Keurig Dr Pepper

BURLINGTON, Mass. and PLANO, Texas, Aug. 8, 2019 /PRNewswire/ -- Keurig Dr Pepper Inc. (NYSE: KDP) today reported financial results for the second quarter ended June 30, 2019 and reaffirmed guidance for Adjusted diluted EPS¹ growth of 15% to 17% for the full year.

GAAP performance in the second quarter of 2019 was significantly impacted by the merger between Keurig Green Mountain and Dr Pepper Snapple Group, which was completed in July 2018.  As a result, compared to the prior year period, net sales advanced 196% to $2.81 billion, operating income increased 251% to $587 million and earnings per diluted share ("diluted EPS") grew 120% to $0.22.

The net sales of $2.81 billion in the second quarter of 2019 declined 0.4%, compared to Adjusted pro forma net sales of $2.82 billion in the prior year period, reflecting strong underlying net sales growth of 2.6% that was more than offset by the expected unfavorable impact of changes in the Company's Allied Brands portfolio.  Adjusted diluted EPS increased 15% to $0.30 in the second quarter, compared to Adjusted pro forma diluted EPS of $0.26 in the year-ago period.

Commenting on the announcement, Keurig Dr Pepper Chairman and CEO Bob Gamgort stated, "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."

Second Quarter Consolidated Results
Net sales increased to $2.81 billion in the second quarter of 2019, compared to $0.95 billion in the year-ago quarter, primarily reflecting the impact of the merger.  Compared to Adjusted pro forma net sales of $2.82 billion in the second quarter of 2018, net sales declined 0.4%.  This performance reflected strong underlying net sales growth of 2.6%, driven by increased volume/mix of 2.1% and higher net price realization of 0.5%, as well as a 0.2% benefit from the shift of Easter into the second quarter of 2019.  More than offsetting these positive drivers was the expected unfavorable impact related to changes in the Company's Allied Brands portfolio that totaled 3.0%, as well as unfavorable foreign currency translation of 0.2%.

KDP in-market performance² was solid in the second quarter of 2019, growing dollar consumption and gaining or maintaining market share in several key categories, including  CSD's³, single-serve coffee, premium unflavored still water, shelf stable fruit drinks and RTD³ coffee.  This performance reflected the strength of Dr Pepper and Canada Dry CSD's, CORE Hydration, Peet's and Forto RTD coffees and Snapple juice drinks.  In coffee, retail consumption of single-serve pods manufactured by KDP grew approximately 5%, and dollar market share was essentially even with year-ago at 81.6%.

Operating income increased to $587 million in the second quarter of 2019, compared to $167 million in the year-ago period, primarily reflecting the impact of the merger, partially offset by the unfavorable year-over-year impact of items affecting comparability.  

Adjusted operating income advanced approximately 10% to $702 million in the second quarter of 2019, compared to Adjusted pro forma operating income of $640 million in the year-ago period.  This strong growth was achieved despite comparison to the second quarter of 2018 that included a $16 million gain in connection with the acquisition of Big Red and a $5 million one-time reimbursement from a resin supplier which, combined, had the effect of reducing the year-over-year Adjusted operating income growth rate by more than three percentage points.  Driving the performance in the second quarter of 2019 were strong productivity and merger synergies, both of which benefitted cost of goods sold and SG&A, and growth in underlying net sales, partially offset by inflation, particularly in packaging and logistics.  Adjusted operating margin grew 230 basis points to 25.0% in the second quarter.  

Net income increased to $314 million in the second quarter of 2019, compared to $83 million in the year-ago period, primarily reflecting the impact of the merger, partially offset by the unfavorable year-over-year impact of items affecting comparability. Diluted EPS grew 120% to $0.22 in the second quarter of 2019, compared to diluted EPS of $0.10 in the year-ago period.

Adjusted net income advanced approximately 19% to $423 million in the second quarter of 2019, compared to Adjusted pro forma net income of $356 million in the year-ago period.  This performance primarily reflected the strong growth in Adjusted operating income and significantly lower interest expense, resulting from the benefits of unwinding several interest rate swap contracts and reduced outstanding indebtedness.  Adjusted diluted EPS increased 15% to $0.30, compared to Adjusted pro forma diluted EPS of $0.26 in the year-ago period, reflecting the growth in Adjusted net income, partially offset by an increase in diluted shares outstanding, largely due to the acquisition of Core Nutrition LLC in November 2018.

