Saturday 21 May 2022

Keurig Dr. Pepper 4Q earnings in line with forecasts, but revenue comes up shy

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BURLINGTON, Mass. and PLANO, Texas, U.S. — Keurig Dr Pepper Inc. yesterday reported financial results for the fourth quarter and full year ended December 31, 2018 and provided guidance for Adjusted diluted EPS growth for 2019 in line with the Company’s merger targets.

The Company’s reported results were significantly impacted by the merger between Keurig Green Mountain and Dr Pepper Snapple Group, Inc., which was completed on July 9, 2018. Highlights of the fourth quarter and full year 2018 include:

  • Successfully completed the merger, with integration efforts and synergies continuing on track.
  • Delivered 2018 financial performance in line with the long-term targets communicated at the time of the merger, positioning KDP for another year of growth in 2019 in line with its merger targets.
  • Drove strong in-market performance and market share growth for the year for carbonated soft drinks (CSDs), single serve coffee and other key categories.
  • Repaid approximately $940 million of bank debt since merger close, due to strong operating profit results and ongoing effective working capital management.
  • Acquired Core, a rapidly-growing premium enhanced water brand, and Big Red, a strong regional CSD brand.
  • Entered into a long-term partnership with Danone Waters of America to sell, distribute and merchandise evian, the leading global brand of premium natural spring water, across the U.S., and expanded KDP’s relationship with both Peet’s, a premium specialty coffee company, for ready to drink coffee, and Forto, a rapidly-growing brand of coffee energy shots.

Commenting on the announcement, Keurig Dr Pepper Chairman and CEO Bob Gamgort stated, “We finished 2018 on a strong note, successfully managing through the merger integration and achieving full year results in line with our 2018 targets. We also delivered strong in-market performance, growing market share in carbonated soft drinks, single-serve coffee and other key categories. Looking ahead, we are confident in our outlook for 2019 Adjusted diluted EPS growth of 15% to 17%, which is in line with our long-term merger target, despite the operating environment becoming more challenging.”

1 Adjusted pro forma metrics used in this release are non-GAAP financial measures and assume the merger occurred on December 31, 2016 and adjusts for other items affecting comparability. See reconciliation of GAAP results to Pro forma results and Adjusted pro forma results in the accompanying financial tables.

2018 Full Year Consolidated Results

Net sales for the full year of 2018 increased 76% to $7.44 billion, compared to $4.23 billion in the year-ago period, primarily reflecting the impact of the merger. Adjusted pro forma net sales of $11.02 billion in 2018 grew 2.3%, driven by higher underlying volume/mix of 3.7%, with strong performances registered across most categories, partially offset by the net unfavorable impact of 0.5% related to changes in the Company’s Allied Brands portfolio during the year, which was expected. Also partially offsetting the growth was unfavorable net price realization of 0.8%, driven by continued moderation in strategic pod pricing investments in the Coffee Systems segment which more than offset higher net pricing in the balance of the portfolio. Unfavorable foreign currency translation also impacted the year by 0.1%.

Retail market performance, as measured by IRi, remained strong for the year. The Company’s CSD and enhanced flavored and premium unflavored water portfolios registered market share growth in both units and dollars, driven by strong performances of Dr Pepper, Canada Dry, Core and Bai. Likewise, the coffee portfolio also performed well for the year, driven by single-serve pod category unit growth, combined with an increase in market share of pods manufactured by KDP.

Operating income increased 44% to $1.24 billion, compared to $0.86 billion 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 pro forma operating income advanced 6.7% to $2.62 billion in 2018, compared to $2.46 billion in the year-ago period. This performance primarily reflected the benefit of the net sales growth and strong productivity, despite inflation in input costs and logistics that were not fully offset by third quarter 2018 pricing actions in the Packaged Beverages segment. Also impacting the performance was comparison against a $49 million gain on Bai 2017 as compared to a $22 million gain on Big Red in 2018. On a percentage of Adjusted pro forma net sales basis, Adjusted operating income grew 100 basis points to 23.8% for the full year of 2018, compared to 22.8% in 2017.

Net income decreased approximately 31% to $0.59 billion in 2018, compared to $0.85 billion in 2017, largely reflecting the unfavorable year-over-year impact of items affecting comparability, partially offset by the impact of the merger. Adjusted pro forma net income advanced 23% to $1.45 billion, primarily reflecting the growth in Adjusted pro forma operating income and a significantly lower effective tax rate, due to the Tax Cuts and Jobs Act. Also impacting the comparison were the non-operating benefits in 2018 of a cash distribution from BODYARMOR, in connection with KDP’s interest in it as a unit-holder, and a gain related to the Core acquisition. Adjusted diluted EPS increased 22% to $1.04 in 2018, compared to $0.85 in 2017.

Since the merger close, KDP repaid approximately $940 million of bank debt, due to the strong operating profit results and ongoing effective working capital management, resulting in the pace of deleveraging in line with the Company’s long-term merger target.

Coffee Systems

Net sales for the year totaled $4.11 billion, compared to $4.23 billion in the prior year. Adjusted pro forma net sales declined 0.4% to $4.12 billion in 2018, compared to $4.14 billion in 2017, due to lower net price realization of 3.7%, reflecting the continued moderation in strategic pod pricing investments, significantly offset by volume/mix growth of 3.2% and favorable foreign currency translation of 0.1%.

