vote, partially offset by inflation in packaging ingredients and logistics.
Operating margin at month, 310 basis points versus year ago to 15.4%.
Turning to beverage concentrates.
Net sales for the segment increased 8.8% in the quarter to $360 million compared to $331 million in the prior years.
This performance was driven by higher net price realization of 6.5% combined with favorable volume mix of 2.3%.
This strong net sales growth in the quarter was driven by Dr Pepper, Canada, dry big Red and Sunkist.
The shipment volume increase for beverage concentrates was due primarily to Dr. Pepper.
Canada, dry big grit and sunkist.
In terms of Bottler case sales volume.
Revenues concentrated increased 2.1% compared to the year ago period.
Operating income for beverage concentrate increased 19.6% to $244 million compared to $204 million in the year ago period.
This performance reflected the benefit on net sales growth strong merger synergies and productivity.
Operating margin up month, 620 basis points versus you their go to 6% to 7.8%.
Turning to Latin America beverages.
Net sales for the segment increased 1.5% to $138 million.
Compared to $136 million in the prior year.
This performance was driven by higher net price realization of 5.2%, partially offset by lower volume mix of 1.5% and unfavorable foreign currency translation of 2.2%.
On a constant currency basis net sales increased 3.7%.
Operating income for Latin America beverages totaled $25 million in the second quarter compared to $27 million in the years ago period.
This performance reflected the net sales growth and productivity, which were more than offset by inflation in logistics and ingredients as well as increased marketing investment.
Turning to interest expense.
Interest expense in the first quarter declined $17 million or 10.5% to $145 million and was driven by about continued de leveraging.
Net income for the quarter increased 8.2% to $451 million compared to $417 million in the prior yet.
This performance was driven by the strong operating income growth lower interest expense and a lower effective tax rate compared to the year ago period.
Partially offsetting these favorable drivers was an unfavorable comparison versus the prior to year totaled 24 million dollar to gain from body armor.
This gain along with the previously mentioned 6 million gain related to the acquisition of bigger collectively reduce the year over year net income growth rate by approximately six percentage points.
Translating into underlying net income growth of approximately 14%.
Taking all of these factors together.
Our adjusted diluted EPS in the first quarter increased 6.7% to further two cents compared to further sense in the prior years.
On an underlying basis adjusted diluted EPS advanced 13%.
Free cash flow was again strong in the quarter driven by growth in the net income and continued effective working capital management.
As a result in the first quarter, we paid down approximate the $423 million over structural payables and reduced net debt by an additional $71 million.
For a total of $494 million in payments.
This increase is the total amount of debt paid down in the first nine months of 2000 $19 million to $788 million as well as a reduction in structural payables of $188 million.
For the first nine months of 2019, we generated over $1.6 billion in free cash flow.
With that free cash flow conversion rate of 130%.
And exited the quarter added $74 million of unrestricted cash on hand.
The debt reduction in the quarter, along with our growth in adjusted EBITDA.
Reduce our debt to adjusted EBITDA ratio.
Which could you referred to as about a management leverage ratio to 4.8 times.
This aggressive pace of de leveraging continues to be consistent with our expectations.
And for perspective.
Since the merger close we have paid down a total of over $1.7 billion of debt.
And finally in terms of our outlook for the balance of 2019.
For the full year, we continue to expect adjusted diluted EPS good off in the range of 15% to 17%.
Representing one point 20 to one point $22 per share.
This guidance is in line with our long term merger target.
We continue to expect net sales growth of 1% to 2% with underlying net sales growth now expected at approximate this 3%.
The latter which is at the high end of our long term merger target of 2% to 3%.
This net sales growth reflects higher than expected growth from the core business and the slower ramp of the new Allied brands, resulting in an approximate 200 basis point headwind impact from the changes in the Allied brands portfolio.
We continue to expect merger synergies off $200 million in 2019.
This is consistent with our long term merger target and we continue to expect these synergies to fully flow through to EPS.
We continue to expect interest expense to be in the range of 550 million to $565 million.
This reflects our expectation of significant cash flow generation and continued de leveraging.
As well as the first health benefit in 2019 totaling $40 million from the unwinding of interest rate swap contracts.
We continue to estimate our effective tax rate for 2019 to be in the range of 25% to 25.5% for the year.
