BURLINGTON, Mass. and PLANO, Texas, Feb. 28, 2019 /PRNewswire/ -- Keurig Dr Pepper Inc. (NYSE: KDP) today reported financial results for the fourth quarter and full year ended December 31, 2018 and provided guidance for Adjusted diluted EPS growth for 2019 in line with the Company's merger targets.
The Company's reported results were significantly impacted by the merger between Keurig Green Mountain and Dr Pepper Snapple Group, Inc., which was completed on July 9, 2018. Highlights of the fourth quarter and full year 2018 include:
- Successfully completed the merger, with integration efforts and synergies continuing on track.
- Delivered 2018 financial performance in line with the long-term targets communicated at the time of the merger, positioning KDP for another year of growth in 2019 in line with its merger targets.
- Drove strong in-market performance and market share growth for the year for carbonated soft drinks (CSDs), single serve coffee and other key categories.
- Repaid approximately $940 million of bank debt since merger close, due to strong operating profit results and ongoing effective working capital management.
- Acquired Core, a rapidly-growing premium enhanced water brand, and Big Red, a strong regional CSD brand.
- Entered into a long-term partnership with Danone Waters of America to sell, distribute and merchandise evian, the leading global brand of premium natural spring water, across the U.S., and expanded KDP's relationship with both Peet's, a premium specialty coffee company, for ready to drink coffee, and Forto, a rapidly-growing brand of coffee energy shots.
Commenting on the announcement, Keurig Dr Pepper Chairman and CEO Bob Gamgort stated, "We finished 2018 on a strong note, successfully managing through the merger integration and achieving full year results in line with our 2018 targets. We also delivered strong in-market performance, growing market share in carbonated soft drinks, single-serve coffee and other key categories. Looking ahead, we are confident in our outlook for 2019 Adjusted diluted EPS growth of 15% to 17%, which is in line with our long-term merger target, despite the operating environment becoming more challenging."
2018 Full Year Consolidated Results
Net sales for the full year of 2018 increased 76% to $7.44 billion, compared to $4.23 billion in the year-ago period, primarily reflecting the impact of the merger. Adjusted pro forma net sales of $11.02 billion in 2018 grew 2.3%, driven by higher underlying volume/mix of 3.7%, with strong performances registered across most categories, partially offset by the net unfavorable impact of 0.5% related to changes in the Company's Allied Brands portfolio during the year, which was expected. Also partially offsetting the growth was unfavorable net price realization of 0.8%, driven by continued moderation in strategic pod pricing investments in the Coffee Systems segment which more than offset higher net pricing in the balance of the portfolio. Unfavorable foreign currency translation also impacted the year by 0.1%.
Retail market performance, as measured by IRi, remained strong for the year. The Company's CSD and enhanced flavored and premium unflavored water portfolios registered market share growth in both units and dollars, driven by strong performances of Dr Pepper, Canada Dry, Core and Bai. Likewise, the coffee portfolio also performed well for the year, driven by single-serve pod category unit growth, combined with an increase in market share of pods manufactured by KDP.
Operating income increased 44% to $1.24 billion, compared to $0.86 billion 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 pro forma operating income advanced 6.7% to $2.62 billion in 2018, compared to $2.46 billion in the year-ago period. This performance primarily reflected the benefit of the net sales growth and strong productivity, despite inflation in input costs and logistics that were not fully offset by third quarter 2018 pricing actions in the Packaged Beverages segment. Also impacting the performance was comparison against a $49 million gain on Bai 2017 as compared to a $22 million gain on Big Red in 2018. On a percentage of Adjusted pro forma net sales basis, Adjusted operating income grew 100 basis points to 23.8% for the full year of 2018, compared to 22.8% in 2017.
Net income decreased approximately 31% to $0.59 billion in 2018, compared to $0.85 billion in 2017, largely reflecting the unfavorable year-over-year impact of items affecting comparability, partially offset by the impact of the merger. Adjusted pro forma net income advanced 23% to $1.45 billion, primarily reflecting the growth in Adjusted pro forma operating income and a significantly lower effective tax rate, due to the Tax Cuts and Jobs Act. Also impacting the comparison were the non-operating benefits in 2018 of a cash distribution from BODYARMOR, in connection with KDP's interest in it as a unit-holder, and a gain related to the Core acquisition. Adjusted diluted EPS increased 22% to $1.04 in 2018, compared to $0.85 in 2017.
Since the merger close, KDP repaid approximately $940 million of bank debt, due to the strong operating profit results and ongoing effective working capital management, resulting in the pace of deleveraging in line with the Company's long-term merger target.
2018 Full Year Segment Results
Beverage Concentrates
Net sales for the year totaled $669 million, reflecting results of the segment since the merger close. Adjusted pro forma net sales increased 3.8% to $1.33 billion in 2018, compared to $1.28 billion in the year-ago period, driven by higher net price realization of 3.2% and favorable volume/mix of 0.6%.
