How Could The Merger With DPS And New Product Launches Affect Keurig Dr Pepper’s Q1 2019 Results?

Keurig Dr Pepper (NYSE: KDP) is set to release its Q1 2019 results on May 9, 2019, followed by a conference call with analysts. KDP’s Q1 2019 would be the third quarterly result of the company after its merger with Dr Pepper Snapple. Reported revenue is expected to increase sharply by close to 60% on y-o-y basis in Q1 2019, reflecting the impact of the recent merger and new product launches. For the full year, Trefis analysis reflects adjusted or pro-forma revenue (assuming that the merger took place on December 31, 2016) so that the financials are comparable for the years 2017, 2018, and 2019.

We have summarized the key expectations from the announcement in our interactive dashboard – How is Keurig Dr Pepper expected to fare in 2019? In addition, here is more Consumer Staples data.

A Quick Look at KDP’s Revenue Sources

KDP’s total adjusted revenue for FY 2018 came in at $11.02 billion. This included 4 revenue sources:

• Beverage Concentrates: $1.3 billion in FY 2018 (12% of total revenue). In this segment, the company manufactures and sells beverage concentrates in the U.S. and Canada. Popular brands include  Dr Pepper, Canada Dry, Crush, Schweppes, Sunkist soda, A&W, 7UP.
• Packaged Beverages: $5.07 billion in FY 2018 (46% of total revenue). In this segment, the company manufactures and distributes packaged beverages and other products, including its own brands, third party owned brands, and certain private label beverages, in the U.S. and Canada.
• Latin America Beverages: $0.5 billion in FY 2018 (5% of total revenue). This includes KDP’s beverage operations in the regions of Mexico and the Caribbean. This segment participates mainly in the carbonated mineral water, flavored CSD, bottled water, and vegetable juice categories.
• Coffee Systems: $4.11 billion in FY 2018 (37% of total revenue). The Coffee Systems segment is primarily a producer of innovative single-serve brewing systems and specialty coffee in the United States and Canada.

Key Revenue Trends

Beverage Concentrates

• Pro-forma Revenue from Beverage Concentrates increased in 2018 due to higher net price realization and increased volume/mix, partially offset by currency headwinds.
• Segment revenue is expected to increase further in 2019, driven by higher shipments, particularly of Squirt, Schweppes, Big Red, and Hawaiian Punch, and benefits from new product launches.

Packaged Beverages

• Pro-forma revenue from the segment increased in 2018, driven by favorable volume mix growth of 2.7% and 1.7% increase in price realization, partially offset by unfavorable foreign currency translation.
• We expect segment revenue to increase marginally in 2019, driven by the successful launch of KDP’s college football marketing campaigns like Fansville, and continued strong performance of Core, Bai, and BODYARMOR, as well as contract manufacturing.

Latin America Beverages

• Similar to 2018, revenue from Latin America Beverages is expected to increase further in 2019, driven by better prices and higher volume, led by Penafiel, along with Clamto, Squirt, and Motts.

Coffee Systems

• Segment revenue saw a marginal decline in 2018 due to lower net price realization, reflecting the continued moderation in strategic pod pricing investments, as well as the impact of discontinuing select legacy brewer models.
• We expect revenue from coffee systems to pick up in 2019, benefiting from exceptionally strong consumer reviews for the new brewer – K-Cafe – along with increased household penetration of the updated K-Mini Brewer platform, which features a modern sleek design and improved coffee quality and temperature.

Full Year Revenue and Profitability Outlook

• For the full year, we expect revenue to increase by about 2.1% to $11.25 billion in 2019, driven by a benefit from the launch of new varieties.
• 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.
• Net income margin is expected to increase from 10.1% in 2018 to about 15% in 2019, 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.

Trefis has a price estimate of $28 per share for KDP’s stock. We believe that strong organic growth, improving margins, and benefits from new launches would provide support to KDP’s stock.

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