We continue to expect our diluted.
Weighted average shares outstanding to approach one point for the 2 billion in 2019.
While we do not provide EPS guidance by quarter.
We remind you that we expect quarter for EPS growth to be tempered due to comping. The significant one time gains approximate in $17 million related to the core acquisition in 2018.
We continue to expect our second held synergies to be greater than our first our synergies.
We continue to expect inflation to moderate somewhat in the second half.
And finally in 2019, we continue to expect free cash flow to approximate $2.3 billion to $2.5 billion.
With this strong free cash flow generation, we expect our management leverage ratio to be in the range of 4.4 to 4.5 times by the end of 2019.
We also remain confident that we will achieve our leverage target of below three times in two to three years from the July 2018 merger closing.
And with that I will hand, it back over to the operator to open it up for your questions.
Thank you would like to ask a question you will need to press star one on your telephone to withdraw your question pressed upon unhedged.
Please standby wildly compiled the Q and a roster.
Our first question comes from Bryan Spillane with Bank of America. Your line is now open.
Hey, good morning, everyone.
Hi, Brian just two questions for me just one I was on on the free cash flow conversion this year year over 130% and.
I think what would be implied in terms of getting to the leverage targets. The multiyear leverage targets that you can maintain a pretty high level of free cash flow conversion. So you could just.
Hi, give us a sense of whether or not where you stand today at converting over 130% is still.
It's sustainable or.
Is there some reason why would be maybe different going forward, then I've got a follow up.
Yeah, good morning brine inflow.
In short yes.
The answer to question right now for this year as we adjust the announced the conversion ratio is one early of course, there are lots of puts and takes and as we discussed before our effective working capital management was the main driver of getting over 100, but we still have a continuation of our program.
Into 2020 as well as toward 2021, and if you add also as we always do at are seeing the opportunities and explore the new initiatives, which we expect actually our conversion ratio to be very close to our give and take 100% conversion and if we can do better of course, we will do better but the.
Conversion ratio will be high in the upcoming two years.
Thank you and then Bob just on on the Brewers. The Brewer lineup I guess going into the holidays. If you go back to the Investor day.
You talked about sort of a bridge of two to build household penetration from what would that that point about 20% than it was.
Quality.
Modern modernizing making it more convenience variety value right. There was a whole sort us sort of line.
Cost of levers right that would drive penetration and it just seems at this point you've got all the Brewers now renovated with the new engines, you've got to do over in the market, which is more convenient but it seems like you've ticked off a lot of those those different lever. So can you just kind of update us on how you're thinking about brewer lineup today those sort of cluster.
Errors and what it might imply for beginning to accelerate household penetration.
Yes, sure you're referring to the waterfall that we showed in the Investor day, where we view we identified the opportunity to convert households in the range of about 60 million households tickets there'll be converted and then we built on that show the research as to why people, who theoretically should be in a single serve.
The system weren't and then we redesigned our brewers.
And our marketing plans to specifically go after those barriers to job. One for you go back couple of your job one was to increase the quality of the Brewers hit the right price points and and then begin add features and as you.
Accurately pointed out we've been taking off many of those opportunities modernizing the look.
Going into specialty beverages, with the K Cafe and now very importantly, going after one of the biggest barriers is the ability to produce a large batch of coffee with K do well. So I would say as we sit here today the quality of the Brewers is up significantly Europe take my word for you can just look at the star ratings online we've been able to fill out a lot of the base.
Six hitting the lower end price points, we're now moving higher end as well and then filling out most of the functionality that we've talked about.
And so we're really happy and that's what's driving the strong household penetration that we continue to experience.
But we've got a great pipeline still ahead, there are still a lot of white space to fill in between all of those.
And there are new features and benefits that we can add to existing brewers to make them, even more interesting that we'll share with you in.
Coming months.
So we feel like we got the basics in place, but a lot of upside still left.
And then I would also remind you that there are drivers of household penetration that arc directly connected to the Brewers in one of the biggest is having a recyclable pod and so thats being implemented as we speak and will be completed by the end of 2020.
And just give me one final point, we got a lot of questions of while you've launched at Brewer. So you've got everybody, who youre going to get based on that into the system. It takes time people don't typically replace their brewer until our current brewer breaks and so the have to layer in lots of different features and benefits they get people on it really is.