The volume/mix growth for Coffee Systems was driven by a 7.4% increase in K-Cup pod volume, partially offset by a 1.5% volume decline for brewers. The brewer performance was driven by an increase in brewer quality that has resulted in consumers keeping their brewers longer, as well as the impact of discontinuing select legacy brewer models. Partially offsetting the decline were the recent launches of the K-Café and redesigned K-Mini brewers, both of which have been very well received, as evidenced by exceptionally strong consumer reviews. For the year, Keurig brewer household penetration grew approximately 7% and is now approaching 22%.

Operating income increased 11.9% to $1.16 billion in 2018, compared to $1.04 billion in 2017. Adjusted pro forma operating income advanced 9.4% to $1.33 billion, compared to $1.22 billion in the prior year, primarily reflecting strong productivity that more than offset inflation in input costs and logistics. On a percentage of Adjusted pro forma net sales basis, Adjusted pro forma operating income grew 290 basis points to 32.3%.

Fourth Quarter Consolidated Results

Net sales in the fourth quarter of 2018 more than doubled to $2.81 billion, compared to $1.17 billion in the year-ago quarter, primarily reflecting the impact of the merger. The net sales of $2.81 billion in the fourth quarter of 2018 grew 0.5% compared to pro forma net sales of $2.80 billion in the year-ago period, driven by volume/mix growth of 2.7%, which reflected strong performances across most categories, partially offset by the unfavorable impact of approximately 1.8% in the quarter from the changes in the Allied Brands portfolio in the Packaged Beverages segment, which was expected. Also impacting the comparison for the quarter was unfavorable foreign currency translation of 0.4%.

Retail market performance, as measured by IRi, remained strong in the quarter. The Company’s CSD portfolio registered market share growth in both units and dollars, driven by strength of Dr Pepper and Canada Dry. In addition, the coffee portfolio held market share in both units and dollars for the quarter, as measured by share of pods manufactured by KDP.

Operating income increased 139% to $547 million in the fourth quarter of 2018, compared to $229 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 pro forma operating income advanced 12.9% to $720 million in the fourth quarter of 2018, compared to $638 million in the year-ago period. This performance primarily reflected strong productivity, lower general and administrative expenses, reduced marketing spending and the benefit of the net sales growth, partially offset by inflation in input costs and logistics and the unfavorable impact of comparison against the $21 million gain on Bai in the fourth quarter of 2017. On a percentage of Adjusted pro forma net sales basis, Adjusted pro forma operating income grew 280 basis points to 25.6% in the fourth quarter of 2018, compared to 22.8% in the year-ago period.

Net income decreased 57% to $266 million in the fourth quarter of 2018, compared to $612 million in the year-ago period, largely reflecting the unfavorable year-over-year impact of items affecting comparability, partially offset by the impact of the merger. Adjusted pro forma net income advanced 28% to $423 million, compared to $330 million in the year-ago period, primarily reflecting the growth in Adjusted pro forma operating income and significantly lower interest expense driven by lower outstanding indebtedness and the unwinding of several interest rate swap contracts. Adjusted diluted EPS increased 25% to $0.30, compared to $0.24 in the year-ago period.

Coffee Systems

Net sales for the fourth quarter of 2018 declined 0.5% to $1.16 billion, compared to $1.17 billion in the year-ago period, reflecting lower net price realization of 3.0% and unfavorable foreign currency translation of 0.4%, significantly offset by higher volume/mix of 2.9%.

The volume/mix growth of 2.9% for Coffee Systems was driven by an 8.6% increase in K-Cup pod volume, partially offset by an 8.6% volume decline for brewers. The brewer performance was primarily driven by shipment timing between the third and fourth quarters of 2018, as well as the impact of discontinuing select legacy Keurig brewer models. Partially offsetting these factors were recent innovation launches that have been very well received in the marketplace.

Operating income in the fourth quarter of 2018 advanced 14.2% to $297 million, compared to $260 million in the year-ago period. Adjusted pro forma operating income advanced 8.6% to $328 million, compared to $302 million in the year-ago period, primarily reflecting strong productivity, partially offset by higher marketing expense and inflation in input costs and logistics. On a percentage of net sales basis, Adjusted pro forma operating income grew 240 basis points to 28.2%.

KDP Adjusted Pro forma Outlook for 2019

The Company expects Adjusted diluted EPS growth in 2019 in the range of 15% to 17%, or $1.20 to $1.22 per diluted share, in line with its long-term merger target. Supporting this guidance are the following expectations:

  • Net sales growth of approximately 2%, consistent with the Company’s long-term merger target of 2-3%, despite the impact of the changes in the Allied Brands portfolio in the Packaged Beverages segment.
  • Merger synergies of $200 million in 2019, consistent with the Company’s long-term merger target for $200 million per year over the 2019-2021 period.
  • Other non-operating income/expense is expected to approximate $30 million of expense in 2019 and assumes no gains related to changes in the Allied Brands portfolio, such as the impacts in 2018 from BODYARMOR and Core, which recorded income of $24 million and $12 million, respectively.
  • Adjusted interest expense is expected to be in the range of $570 million to $590 million, reflecting ongoing deleveraging and the continued benefit of unwinding interest rate swap contracts.
  • The Adjusted effective tax rate is expected to be in the range of 25.0% to 25.5%.
  • Diluted weighted average shares outstanding are estimated to be approximately 1,420 million.
  • The Company continues to expect significant cash flow generation and rapid deleveraging, with a targeted leverage ratio below 3.0x in two to three years from the July 2018 closing of the merger.

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