Strong free cash flow generation resulting from the Company's growth in operating profit and ongoing effective working capital management enabled KDP to reduce its outstanding debt by $303 million in the quarter. For the first six months of 2019, the Company has reduced its outstanding debt by $717 million.

Second Quarter Segment Results

Coffee Systems
Net sales for the second quarter of 2019 increased 4.3% to $990 million, compared to $949 million in the year-ago period, reflecting higher volume/mix of 8.3%, partially offset by lower net price realization of 3.5% and unfavorable foreign currency translation of 0.5%.

The volume/mix growth of 8.3% for Coffee Systems was driven by a 12.8% increase in K-Cup pod volume and a 19.4% increase in brewer volume both, in part, due to timing. Partially offsetting this volume growth was unfavorable pod sales mix, primarily reflecting the mix impact of higher shipments to branded partners in the second quarter of 2019.

Operating income for Coffee Systems advanced 4.7% to $287 million in the second quarter of 2019, compared to $274 million in the year-ago period.  Adjusted operating income advanced 8.2% to $331 million, compared to Adjusted pro forma operating income of $306 million in the year-ago period, primarily reflecting productivity and the strong growth in pod sales, partially offset by inflation in packaging and logistics.  Adjusted operating margin grew 120 basis points versus year-ago to 33.4%.

Packaged Beverages
Net sales for the second quarter of 2019 decreased 4.9% to $1.31 billion, compared to Adjusted pro forma net sales of $1.38 billion in the year-ago period, reflecting underlying net sales growth of 1.0%, driven by higher net price realization of 2.0% that was partially offset by lower volume/mix of 1.0%, as well as a 0.5% benefit from the shift of Easter into the second quarter of 2019.  These positive drivers were more than offset by the expected unfavorable impact related to the year-over-year changes in the Allied Brands portfolio that totaled 6.3%, as well as unfavorable foreign currency translation of 0.1%.

Net sales growth in the quarter was registered by CORE, Dr Pepper, Sunkist and Canada Dry, while Bai and 7UP declined.  Contract manufacturing also registered growth in the quarter. 

Operating income for Packaged Beverages totaled $186 million in the second quarter of 2019.  Adjusted operating income in the second quarter of 2019 advanced 18.0% to $190 million, compared to Adjusted pro forma operating income of $161 million in the prior year, largely reflecting strong productivity and merger synergies, as well as timing of marketing investment versus the year-ago period. These drivers were partially offset by inflation, particularly in packaging and manufacturing input costs.  Adjusted operating margin grew 280 basis points versus year-ago to 14.5%. 

Beverage Concentrates
Net sales for the second quarter of 2019 increased 3.1% to $370 million, compared to Adjusted pro forma net sales of $359 million in the year-ago period, reflecting higher net price realization of 4.4%, partially offset by lower volume/mix of 1.1% and unfavorable foreign currency translation of 0.2%.

Dr Pepper continued to fuel the growth in net sales for the segment, along with the strength of Canada Dry, Schweppes and A&W.  Shipment volume declined 1.0%, largely due to Dr Pepper and Crush, partially offset by volume growth for Canada Dry.  Bottler case sales volume increased 1.9% in the quarter. 

Operating income for Beverage Concentrates totaled $244 million in the second quarter of 2019.  Adjusted operating income in the quarter increased 4.2% to $246 million, compared to Adjusted pro forma operating income of $236 million in the year-ago period, primarily reflecting the growth in net sales.  Adjusted operating margin grew 80 basis points versus year-ago to 66.5%.

Latin America Beverages
Net sales in the second quarter of 2019 increased 3.7% to $141 million, compared to Adjusted pro forma net sales of $136 million in the year-ago period, reflecting higher net price realization of 3.8% and favorable foreign currency translation of 1.3%, partially offset by lower volume/mix of 1.4%.

Operating income for Latin America Beverages totaled $26 million in the second quarter of 2019.  Adjusted operating income totaled $20 million in the second quarter of 2019, compared to Adjusted pro forma operating income of $26 million in the year-ago period. This $6 million decline reflected the comparison to a $5 million benefit in the second quarter of 2018 related to a reimbursement by a resin supplier, as well as inflation in logistics and input costs. These factors more than offset the benefit of the net sales growth and productivity.