Slower build them one might think.
But it's all moving in that direction that gives us line of sight to growing household penetration.
For for quite a long term.
Alright, thank you.
Sure.
Our next question comes from Lauren Lieberman with Barclays. Your line is now open.
Great. Thanks, Good morning, good morning.
I wanted to ask a little bit about the allied brands. So I'm, assuming kind of the slower ramp is about the market performance of what you already have in the portfolio not a matter of attracting more.
I'm sure. It's a different story for different brands, but anything you can offer is it sort of.
Health of the brand established brands that you brought in house is it noise in sort of the newer segments that you've been entering.
And I.
I know its is a short time period, but is this performance are impacting it all youre thinking about portfolio composition for that Allied you go forward.
Yes, let me give it let me give a couple of an hour and I think first of all as I mentioned the total Allied portfolio now is about 350 million in sale. So it's important but it's not as large as it once was that number may be surprising because you might think walls lack of the number was much larger than that and the reality of.
It was but if you recall, we acquired some of those businesses. So if you look at the core in the big Red businesses that we acquired in the past year, they're actually larger than the remaining allied brand portfolio that we have less so it's still a good opportunities for for us to access different segments and different levels of growth.
But in its absolute it's not as important as it once was we talked about the net change in allied brands with Fiji and body armor coming out in some of the new ones coming in.
Scott Peterson for till we said that was about 100 bit headwind and now we're saying it's about 200 bit headwind.
Look if you if you take a rounding there is involved in that.
Slightly more than that rounded down to 100 slightly less than that rounded up to 200, what we're talking about here is a delay in sales versus our expectation of about $50 million.
So it has an impact on our growth rate for sure but the good news is I emphasized before is that we've been able to offset that with really good strength in our core owned businesses, which which speaks to the health of that portfolio.
As we sit here today, we did get to answer the part of your question and we look at those new brands. We think it is primarily just the delay it's just a slower start up we're getting the distribution.
The velocity is building, it's just not at a rate that we thought it would be and it's it's a combination of things when you're looking at a new brands, sometimes it's hard to forecast.
Every on as a good example, if you look at the latest 13 weeks, we're growing heavy on at about 8%.
That's below the category because that category is really strong the categories growing like 12, 13% for 8% not too bad and it's up significantly. So we're seeing traction, it's just taking longer to get there and it really doesn't affect the way that we think about allied brands going forward and as I remind you were also continued to put new.
Partnerships in place like a shock that we'll continue to fill that pipeline. So I think this is well contained and well defined and really doesn't change our outlook going forward.
Okay. Thank thats Super helpful. Thanks, a lot right.
Our next question comes from Steve Powers Deutsche Bank. Your line is now open.
Hey, Thanks, good morning.
I wanted to drill into beverage concentrate so if I could the performance there was really strong this quarter.
And price realization seems to be that the key driver both sales and segment margins is there anything you're you're doing differently in that business. This year, perhaps with respect to promotional depth breadth to drive that kind of price realization seemingly without any real degradation of volume.
And if so what's the runway on that source of profit growth continuing is this a one year step up that we're seeing in 2019 with with more normalized growth to resume in the year ahead or or do you see more.
Incremental opportunity available to you in 2020 beyond.
Well, it's hard to know what pricing price realization going forward is going to be honest with you I mean, that's very much driven by the industry in total and other factors like inflation.
So that's still to be determine which are pointing out though is very important is the strength of our brands that are sold in the beverage concentrate segment.
Allow the pricing to be put in and yet the volume holds up nicely and remember these are the sales primarily a brands like Dr. Pepper and Canada dry and then we've got others crush et cetera, Schweppes that go through and are sold by either coke or Pepsi.
But also through a very important channel of fountain, foodservice, which is where restaurants and as we point out a number of times. Dr. Pepper is actually the most available brand in the country in not fountain foodservice and so the brand. It's a it's a concentrated portfolio of brands with incredible strength. That's why we continue.
As you invest so heavily in marketing behind these brands, they're able to withstand the pricing and what you're seeing in the quarter is that pricing flowing through.
