Coffee and bottled beverage conglomerate Keurig Dr Pepper's (NYSE:KDP) first-quarter 2019 earnings didn't reveal any major surprises. The company achieved moderate core growth across business lines as it continued integration activities following the merger of Dr Pepper Snapple Group and Keurig Green Mountain in July 2018. Let's review the headline numbers and dig into the essential details from the quarter. 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||Q1 2019||Q1 2018||Growth (YOY)|
|Revenue||$2.50 billion||$2.53 billion||(1.2%)|
|Net income||$230 million||$222 million||3.6%|
What happened with Keurig Dr Pepper this quarter?
- While reported revenue declined slightly, underlying sales grew 2.5%, comprised of 1.4% thanks to higher volume and a more favorable product mix, and 1.1% net price realization. This core growth was offset by a previously anticipated impact of 2.5 percentage points from changes in the company's Allied Brands beverage portfolio, as well as 0.6% of calendar timing differences between the current and prior-year quarters.
- In the coffee systems segment, net sales increased by 2.1% to $968 million. Lower net price realization offset higher volume in K-Cup pods and brewer systems.
- Packaged beverages net sales dipped 5.3% to $1.12 billion, as pricing power was negated by slightly lower volume, a decline in Allied Brand sales, and calendar timing shifts. The company noted sales growth in Dr Pepper, CORE, Evian, Canada Dry, and Xyience brands, and sales decreases in Mott's and 7UP.
- Beverage concentrate sales improved by 4.8% to $304 million. In this segment, net price realization jumped 7.1%, and was offset by lower volume and mix of 2%, and foreign currency translation of 0.3%. Per management, segment performance was led by Dr Pepper, Crush, and Big Red, while Canada Dry sales dipped against the prior-year quarter.
- Sales in the Latin America beverages segment rose 2.7% to $116 million, primarily on improved pricing.
- Operating margin improved by 80 basis points to 19.9%.
Roughly eight months after the merger that created Keurig Dr Pepper, the company is beginning to exhibit some of the anticipated strengths of combined coffee and beverages operations. CEO Bob Gamgort highlighted a number of positive areas in the company's earnings press release:
Our first quarter results represent a good start to the year, with strong EPS delivery and all four segments registering underlying net sales growth. In addition, our in-market performance was also solid, as we grew retail dollar consumption across the majority of our portfolio and held or grew market share in nearly all categories. Our cash flow generation remains strong and we continue to reduce debt in line with our deleveraging targets. We remain confident in our targets for 2019 and our long-term value creation framework.
Gamgort's comments on cash flow in particular are pertinent as the organization is churning out appreciable operating cash. Keurig Dr Pepper generated nearly $600 million in operating cash flow this quarter, and it used part of this cash haul to pay down $414 million in merger-related debt. Total debt, including short-term borrowings, stood at $15.2 billion at the end of the first quarter.
Keurig Dr Pepper reaffirmed its current-year financial outlook benchmarks alongside earnings. The company expects net sales growth of 2% in 2019, and adjusted diluted earnings per share (EPS) growth of 15% to 17%, which translates to a range of $1.20 to $1.22 per share. Management also confirmed that the company still expects to achieve merger synergies of $200 million in 2019, meaning that it's on track to realize projected annual synergies of $200 million over the next three years.