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Keurig Dr Pepper Reveals Strong Core Growth Beneath Flat Results

Asit Sharma, The Motley Fool

Coffee and bottled beverage manufacturer Keurig Dr Pepper's (NYSE: KDP) second quarter fell just shy of marking the one-year anniversary of the merger of Dr Pepper Snapple Group and Keurig Green Mountain in July 2018. After roughly four quarters of combined operations, the new entity continues to demonstrate the potential for both revenue expansion and merger-related cost synergies. Below, we'll visit the raw numbers from the company's report, issued on Thursday, and review salient details, as well as management's outlook heading into the second half of 2019.

Note that all comparative numbers that follow refer to the prior-year quarter, on a pro forma basis (i.e., combining prior-year results for Dr Pepper Snapple Group and Keurig Green Mountain).

Keurig Dr Pepper: The raw numbers

Metric

Q2 2019

Q2 2018

Change

Revenue

$2.81 billion

$2.82 billion

(0.3%)

Net income

$314 million

$323 million

(2.8%)

Diluted EPS

$0.22

$0.23

(4.3%)

Data source: Keurig Dr Pepper. EPS = earnings per share.

What happened with Keurig Dr Pepper this quarter?

  • Reported revenue declined by less than half of one percent, as seen in the table above. However, the company notched underlying growth of 2.6%, composed of a positive impact of 2.1% from product mix and 0.5% of higher price realization. Revenue also benefited 0.2% from calendar timing differences versus the prior-year period. These collective advances were offset by a 3% unfavorable impact stemming from changes in the company's Allied Brands portfolio, and 0.2% of foreign currency translation.

  • Coffee systems sales rose 4.3% to $990 million. The segment enjoyed an impressive positive sales boost of 8.3% from volume and mix, which was partially offset by 3.5% of lower price realization and unfavorable effects of 0.5% from foreign currency translation. The higher volume was attributed to a 12.8% rise in K-Cup pod volume and an increase of 19.4% in brewer volume, mitigated by an unfavorable overall pod sales mix as shipments to branded K-Cup partners ramped up during the quarter.

  • Packaged beverage sales dipped nearly 5% to $1.31 billion. Underlying net sales growth of 1% and a 0.5% lift from calendar timing differences were absorbed by changes to the Allied Brands portfolio which created a drag of 6.3%. Foreign currency effects also produced a negative impact, though slight, of 0.1%. The company noted that the Dr Pepper, Sunkist, CORE, and Canada Dry brands all registered net sales growth during the quarter, while 7UP and Bai declined.

  • Beverage concentrate sales edged up by 3% to $370 million, led primarily by net sales growth in Dr Pepper, and to a lesser extent by Canada Dry, A&W, and Schweppes.

  • In the company's smallest segment, Latin American beverages, net sales advanced by 3.1% to $141 million, on higher net price realization and favorable foreign currency translation.

  • Operating margin improved by 30 basis points to 20.9%, which also represents a sequential improvement of roughly 1 percentage point from the first quarter of 2019.

  • The company paid back $303 million worth of long-term debt during the quarter, bringing its year-to-date debt reduction total to $717 million. Keurig Dr Pepper currently holds roughly $8.5 billion of short- and long-term debt on its balance sheet.

Two cola soft drinks on a wooden table.

Management's perspective

In Keurig Dr Pepper's earnings release, CEO Bob Gamgort took stock of the last four quarters following the merger of two disparate beverage companies. Gamgort affirmed management's belief that the combination of packaged coffee and bottled drinks revenue streams is meeting envisioned outcomes:

Our strong quarterly results cap an outstanding first year for Keurig Dr Pepper. Our team has executed well across the board, integrating two companies into one seamless total beverage organization, gaining or maintaining market share across the majority of our portfolio and delivering the bold financial commitments communicated at the time of the merger announcement. Looking ahead, we remain confident in the delivery of our long-term value creation framework.

Looking forward

Keurig Dr Pepper left its previously issued full-year guidance unchanged on Thursday. The company still anticipates 15% to 17% growth in adjusted earnings per share (EPS), which would place EPS in the range of $1.20 to $1.22 for 2019. Management is still targeting year-over-year net sales growth of 2% and expects to realize merger synergies of $200 million in 2019, the first of three years in which this amount of cost savings is expected to be achieved. Shareholders were apparently content with the underlying growth this quarter and reaffirmation of full-year targets: "KDP" shares were up roughly 3% in the trading session following the company's earnings release.

Asit Sharma 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.

This article was originally published on Fool.com