That was taken sometimes is a bit of a delay to get that pricing and you're seeing that matched up against the benefits of productivity in synergies across the entire business as a result of the integration and that's why you're getting such powerful.
Profit increased during the during the quarter, but we did a very robust business.
And to your point about pricing will say, we take every opportunity we get going forward, but it's hard to have a forward looking position on on industry pricing.
Okay. Just just to clarify then so this is reflective of true list price increases that you've taken versus.
Your change in the promotional cadence or is it a little bit both.
Well when you're selling in the concentrate segment and answers as little both but we can you take a look at the concentrate segment. When you think about pricing it's different than even the way, we think about it and in our packaged beverages segment were were actively involved in the promotions.
Remember, we're selling to somebody else, who turns around and resells our products in the beverage concentrate segment. So that's that's why it's it's.
More of a combination, but it's really more about the absolute pricing that we're giving that it is timing or.
Level of discounting as you might see in a retail environment.
Okay. Thank you.
Sure.
Our next question comes from Nick model.
Your line is now open.
Thanks, Good morning, everyone. Good morning, right. So good morning. The question I have two on the two quick ones on by look what happened.
I guess the question you know what do you think is really called implantable weakness in the fact that it's it's been lagging your expectations on flogging the person and then the second and Bob is just look I think you guys. Obviously done a very good job of integrating at a time, where a lot of big mergers have not really gone that well and I'm, just kind of thinking about future layers and value creation.
And thinking about what's been going on between Coke and Pepsi and Refranchising and how it's really well for coal can I just wonder if an opportunity for TDP longer term just wanted to get your thoughts on that.
Sure.
Hey by if I think it's pretty straightforward, which was it was a pioneer in the category. It became the number one player by far and there's a lot of competition was that that Thats CPG.
Issues that happen every day, what do we need to do we need to refresh the brand.
And drive it to the next level with innovation that will keep it ahead of the game.
For perspective, when we talk about weakness and by its still a business. It's about a half a billion dollars and sale and our 52 week basis. According to IRI grew about 3%. So it's not as if the brand is falling off the edge is just not growing at the level that we believe it has the potential to grow and so it's going to be a combination of.
Renovation on the brand and some innovation that will continue to drive and again, we'll open as I said, we'll be happy to share that with you and not in early 2020 with regard to your question about M&A more broadly we've been very focused on taking the portfolio that we have today and making it work and you're seeing there is a significant amount of upside potential for the foreseeable.
Future there will be a point in time it will start thinking about M&A differently. You are also talking about.
Route to market side of the business Refranchising and driving that.
There's nothing that we would talk about at this point in time, but one of the big value drivers is for us to optimize the distribution that we had system that we have today and what that really means in the near term is running at more effectively which is actually showing up in a lot of our numbers.
And also on the margins, bringing in routes from independent distributors for example, where we see an opportunity to combine that with our own routes and get more scale will be doing that on the margins, but I look at that it's more fine tuning on top of running the fundamental distribution system, we have right now better rather than a big strategic move like the one that you're.
Referring to.
Great helpful. Thank you.
Sure.
Our next question comes from Sean came with you.
Your line is now open.
Hi, Thank you.
Given the pod volumes during Q2, and then this quarter I'd like to rebound.
Are there any I guess channel inventory considerations into Q4 and is there potentially any upside I guess the full year outlook.
Our if you look at our pod volume over the long term.
It's been it's been really solid so just to remind everybody in 2018 pod volume was up about 7.5%.
We're running 8.5% on a year to date basis and one on 12 month basis, we're running about the same about 8.5%.
What we called out in the last call.
With the fact that we knew that we shipped ahead of consumption in the second quarter, 100% driven by partners, who wanted to take volume.
Earlier, so that we were up 12.8, we said that we're going to get a reaction to that in our numbers. In Q3, we did were up six which is below our long term trend. Our assumption is when you look at Q4 is that all reverts back to the me.
And if theres no. There's nothing notable to call out on that and I think part of the learning over the past.
18 months or so if you look at this businesses.
It's a challenging business to try to forecast quarter to quarter. If your outside of the company, but when you take a broader view and you don't even have to go much longer than six months, but certainly if you go nine months or a year, it's a really steady and dependable business with some quarterly fluctuations and so our assumption in any such situation that unless there's something notable that we would call out.
