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Keurig Dr Pepper (KDP) Q2 Earnings Beat, Sales Lag Estimates

Zacks Equity Research

Keurig Dr Pepper Inc. KDP reported second-quarter 2019 results, wherein earnings beat the Zacks Consensus Estimate while sales missed. The company’s top line was hurt by the changes made in its Allied Brands’ portfolio and negative impacts from currency. However, the bottom line improved on account of higher operating income and lowered debt. Furthermore, Keurig Dr Pepper reiterated its guidance for 2019.

Following the company’s solid bottom-line performance in second-quarter 2019 and reaffirmed view for the year, shares of the company gained nearly 5.1% on Aug 8.

Quarterly Highlights

Adjusted earnings of 30 cents per share improved 15% year over year and surpassed the Zacks Consensus Estimate of 29 cents. This improvement was aided by higher adjusted operating income and a considerable decline in interest expenses due to reduced indebtedness and unwinding of several interest rate swap contracts.

Notably, the company reduced outstanding debt by $303 million in the second quarter owing to its strong operating performance and effective working capital management. In the first six months of 2019, Keurig Dr Pepper lowered debt by $717 million.

Keurig Dr Pepper, Inc Price, Consensus and EPS Surprise

Keurig Dr Pepper, Inc Price, Consensus and EPS Surprise

Keurig Dr Pepper, Inc price-consensus-eps-surprise-chart | Keurig Dr Pepper, Inc Quote

Net sales in the quarter under review came in at $2,812 million, which missed the Zacks Consensus Estimate of $2,863 million and dipped 0.4% from adjusted pro forma net sales of $2,822 million (including the merger adjustments) in the year-ago quarter. The adverse effects of the changes made to its Allied Brands’ portfolio and the negative impact of foreign currency translations resulted in the downturn. This decline was partly compensated with an underlying net sales increase of 2.6%.

Underlying net sales was aided by 2.1% growth in volume/mix and a 0.5% net price realization along with a 0.2% improvement from the shift of Easter into second-quarter 2019. This was offset by 3% adverse effects from changes in Allied Brands’ portfolio and 0.2% negative currency translations. However, net sales were more than doubled (up 196%) from the year-ago quarter’s reported net sales of $949 million mainly owing to the benefits of the merger.

During the second quarter, the company benefited from strong in-market performance measured by IRI. Keurig Dr Pepper witnessed dollar consumption growth, with market share gains across its several major categories including CSD's3, single-serve coffee, shelf stable fruit drinks, unflavored still water, and RTD3 coffee. This uptick was backed by strength in Dr Pepper and Canada Dry CSD brands; Peet's, CORE Hydration and Forto RTD coffees; and Snapple juice. Further, in coffee, retail consumption for the single-serve pods manufactured by KDP rose nearly 5%, while dollar market share remained in line with the prior-year figure at 81.6%.

Adjusted operating income grew 10% year over year to $702 million driven by solid productivity and merger synergies that leveraged costs of goods sold and SG&A expenses. Also, improvement in underlying net sales aided the performance. Nevertheless, this was partly offset by inflation, packaging and logistics in particular. Meanwhile, adjusted operating margin expanded 230 basis points (bps) to 25%.

Segmental Details

Sales at the Beverage Concentrates segment rose 3.1% year over year to $370 million from adjusted pro forma net sales of $359 million in the year-ago quarter. Net revenues primarily benefited from a 4.4% increase in net price realizations, partly negated by a 1.1% decline in volume/mix and 0.2% currency headwinds.

Sales at the Packaged Beverages segment totaled $1.31 billion, down 4.9% from adjusted pro forma net sales of $1.38 billion in the year-ago quarter. This downturn can be primarily attributed to a 6.3% impact of changes in Allied Brands portfolio and 0.1% adverse currency effects. This was, however, slightly mitigated with underlying sales growth of 1%, which reflected a 2% increase in price realization, offset by a 1% decline in volume/mix. Further, the company witnessed a 0.5% rise from the shift of Easter into the second quarter.  

Sales from the Latin America Beverages segment improved 3.7% to $141 million from adjusted pro forma net sales of $136 million in the prior-year quarter. Gains from a 3.8% rise in price realization and 1.3% growth from favorable currency were partly offset by a 1.4% fall in volume/mix.

The Coffee Systems segment’s sales increased 4.3% to $990 million from $949 million recorded in the year-ago quarter. This increase was backed by improved volume/mix, offset by lower pricing and unfavorable currency. Volume/mix grew 8.3%, benefiting from a 12.8% increase in K-Cup pod volume and a 19.4% rise in brewer volume, offset by adverse pod sales mix.

Financials

Keurig Dr Pepper ended the second quarter with cash and cash equivalents of $106 million as of Jun 30, 2019, compared with $83 million as of Dec 31, 2018. Long-term obligations totaled $13,164 million and total stockholders’ equity was $22,883 million. Net cash provided by operating activities totaled nearly $1,203 million as of Jun 30, 2019.

Outlook

Keurig Dr Pepper reiterated guidance for 2019. The company continues to anticipate adjusted earnings per share growth of 15-17%, which is in line with the long-term target for the 2018-2021 period set at the time of the merger. This brings the company’s adjusted earnings guidance to $1.20-$1.22 per share for 2019.

The earnings view for 2019 is supported by net sales growth of about 2%, which is also in line with Keurig Dr Pepper’s long-term sales growth target of 2-3%. Meanwhile, the top-line view incorporates the adverse impact of roughly 100 bps from the changes in the Allied Brands portfolio. Further, it anticipates capturing merger synergies of nearly $200 million in the current year, consistent with the long-term target of capturing $200-million synergies every year in the 2019-2021 period.

Adjusted other net expenses are projected to be $30 million in 2019. Adjusted interest expenses are likely to be $550-$565 million owing to its ongoing efforts toward lowering debt and benefits from the unwinding of interest swap contracts. Adjusted effective tax is expected to be 25-25.5%, with outstanding shares estimated at 1,420 million.

Additionally, the company expects significant cash flow generation and rapid deleveraging, targeting a leverage ratio of less than 3.0 in two to three years from the closing of the merger in July 2018.

Price Performance

In the past three months, shares of this Zacks Rank #4 (Sell) company have lost 0.8% against the industry’s 1% growth.



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