Keurig Dr Pepper (KDP +0.00%) crossed over the one-year anniversary of the merger of Dr Pepper Snapple Group and Keurig Green Mountain early in the third quarter of 2019. The beverage conglomerate's quarterly scorecard highlights the advantage of combining packaged coffee and beverages businesses: In a middling quarter for bottled beverages, concentrates and coffee helped push total revenue into positive territory against the prior year.
As a result, a marginally higher top line surpassed investors' expectations, and the consumer staples stalwart displayed effervescence Thursday following the release, with shares gaining 8% on the session at midday.
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: Headline numbers
| Metric | Q3 2019 | Q3 2018 | Change |
|---|---|---|---|
| Revenue | $2.870 billion | $2.856 billion | 0.5% |
| Net income | $304 million | $300 million | 1.3% |
| Diluted EPS | $0.21 | $0.21 | 0% |
Data source: Keurig Dr Pepper. EPS = earnings per share.
What happened with Keurig Dr Pepper this quarter?
Image source: Getty Images.
- Keurig Dr Pepper enjoyed strong organic growth of 3.1%, due to increased volume of 1.5%, and favorable pricing and mix of 1.6%. The company also enjoyed a modest 0.3% impact from one additional shipping day in the quarter.
- These positive revenue factors were offset by ongoing changes in the company's Allied Brands beverage portfolio, which impacted revenue by 2.7%, and unfavorable foreign currency translation of 0.2%, which resulted in the total reported revenue advance of 0.5% as shown in the table above.
- Coffee systems revenue rose by 1.1% to $1.07 billion. An increase of volume and mix of 3.1% was offset by lower price realization of 1.9% and a small foreign currency impact of 0.1%. Strong pod volume growth was partially undermined by pod mix, while brewer sales volume climbed 8%.
- In the organization's largest segment, packaged beverages, revenue dipped by 2.2% to $1.31 billion, as organic growth of 3.1% and a 0.6% impact from the extra shipping day were more than offset by a 5.8% decrease in Allied Brands portfolio sales. Management cited strength in contract manufacturing, as well as growth in significant brands including Dr Pepper, Sunkist, A&W, and Canada Dry, while sales of the Bai antioxidant-infused beverage line declined.
- Beverage concentrate sales improved by nearly 9% to $360 million, which the company attributed to higher price realization of 6.5% and favorable volume and mix of 2.3%. Performance was led by sales of Dr Pepper, Sunkist, Canada Dry, and Big Red.
- Net sales in Latin American beverages increased by 1.5% to $138 million.
- Operating margin ticked up by 40 basis points to 20.2%.
- The company used its vigorous cash flow to pay down $71 million in merger-related debt and $423 million in structured accounts payable during the quarter. Keurig Dr Pepper has reduced debt by $788 million in the first three quarters of the year, and ended the third quarter with $13.1 billion of long-term debt on its balance sheet.
Management's thoughts on the quarter
In the organization's earnings filing, CEO Bob Gamgort alluded to the pursuit of long-term goals, such as the realization of $600 million in cumulative cost synergies from the merger by 2021, while also lauding the execution that characterized the last three months:
KDP's third quarter results continued to track well with the ambitious long-term targets we established nearly two years ago. Our underlying net sales growth in the quarter accelerated to 3.1%, with balanced contribution from volume/mix and pricing. Healthy underlying growth in all four segments, combined with margin expansion, enabled strong earnings growth, cash generation and continued debt reduction.
Looking ahead
As 2019 draws to a close, the company reaffirmed previously shared full-year targets on Thursday. Management expects that organic revenue will expand at a 3% rate for the entire year against 2018. The company anticipates increasing diluted EPS year over year by 15% to 17%, which should result in earnings of $1.20 to $1.22 per share.
In addition, the beverage behemoth disclosed that it's on track to realize $200 million in cost synergies this year, which will keep it on pace to hit its $600 million target by the end of 2021. Finally, the organization's enviable cash generation will continue into the fourth quarter, culminating in a cool $2.3 billion to $2.5 billion in free cash flow in 2019.