You should assume that it just reverts back to the meat.
Thank you.
Okay.
Our next question comes from Kevin Grundy with Jefferies. Your line is now open.
Hi, good morning.
Congratulations on the strong result.
Question really hurt for bulk of the if you want to touch on this so.
So far so good with the synergy delivery credit to you in your team for doing that and you're still targeting the 600 million.
Please go back and look at what's going on.
Closing in on two years since the deal was announced you've obviously had a much much closer look.
Different areas of synergy so a couple of different questions in an open what do you see potential upside if any to the initial target on the Bob for you.
The target was a number you expected to fully flow through pizza earnings, but as we've had this conversation on the call is owned by me some attention snapple needs in that sense, and it's going to be slower slower ramp for the allied brands. So there's an argument to be made that maybe investment levels need to move higher does that give you any pause.
I was with the 600 million target, maybe you do need to address some of it should not potentially flow through to earnings.
Let me talk about the second one first time knows I could talk about.
Where the 600 million is coming from it to your point now that we're into it with our level of confidence.
As you point out.
We put these ambitious targets out just about two years ago, a lot has changed over that time, we've had two.
Compensate for significant inflation increases, we see pricing in the industry, which has had a negative impact on volume the points about by or snap Laurel that's business as usual you always have a brands they are performing well or above plan look at the strength in core hydration for example, doing incredibly well and you always have brands that you can you need.
The effects and so on balance out there are no conclusions that you should take from that but that means theres, an overall increase in spending our investment required to address those it's more just being very Frank with you guys about where things are working and where they're not keeping you in a loop about where our management attention is so I think the most important takeaway.
Free for you it.
Any of our investors is that we put out a long term algorithm and the critical parts and long term algorithm is topline growth in 2% to 3% and EPS growth of 15% to 17% and as I say frequently what you pay us to do is to manage through all of those changes the environment and competition and all the noise that's out there and deliver that and we're going to have leveraged that we.
Can pull that were a positive versus our original expectations and we use those to offset some of the negative surprises and I'd, just say and balance you should take away then nothing different other than our original algorithm over the two to three in the 15 to 17 is intact.
And the integration is going remarkably well, which supports that but specifically your question on on synergies, let me turn it over to close on terms of how we now think about that as we're into the integration and also the broader concept the value capture which is synergies and productivity in the way that we think about it internally sure. So if we add on.
Actually though it expectations into the live at $200 million in 2019 as we have.
Guided the several times, which also makes us to say, 100% behind $600 million of delivery over three years is that during 2019 2021. So that is stays as rock solid commitment and the end to be have great fun. So achieving as Bob said, we also expect the synergy number to flow who Uh huh.
Early in EPS and they started to deliver the synergies initially in SGN, a then procurement and logistics fully obviously, we have several initiatives at that fueling.
These deliveries, but I just given the that's a big buckets.
The out as of the of the delivery and as bubble ASO said behind it. Besides the deal synergies. We also have civil base productive base productivity programs as we call them internally, which has nothing to do these the synergies in both businesses that that JV have old build but its him and we.
It also happy to share that we had been executing very nicely behind those initiatives as well.
That's great I just follow up with one maybe just touch on you guys decide to make a small tweaks to the guidance in early September and then another one today what happened I guess in the month of September that you felt incrementally more cautious on the impact from the allied brands with them incrementally better on the underlying portfolio presumably.
As you move through September maybe you could comment on that I'll pass it on thank you.
Yes, sure I mean, I, we talk at the the 1% to 2% that we talked about back in September at an industry conference was clarification of a position that well known.
People are struggling with trying to do the math on what the fourth quarter might look like and so we just decided clarify if you recall, we said just to clarify our reported net sales will be in the range of 1% to 2% consensus was around 1.4. So we saw that as a non event that surprised us that people, but that wasn't event.
What we are seeing right now, which I think is important to point out is this is about the time period, where the allied brands do Allied brand should have kicked in at a higher level. When they are and I just put the size of that on an annual basis is about $50 million.
But again the good news is that our we're seeing real strength in our core business.
And that's been able to offset that so balance it puts us in a position. We're we have confidence in a 3% underlying net sales growth for the year, which is which is a very strong number.
