After Strong Q1, Will Volume And Price Mix, Along With Merger Synergies, Help Keurig Dr Pepper In FY 2019?

Keurig Dr Pepper (NYSE: KDP) released its Q1 2019 results on May 9, 2019, followed by a conference call with analysts.

Performance Snapshot

• Net sales more than doubled to $2.5 billion in Q1 2019 from $0.95 billion in Q1 2018, reflecting the impact of the merger with Dr Pepper Snapple.
• The adjusted pro forma revenue (assumes that the merger took place on December 31, 2016 so that the financials are comparable for the years 2017, 2018, and 2019) decreased by 1.1% in Q1 2019, driven by strong underlying net sales growth of 2.5%, led by higher volume/mix of 1.4% and net price realization of 1.1%, more than offset by the unfavorable impacts related to changes in KDP’s Allied Brands portfolio of 2.5% and calendar timing of 0.6%, with Easter shifting to Q2 2019, along with unfavorable foreign currency translation of 0.5%.
• Adjusted EPS increased from $0.19/share in Q1 2018 to $0.25/share in Q1 2019, driven by higher operating income, lower interest cost – due to the benefits of unwinding several interest rate swap contracts and reduced outstanding debt – and lower effective tax rate.

We have summarized the key announcements in our interactive dashboard – How did Keurig Dr Pepper fare in Q1 2019 and what is the full year outlook? 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, and 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

• Net sales increased by 4.8% (y-o-y) to $304 million in Q1 2019, reflecting higher net price realization of 7.1%, partially offset by lower volume/mix of 2% and unfavorable foreign currency translation of 0.3%.
• Lower shipments were largely due to declines in Canada Dry, Dr Pepper, and Schweppes, partially offset by higher volume for Big Red and Crush.
• Strong price realization along with growth in sales of Squirt, Schweppes, Big Red, and Hawaiian Punch is expected to drive revenue growth for the full year.

Packaged Beverages

• Net sales decreased by 5.3% (y-o-y) in Q1 2019, reflecting net sales growth of 1.4% driven by higher net price realization, which was more than offset by lower volume/mix, unfavorable impact from changes in the Allied Brands portfolio, calendar timing, and currency headwinds.
• We expect full year growth to be driven by higher sales of CORE, Evian, Dr Pepper, Canada Dry, and Xyience, led by a new marketing campaign, along with growth in contract manufacturing.

Latin America Beverages

• Net sales increased by 2.7% (y-o-y) to $116 million, reflecting higher net price realization of 4.1% and favorable volume/mix of 1%, partially offset by unfavorable foreign currency translation of 2.4%.
• Full year revenue growth is expected to be driven by rising sales of Penafiel, along with Clamto, Squirt, and Motts.

Coffee Systems

• Net sales increased 1.7% (y-o-y) in Q1 2019, driven by higher volume/mix of 5%, partially offset by lower net price realization of 2.5% and unfavorable foreign currency translation of 0.8%.
• Volume/mix growth was driven by a 7% increase in K-Cup pod volume and a 12.4% increase in brewer volume, partially offset by lower pod sales mix, primarily reflecting the impact of significant volume growth of branded partners in the first quarter of 2019.

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, benefiting 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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