KDP Adjusted Pro forma Outlook for 2019
The Company reaffirmed Adjusted diluted EPS growth in 2019 in the range of 15% to 17%, or $1.20 to $1.22 per diluted share, in line with its long-term merger target.  Supporting this guidance are the following expectations:

• Net sales growth of approximately 2%, which incorporates an approximate 100 bps unfavorable impact from the changes in the Allied Brands portfolio and is consistent with the Company's long-term merger target of 2-3%.
• Merger synergies of $200 million in 2019, consistent with the Company's long-term merger target for $200 million per year over the 2019-2021 period.
• Adjusted other expense, net is expected to approximate $30 million of expense in 2019 and assumes no gains related to changes in the Allied Brands portfolio.
• Adjusted interest expense is now expected to be in the range of $550 million to $565 million, including the $40 million first-half 2019 benefit of unwinding interest rate swap contracts, the exclusion of non-cash amortization of the fair value adjustment related to the merger on a portion of the debt and ongoing deleveraging.
• The Adjusted effective tax rate is expected to be in the range of 25.0% to 25.5%.
• Diluted weighted average shares outstanding are estimated to be approximately 1,420 million.
• Free Cash Flow generation is expected to be in the range of $2.3 billion to $2.5 billion.
• Management leverage ratio is expected to be in the range of 4.4x to 4.5x at year end 2019.

As a result of the significant cash flow generation, the Company also reaffirmed its guidance of achieving a management leverage ratio below 3.0x within three years of the July 2018 closing of the merger.

Investor Contacts:
Tyson Seely
Keurig Dr Pepper
T: 781-418-3352 / tyson.seely@kdrp.com

Steve Alexander
Keurig Dr Pepper
T: 972-673-6769 / steve.alexander@kdrp.com

Media Contact:
Katie Gilroy
Keurig Dr Pepper
T: 781-418-3345 / katie.gilroy@kdrp.com

About Keurig Dr Pepper
Keurig Dr Pepper (KDP) is a leading coffee and beverage company in North America, with annual revenue in excess of $11 billion. KDP holds leadership positions in soft drinks, specialty coffee and tea, water, juice and juice drinks and mixers, and markets the #1 single serve coffee brewing system in the U.S. The Company maintains an unrivaled distribution system that enables its portfolio of more than 125 owned, licensed and partner brands to be available nearly everywhere people shop and consume beverages. With a wide range of hot and cold beverages that meet virtually any consumer need, KDP key brands include Keurig®, Dr Pepper®, Green Mountain Coffee Roasters®, Canada Dry®, Snapple®, Bai®, Mott's®, CORE® and The Original Donut Shop®. The Company employs more than 25,000 employees and operates more than 120 offices, manufacturing plants, warehouses and distribution centers across North America.  For more information, visit www.keurigdrpepper.com.

FORWARD LOOKING STATEMENTS
Certain statements contained herein are "forward-looking statements" within the meaning of applicable securities laws and regulations. These forward-looking statements can generally be identified by the use of words such as "outlook," "guidance," "anticipate," "expect," "believe," "could," "estimate," "feel," "forecast," "intend," "may," "plan," "potential," "project," "should," "will," "would," and similar words, phrases or expressions and variations or negatives of these words, although not all forward-looking statements contain these identifying words. Forward-looking statements by their nature address matters that are, to different degrees, uncertain, such as statements regarding the estimated or anticipated future results of the combined company following the combination of Keurig Green Mountain, Inc. ("KGM") and Dr Pepper Snapple Group, Inc. ("DPSG" and such combination, the "transaction"), the anticipated benefits of the transaction, including estimated synergies and cost savings, and other statements that are not historical facts. These statements are based on the current expectations of our management and are not predictions of actual performance.

These forward-looking statements are subject to a number of risks and uncertainties regarding the combined company's business and the combination and actual results may differ materially. These risks and uncertainties include, but are not limited to: (i) the impact the significant additional debt incurred in connection with the transaction may have on our ability to operate our combined business, (ii) risks relating to the integration of the KGM and DPS operations, products and employees into the combined company and assumption of certain potential liabilities of KGM and the possibility that the anticipated synergies and other benefits of the combination, including cost savings, will not be realized or will not be realized within the expected timeframe, and (iii) risks relating to the combined businesses and the industries in which our combined company operates. These risks and uncertainties, as well as other risks and uncertainties, are more fully discussed in the Company's filings with the SEC, including our Current Report on Form 10-K filed with the SEC on February 28, 2019, and our subsequent filings with the SEC. While the lists of risk factors presented here and in our public filings are considered representative, no such list should be considered to be a complete statement of all potential risks and uncertainties. Any forward-looking statement made herein speaks only as of the date of this document. We are under no obligation to, and expressly disclaim any obligation to, update or alter any forward-looking statements, whether as a result of new information, subsequent events or otherwise, except as required by applicable laws or regulations.