And it's just a tweak between the Allied brand in core, which I think as a net positive and as I said earlier I really think the allied brand numbers more about timing than it is anything else, but when we get around the 2020, we will talk more specifically about that.
Thank you very much good luck.
Our next question comes from Amit Sharma with BMO capital. Your line is now open.
Hi, good morning, everyone.
Morning.
Bob I wanted to go back to your response to Steve's question on sustainability.
Beverage concentrate segment and and I want to like broaden that do not just beverage content, but packaged beverage as well is it fair due to read from your sadness that these are good sustainable margin structure.
For these businesses as we go into 2020 and beyond.
Yeah, I mean, it if you if you think about what we've been consistent in saying, which is 2% to 3% topline, 15% to 17% EPS growth than yes. The implied in all of that is the margin structure that we have in place is solid and sustainable and will benefit from the growth that we're talking about so.
In any integration you get a boost from synergies and we as those on just talked about we also look at ongoing productivity, that's above and beyond the synergies, which helps fuel those margins.
Did you do get a point, where the margins benefit from the synergies and then you are driving the business based on growth and the topline growth there were pointing out to you is accelerating its driven by an underlying performance, it's about 3% driven by strength in our core brands and that will continue to drive our total profit.
As our margins are we believe very sustainable.
Just a follow up on that like if you look at historically.
Legacy Dr Pepper portfolio versus your competition in North America.
That portfolio outperformed on the operating profit base is right and now obviously expectation for both coke and Pepsi and much higher.
Is that performance gap you expect to continue like legacy Dr Pepper portfolio should still be outperforming.
Those two accompanied in terms of their north American performs rain.
Well, we just to be as we don't spend less time thinking about our performance relative on operating profit relative to our peers. We look at our business and we look at the upside that we have we see a lot of upside on our business in the absolute.
As I point out to many people our portfolio in many cases is not in direct competition with coke or Pepsi, particularly on the CSD cyber our strength is in the non coal segment.
With Dr Pepper in Canada, dry leading the way so I don't I don't think that has changed at all and look to answer. Your question is all of our upside that we believe is in the business in total is reflected in the long term targets that we set for.
Got it thanks, so much.
Our next question comes from Laurel, Ron that with Guggenheim. Your line is open.
Hey, good morning, everyone.
Thanks.
Hey, good morning, two questions I mean, the first one on my Cafe.
Kraft Heinz doesn't get need that I can say would keep their EBITDA by about 200 million donors in Nova 12 months.
Should we think given that you will gain that that's 100 million dollar some in your EBITDA from mid next year to meet a 21.
Could you tell us whats your plan for for that brands. That's now, though you will will carry.
Yes, I mean first of all the.
The way that we look at this move of met cafe into that carry system really speaks to the value.
The vote of confidence.
I would remind everybody that if you look at all of our branded partners.
All of them, but nearly all of them at this point in time as the contracts have expired have extended for longer period of time than they ever have before so this is just yet one more vote of confidence that partnering with curious good for everybody in the ecosystem.
We transition that over to us in mid 2020.
There are upfront investments that are involved with that and we'll talk when we talk about 2020.
We will talk about how that impacts our guidance in 2020, but remember before you take off yet to pick the puts and takes together.
We don't know the tariff environment is going to be in 2020.
To be a negative so we've got positives and negatives and as I said before it's our job to navigate all of those and and be able to deliver long term guide.
I have not seen the number that you're referring to all I would suggest though is that it's about $300 million in retail sales.
Not wholesale.
Could not get put a number nearly that big based on a retail business of $300 million.
And I ask you haven't seen that one, but we'll provide more clarity when we talk about 2020, and how that may impact our results at that time.
Yes sure.
My view.
Maria is that we are already had mcafee in system. So as you think about incrementality and what it might mean for the business. It was already in this is a different relationship it's broader as I'm sure you know, but it's not wholly incremental and I think thats important to keep in mind, yet. It's a good point just a bunch of a brand that.
I think you.
To put a finer point on that one is we already participated in the financials of Mic cafe to a level through the K Cup business that we had so it's not a unlicensed business. They came in but net net. This is this is all incredibly positive for US. We just don't I think that number you put out there would be.
I would be very big and not necessarily incremental so thats why were clarifying.
