Keurig Dr Pepper’s Revenue Comes Up Shy Of Consensus Expectations; Stock Falls 5% On Disappointing Outlook

Keurig Dr Pepper (NYSE: KDP), a leading coffee and beverage company in North America, announced its Q4 2018 results on February 28, 2019, followed by a conference call with analysts. This was the second quarterly result of the company after its merger with Dr Pepper Snapple. KDP reported revenue of $2.81 billion in Q4 2018, significantly higher than $1.17 billion in Q4 2017, primarily reflecting the impact of the merger. However, on an adjusted or proforma basis (assuming that the merger took place on December 31, 2016,  thus making FY 2017 financials comparable with FY 2018), the revenue increase was a meager 0.5% for the quarter, with the absolute revenue being shy of the consensus of $2.84 billion, driven by volume/mix growth of 2.7%.  This 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, and an unfavorable foreign currency translation of 0.4%.  KDP’s adjusted earnings came in at $0.30 per share in Q4 2018, which was 25% higher than $0.24 per share in the year-ago period and in line with market expectations. This primarily reflected growth in operating income and significantly lower interest expense driven by lower outstanding indebtedness and the unwinding of several interest rate swap contracts.

We have summarized the key takeaways from the announcement in our interactive dashboard – How Did Keurig Dr Pepper Fare After A Mega Merger In 2018 And What Is The Outlook For 2019? In addition, here is more Consumer Staples data.

Key Factors Affecting Earnings

Beverage concentrates: Net sales from beverage concentrates increased by 4.8% to $352 million, compared to pro forma net sales of $336 million in the year-ago period, driven by higher net price realization of 2.6% and increased volume/mix of 2.4%, partially offset by unfavorable currency translation of 0.2%. For the full year, adjusted pro forma net sales increased 3.8% to $1.33 billion in 2018, compared to $1.28 billion in the year-ago period, driven by higher net price realization of 3.2% and favorable volume/mix of 0.6%. The increase in net sales was driven by very strong growth of Dr Pepper and A&W as well as increased sales for Squirt, Schweppes, Big Red, and Canada Dry. Shipment volume growth for the segment was led by Canada Dry, Big Red, and Hawaiian Punch, partially offset by Crush and 7UP. Operating income from the segment increased by over 5% in 2018, reflecting the strong net sales performance and slightly lower marketing spend.

Packaged Beverages: Sluggish growth in the packaged beverages segment proved to be a drag on the company’s top line in Q4. Net sales grew by a measly 0.1% (y-o-y) in Q4 2018, driven by favorable underlying volume/mix growth of 2.7% and higher net price realization of 1.7%, partially offset by the unfavorable impact of 4.2% resulting from changes in the Allied Brands portfolio and an unfavorable foreign currency translation of 0.1%. For the full year, adjusted proforma net sales grew by 4.1%, primarily due to double-digit revenue growth of Canada Dry, reflecting successful innovation. Revenue growth also received a boost from the successful launch of KDP’s college football marketing campaigns, like Fansville, which featured an engaging storyline. Additionally, the segment benefited from strong performance of Core, Bai, and BODYARMOR, as well as contract manufacturing, partially offset by declines in Fiji, Vita Coco, and Hawaiian Punch.

Latin America Beverages: Penafiel, along with Clamto, Squirt, and Motts led to an increase of 3.9% in segment sales. Adjusted revenue from Latin America Beverages increased to $506 million in 2018, reflecting higher net price realization of 5.5% and favorable volume/mix of 0.7%. Pro forma operating income increased by a whopping 28% on a year-on-year basis, benefiting from net sales growth and productivity savings, partially offset by inflation in input costs and logistics.

Coffee Systems: Adjusted revenue declined by 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. However, this was offset by 1.5% decline in volume of brewers, due to 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. KDP benefited immensely by the launch of K-Cafe, which was supported by the second year of its “Brew-The-Love” campaign, featuring James Gordon, and has been well received in the market as reflected in the exceptionally strong consumer reviews for the new brewer. K-Cafe enables consumers to make lattes and cappuccinos at home using any K-Cup pod. Additionally, the updated K-Mini Brewer platform, which features a modern sleek design and improved coffee quality and temperature, has helped increase household penetration in the Keurig system.

What Lies Ahead?

We expect KDP to report revenues of about $11.31 billion in 2019, which would mark a growth of 2.6% over the pro forma revenue of $11.02 billion in 2018, and significantly higher than reported revenue of $7.4 billion. The company’s top line is expected to benefit from the launch of new varieties. As the US heads in to spring, KDP is expected to capitalize on the launch of Diet Canada Dry Ginger Ale & Lemonade and the introduction of Canada Dry Ginger Ale and Orangeade, both of which will be supported by marketing investment. The company has also stuck to its strategy of partnerships, which is a key element of its Coffee Systems business. KDP recently partnered with Tim Hortons, the iconic coffee brand in Canada, which was previously unlicensed and Panera, the well-regarded bakery cafe brand in the U.S. It has also signed an agreement with McCafe Canada, previously an unlicensed brand, which it will begin distributing in 2020, and expanded multiple private label partnerships in 2018.

Net income margin is expected to increase to 11.5% in 2019 from 7.9% in 2018, driven by expected merger synergies of $200 million in 2019 along with lower advertising and marketing expenditure. Additionally, the absence of merger-related costs which ate into the margins of 2018, coupled with increasing productivity gains, is expected to provide a further fillip to profitability.

KDP’s stock price declined by close to 5% as soon as the results were announced, mainly due to a downward revision in the outlook for 2019. The company expects to generate adjusted earnings of $1.20 to $1.22 per share in 2019, a tad lower than the consensus estimate of $1.23 per share. With the stock having already rallied by close to 15% in the last six months, there may be limited upside to the stock price over the next one year. We believe that strong organic growth, improving margins, and benefits from new launches would provide support to KDP’s stock.

We have a price estimate of $28 for Keurig Dr Pepper’s stock price, which is slightly higher than its current market price.

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