NON-GAAP FINANCIAL MEASURES
This release includes certain non-GAAP financial measures including Adjusted pro forma net sales, Adjusted pro forma operating income, and Adjusted diluted EPS, which differ from results using U.S. Generally Accepted Accounting Principles (GAAP). These non-GAAP financial measures should be considered as supplements to the GAAP reported measures, should not be considered replacements for, or superior to, the GAAP measures and may not be comparable to similarly named measures used by other companies. Non-GAAP financial measures typically exclude certain charges, including one-time costs related to the Transaction and integration activities, which are not expected to occur routinely in future periods. The Company uses non-GAAP financial measures internally to focus management on performance excluding these special charges to gauge our business operating performance, and to provide a meaningful comparison of the Company's performance to periods prior to the Transaction. Management believes this information is helpful to investors because it increases transparency and assists investors in understanding the underlying performance of the Company and in the analysis of ongoing operating trends. Additionally, management believes that non-GAAP financial measures are frequently used by analysts and investors in their evaluation of companies, and its continued inclusion provides consistency in financial reporting and enables analysts and investors to perform meaningful comparisons of past, present and future operating results. The most directly comparable GAAP financial measures and reconciliations to non-GAAP financial measures are set forth in the appendix to this presentation and included in the Company's filings with the SEC.

See the attached schedules for the supplemental financial data and corresponding reconciliations of KDP Adjusted pro forma net sales, Adjusted pro forma operating income, and Adjusted diluted EPS.

To the extent that the Company provides guidance, it does so only on a non-GAAP basis and does not provide reconciliations of such forward-looking non-GAAP measures to GAAP due to the inability to predict the amount and timing of impacts outside of the Company's control on certain items, such as non-cash gains or losses resulting from mark-to-market adjustments of derivative instruments, among others.

 

 

 

Unaudited Pro Forma Financial Information

On January 29, 2018, DPS entered into an Agreement and Plan of Merger (the "Merger Agreement") by and among DPS, Maple and Salt Merger Sub, Inc. ("Merger Sub"), whereby Merger Sub will be merged with and into Maple, with Maple surviving the merger as a wholly-owned subsidiary of DPS (the "Transaction"). The Transaction was consummated on July 9, 2018 (the "Merger Date"), at which time DPS changed its name to "Keurig Dr Pepper Inc.".

Immediately prior to the consummation of the Transaction (the "Effective Time"), each share of common stock of Maple  issued and outstanding was converted into the right to receive a number of fully paid and nonassessable shares of common stock of Merger Sub determined pursuant to an exchange ratio set forth in the Merger Agreement (the "Acquisition Shares"). As a result of the Transaction, the stockholders of Maple as of immediately prior to the Effective Time own approximately 87% of DPS common stock following the closing and the stockholders of DPS as of immediately prior to the Effective Time own approximately 13% on a fully diluted basis. Upon consummation of the Transaction, DPS declared a special cash dividend equal to $103.75 per share, subject to any withholding of taxes required by law, payable to holders of its common stock as of the record date for the special dividend.

The following unaudited pro forma combined financial information second quarter and first six months of 2018 is based on the actual first quarter financial statements of KDP after giving effect to the Transaction and the assumptions, reclassifications and adjustments described in the accompanying notes to this financial information. The financial information is presented as if the Transaction had been consummated on December 31, 2016, and combines the historical results of DPS and Maple. Refer to the Summary of Pro Forma Adjustments and Summary of Reclassifications below for details of the reclassifications and adjustments applied to the historical financial statements of DPS and of Maple, which is now reflected under the KDP column.

The financial information was prepared using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the completion of the acquisition. We utilized fair values at the Merger Date for the allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed. The historical consolidated financial statements have been adjusted in the accompanying financial information to give effect to unaudited pro forma events that are (1) directly attributable to the transaction, (2) factually supportable, and (3) are expected to have a continuing impact on the results of operations of KDP.

As a result of the measurement period adjustments for the DPS Merger, we have finalized the accompanying unaudited pro forma condensed combined statements of income during the second quarter of 2019. Changes to the presentation for the year ended December 31, 2018 were not significant.

The financial information has been prepared based upon currently available information and assumptions deemed appropriate by the Company's management. This financial information is not necessarily indicative of what our results of operations actually would have been had the Transaction been completed as of December 31, 2016. In addition, the financial information is not indicative of future results or current financial conditions and does not reflect any anticipated synergies, operating efficiencies, cost savings or any integration costs that may result from the Transaction. The financial information should be read in conjunction with historical financial statements and accompanying notes filed with the SEC.