Dr Pepper fueled the growth in Adjusted pro forma net sales for the segment, along with broad-based strength across the portfolio, particularly for A&W and, to a lesser extent, Squirt, Schweppes, Big Red and Canada Dry, partially offset by Crush and Sunkist. Shipment volume growth for the segment was led by Canada Dry, Big Red and Hawaiian Punch, partially offset by Crush and, to a lesser extent, 7UP.
Bottler case sales volume increased 0.6% and fountain foodservice volume increased 1.7% in 2018.
Operating income totaled $430 million for the year, reflecting results of the segment since the merger close. Adjusted pro forma operating income increased 5.1% to $858 million in 2018, compared to $816 million in 2017, primarily reflecting the benefits of the Adjusted pro forma net sales growth and lower marketing spending.
Packaged Beverages
Net sales for the year totaled $2.42 billion, reflecting results of the segment since the merger close. Adjusted pro forma net sales advanced 4.1% to $5.07 billion in 2018 compared to $4.87 billion in 2017, reflecting strong underlying volume/mix of 5.4%, partially offset by the unfavorable impact of 1.2% resulting from changes in the Allied Brands portfolio during the year, as expected. Slightly lower net price realization of 0.1% also impacted the comparison. Driving the strong Adjusted pro forma net sales performance were Canada Dry, Core, Bai and BODYARMOR, as well as contract manufacturing, partially offset by declines in Fiji, Vita Coco and Hawaiian Punch.
Operating income totaled $257 million for the year, reflecting results of the segment since the merger close. Adjusted pro forma operating income declined 9.8% to $688 million in 2018, compared to $763 million in 2017. This performance primarily reflected inflation in input costs and logistics not fully offset by pricing actions taken beginning in late third quarter 2018, as well as the unfavorable impact of the comparison against the $49 million gain on Bai in 2017 as compared to the $22 million gain on Big Red in 2018. Also impacting the segment were higher general and administrative expenses. Partially offsetting these factors were the benefits of the growth in Adjusted pro forma net sales and productivity savings.
Latin America Beverages
Net sales for the year totaled $244 million, reflecting results of the segment since the merger close. Adjusted pro forma net sales increased 3.9% to $506 million in 2018, compared to $487 million in 2017, reflecting higher net price realization of 5.5% and favorable volume/mix of 0.7%, partially offset by unfavorable currency translation of 2.3%.
Operating income totaled $29 million for the year, reflecting results of the segment since the merger close. Adjusted pro forma operating income increased 28% to $82 million, compared to $64 million in 2017, reflecting the benefits of the Adjusted pro forma net sales growth and productivity savings, partially offset by inflation in input costs and logistics.
Coffee Systems
Net sales for the year totaled $4.11 billion, compared to $4.23 billion in the prior year. Adjusted pro forma net sales declined 0.4% to $4.12 billion in 2018, compared to $4.14 billion in 2017, due to lower net price realization of 3.7%, reflecting the continued moderation in strategic pod pricing investments, significantly offset by volume/mix growth of 3.2% and favorable foreign currency translation of 0.1%.
The volume/mix growth for Coffee Systems was driven by a 7.4% increase in K-Cup pod volume, partially offset by a 1.5% volume decline for brewers. The brewer performance was driven by an increase in brewer quality that has resulted in consumers keeping their brewers longer, as well as the impact of discontinuing select legacy brewer models. Partially offsetting the decline were the recent launches of the K-Café and redesigned K-Mini brewers, both of which have been very well received, as evidenced by exceptionally strong consumer reviews. For the year, Keurig brewer household penetration grew approximately 7% and is now approaching 22%.
Operating income increased 11.9% to $1.16 billion in 2018, compared to $1.04 billion in 2017. Adjusted pro forma operating income advanced 9.4% to $1.33 billion, compared to $1.22 billion in the prior year, primarily reflecting strong productivity that more than offset inflation in input costs and logistics. On a percentage of Adjusted pro forma net sales basis, Adjusted pro forma operating income grew 290 basis points to 32.3%.
Fourth Quarter Consolidated Results
Net sales in the fourth quarter of 2018 more than doubled to $2.81 billion, compared to $1.17 billion in the year-ago quarter, primarily reflecting the impact of the merger. The net sales of $2.81 billion in the fourth quarter of 2018 grew 0.5% compared to pro forma net sales of $2.80 billion in the year-ago period, driven by volume/mix growth of 2.7%, which reflected strong performances across most categories, partially offset by the unfavorable impact of approximately 1.8% in the quarter from the changes in the Allied Brands portfolio in the Packaged Beverages segment, which was expected. Also impacting the comparison for the quarter was unfavorable foreign currency translation of 0.4%.
Retail market performance, as measured by IRi, remained strong in the quarter. The Company's CSD portfolio registered market share growth in both units and dollars, driven by strength of Dr Pepper and Canada Dry. In addition, the coffee portfolio held market share in both units and dollars for the quarter, as measured by share of pods manufactured by KDP.