Okay. Thank you.
And a quick one again on the on the consulting business is so profitable for you. So that that has a some indication about the.
The next quarter and the future so.
He there I mean, your volume and Youll Simpson sodium wherever is throwing a quarter.
Could you tell us some the delivery of inventory at buffer as labor on how did seem if there is a disconnect can performance versus what we're seeing in Indonesia and data.
Well I don't I don't know, how you could see that data to be honest with you a lot of this goes through restaurants in places that they are do we have no visibility to all in suggest as the this quarter is not a disconnect between our sales and what we believe is consumption out there at all but we've been we're really candid on K cups, when we shipped ahead of consumption call.
The net out so we view the first one the call that out this is reflective as I said before a couple of thank you got really good volume goes through our business is very healthy across those channels and we specifically called out fountain foodservice, where our brands continue to be in great demand.
This is also reflective of pricing that was put in place and there is always a delay on pricing flowing through and when you have a combination of pricing starting to flow through combined with volume that holds up in the face of that youre going to see some very good numbers and there's a little bit of what was exactly this quarter a year ago, but there is nothing extraordinary in that number.
That could should cause you to to be concerned.
Okay. Thank you very much I consider thank you.
Our next question comes from Peter Girl with Jpmorgan. Your line is now open.
Hey, good morning, everyone.
Good morning follow.
I appreciate the color on the track first is on track performance in pod is there anything you can share in terms of the price versus volume relationship kind of for the untracked channels versus what we see and attract and then the second part while we're on the coffee business.
I appreciate.
The color on the Q4 pod volume, but.
Volume cycling a very easy comparison, how are you thinking about brewer shipment volume next quarter. Thanks.
Yes, so there's just too ill start with the brewer shipment volume and again.
We we minimize the impact of version involve our objective is to grow household penetration.
And I think we had some credibility on that we had that conversation when there was a quarter year ago that you referred to as an easy compare that caused a lot of concern.
And we're way ahead since that I mean, we're running it like a 12.5% growth.
Since that time period, you never even heard us for a second refer to that number nor are we use that as a predictor of household penetration because we don't believe its predictor household penetration. So I would suggest that the fourth quarter. This year I go again household penetration based on the volume that Youre seeing is growing mid single digits you're seeing.
Our growth so far year to date above 10% you that would suggest that we shipped.
Brewers for the holidays earlier than we have and as if thats part of the strategy for our customers. So I think that.
Back to my comment I said on pause reversion to the mean I think at the same rule applies on Brewers overtime. It's a very steady number. The fact that we ship. Some earlier is net a good thing because it means we forward position the product to get early merchandising for the holiday season.
But in the end we don't we think this has very little is very weak indicator of performance our pod business, whether it's up or down we don't spend a lot of time talking about that for that reason, having said, let me give a pot as you refer to.
It's getting increasingly difficult for you guys tractors business, using IRA or Nielsen because track channels are now representing about 50% or total sales.
And the untracked channels, which are driven by club and E. Commerce are largely in some other channels are in total growing faster than the track channels and Thats separation is accelerating as you can imagine with the adoption of ecommerce.
We believe our ecommerce businesses two to three X the size of a typical CPG business. So the trend that you're seeing with US is really the leading edge of where you're going to see the rest of CPG go over time, when we take a look at our business in the untracked channels, it's growing faster, but if you're asking about the composition of.
Volume and mix, it's not materially different than what you see in the track channels are KDP manufactured share and our owned and licensed share. We believe is when we look at our untracked channels is slightly higher than it is an attractive channels. Like for example away from home offices are in there in our share in offices of of our own brands is.
Higher, but it's not material enough for you to to put too much thought in there. It's just the knowledge that you're only looking at half the market and unfortunately for for modeling purposes. The other half the market is not transparent to you and growing at a faster rate, which we continue to see accelerating.
It's good for the bit the total she is harder to observe from the outside.
Thanks, I appreciate the color.
Okay.
Thank you that concludes our question and answer session. Today I'll now turn the call back over to management for closing remarks.
Thanks, everyone for joining the call today, I know, we want to it over and it's a busy day for everyone, but the IR team is around today for any follow up questions. Thank you.
This concludes today's conference call.
You may now disconnect. Thank you.