Summary of Pro Forma Adjustments

Pro forma adjustments included in the Pro Forma Combined Statements of Income are as follows:

Summary of Reclassifications

Reclassifications included in the Pro Forma Combined Statements of Income for the three months ended March 31, 2018 are as follows:

 

 

 

KEURIG DR PEPPER INC.
RECONCILIATION OF CERTAIN NON-GAAP INFORMATION
(Unaudited)

The company reports its financial results in accordance with U.S. GAAP. However, management believes that certain non-GAAP financial measures that reflect the way management evaluates the business may provide investors with additional information regarding the company's results, trends and ongoing performance on a comparable basis.

For periods that occur in 2019, management compares the Adjusted GAAP, which is defined as U.S. GAAP results adjusted for certain items affecting comparability, for the second quarter and first six months of 2019 to Adjusted Pro Forma, which is defined as Pro Forma results adjusted for certain items affecting comparability, for the second quarter and first six months of 2018. Pro Forma information is no longer prepared as the second quarter and first six months of 2019 reflects DPS and Maple as a combined company for the entire period.

Specifically, investors should consider the following with respect to our financial results:

Adjusted: Defined as certain financial statement captions and metrics adjusted for certain items affecting comparability.

Items affecting comparability: Defined as certain items that are excluded for comparison to prior year periods, adjusted for the tax impact as applicable. Tax impact is determined based upon an approximate rate for each item. For each period, management adjusts for (i) the unrealized mark-to-market impact of derivative instruments not designated as hedges in accordance with U.S. GAAP and do not have an offsetting risk reflected within the financial results; (ii) the amortization associated with definite-lived intangible assets; (iii) the amortization of the deferred financing costs associated with the DPS Merger and Keurig Acquisition; (iv) the amortization of the fair value adjustment of the senior unsecured notes obtained as a result of the DPS Merger; (v) stock compensation expense attributable to the matching awards made to employees who made an initial investment in the Keurig Green Mountain, Inc. Executive Ownership Plan or the Keurig Dr Pepper Omnibus Incentive Plan of 2009; and (vi) other certain items that are excluded for comparison purposes to prior year periods.

Prior to the second quarter of 2019, we did not add back the amortization of the fair value adjustment of the senior unsecured debt recognized as a result of the purchase price allocation for the DPS Merger. As this item is similar to the amortization of intangibles, we changed our method of computing Adjusted Pro Forma (2018) and Adjusted GAAP (2019) results to exclude the amortization of the fair value adjustment of the senior unsecured notes in order to reflect how management views our business results on a consistent basis.

For the second quarter and first six months of 2019, the other certain items excluded for comparison purposes include (i) restructuring and integration expenses; (ii) expenses associated with our productivity projects; (iii) transaction costs not associated with the DPS Merger; (iv) provision for legal settlements; (v) the impact of the step-up of acquired inventory not associated with the DPS Merger (vi) the loss on early extinguishment of debt related to the redemption of debt and (vii) the loss related to the malware incident.

For the second quarter and first six months of 2018, the other certain items excluded for comparison purposes include (i) restructuring and integration expenses; (ii) expenses associated with our productivity projects; (iii) provisions for legal settlements;(iv) the loss on early extinguishment of debt related to the redemption of debt; and (v) tax reform associated with the TCJA.

Reconciliations for these items are provided in the tables below.

 

 

 

 

 

 

 

 

 

 

 

KEURIG DR PEPPER INC.
RECONCILIATION OF NET CASH PROVIDED BY OPERATING ACTIVITIES TO FREE CASH FLOW
(Unaudited)

Free cash flow is defined as net cash provided by operating activities adjusted for purchases of property, plant and equipment, proceeds from sales of property, plant and equipment, and certain items excluded for comparison to prior year periods. For the first six months of 2019 and 2018, there were no certain items excluded for comparison to prior year periods.

RECONCILIATION OF CERTAIN ADJUSTED FINANCIAL RESULTS TO CERTAIN
CURRENCY NEUTRAL ADJUSTED FINANCIAL RESULTS
(Unaudited)

Adjusted net sales, adjusted income from operations and adjusted earnings per share, as adjusted to currency neutral: These adjusted financial results are calculated on a currency neutral basis by converting our current-period local currency financial results using the prior-period foreign currency exchange rates.

 

 

 

SOURCE Keurig Dr Pepper