Operating income increased 139% to $547 million in the fourth quarter of 2018, compared to $229 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 pro forma operating income advanced 12.9% to $720 million in the fourth quarter of 2018, compared to $638 million in the year-ago period. This performance primarily reflected strong productivity, lower general and administrative expenses, reduced marketing spending and the benefit of the net sales growth, partially offset by inflation in input costs and logistics and the unfavorable impact of comparison against the $21 million gain on Bai in the fourth quarter of 2017. On a percentage of Adjusted pro forma net sales basis, Adjusted pro forma operating income grew 280 basis points to 25.6% in the fourth quarter of 2018, compared to 22.8% in the year-ago period.
Net income decreased 57% to $266 million in the fourth quarter of 2018, compared to $612 million in the year-ago period, largely reflecting the unfavorable year-over-year impact of items affecting comparability, partially offset by the impact of the merger. Adjusted pro forma net income advanced 28% to $423 million, compared to $330 million in the year-ago period, primarily reflecting the growth in Adjusted pro forma operating income and significantly lower interest expense driven by lower outstanding indebtedness and the unwinding of several interest rate swap contracts. Adjusted diluted EPS increased 25% to $0.30, compared to $0.24 in the year-ago period.
Fourth Quarter Segment Results
Beverage Concentrates
Net sales for the fourth quarter of 2018 advanced 4.8% to $352 million, compared to pro forma net sales of $336 millionin the year-ago period, driven by higher net price realization of 2.6% and increased volume/mix of 2.4%, partially offset by unfavorable currency translation of 0.2%.
Dr Pepper fueled the growth in net sales for the segment, along with increases for 7UP, Big Red, Schweppes and Sunkist, partially offset by Crush and Canada Dry. Shipment volume growth for the segment was led by Canada Dry, Dr Pepper, Big Red and Sunkist, partially offset by Crush.
Bottler case sales volume in the fourth quarter increased 0.8% and fountain foodservice volume increased 1.6%.
Operating income in the fourth quarter of 2018 totaled $238 million for the segment. Adjusted pro forma operating income increased 14.2% to $242 million, compared to $212 million in the year-ago period, and Adjusted pro forma operating margin advanced 570 basis points versus year-ago to 68.8%. This performance primarily reflected the benefits of the net sales growth and lower marketing, partially offset by inflation in input costs and logistics.
Packaged Beverages
Net sales for the fourth quarter of 2018 advanced 0.1% to $1.18 billion, essentially even with pro forma net sales in the year-ago period. This performance reflected favorable underlying volume/mix growth of 2.7% and higher net price realization of 1.7%, partially offset by the unfavorable impact of 4.2% resulting from changes in the Allied Brands portfolio, as expected. Also impacting the comparison was unfavorable foreign currency translation of 0.1%. Driving the strong underlying net sales performance were Canada Dry, Core, Dr Pepper, Big Red and Mott's, as well as contract manufacturing, partially offset by declines in Fiji and, to a lesser extent, BODYARMOR and Snapple.
Operating income in the fourth quarter of 2018 totaled $196 million for the segment. Adjusted pro forma operating income increased 8.4% to $206 million, compared to $190 million in the year-ago period, and Adjusted pro forma operating margin advanced 130 basis points versus year-ago to 17.5% of net sales. This improvement reflected the underlying net sales growth, including the benefit of pricing, favorable product mix, productivity savings and lower marketing spending, partially offset by inflation in input costs and logistics, as well as the unfavorable impact of comparison against the $21 million gain on Bai in the fourth quarter of 2017.
Latin America Beverages
Net sales for the fourth quarter of 2018 increased 1.7% to $120 million, compared to pro forma net sales of $118 million in the year-ago period, reflecting higher net price realization of 5.8% and favorable volume/mix of 0.1%, partially offset by unfavorable foreign currency translation of 4.2%.
Operating income in the fourth quarter of 2018 totaled $14 million for the segment. Adjusted pro forma operating income increased 20.0% to $18 million, compared to $15 million in the year-ago period. This performance reflected the benefit of the net sales growth and productivity savings, partially offset by inflation in input costs and logistics.
Coffee Systems
Net sales for the fourth quarter of 2018 declined 0.5% to $1.16 billion, compared to $1.17 billion in the year-ago period, reflecting lower net price realization of 3.0% and unfavorable foreign currency translation of 0.4%, significantly offset by higher volume/mix of 2.9%.
The volume/mix growth of 2.9% for Coffee Systems was driven by an 8.6% increase in K-Cup pod volume, partially offset by an 8.6% volume decline for brewers. The brewer performance was primarily driven by shipment timing between the third and fourth quarters of 2018, as well as the impact of discontinuing select legacy Keurig brewer models. Partially offsetting these factors were recent innovation launches that have been very well received in the marketplace.
Operating income in the fourth quarter of 2018 advanced 14.2% to $297 million, compared to $260 million in the year-ago period. Adjusted pro forma operating income advanced 8.6% to $328 million, compared to $302 million in the year-ago period, primarily reflecting strong productivity, partially offset by higher marketing expense and inflation in input costs and logistics. On a percentage of net sales basis, Adjusted pro forma operating income grew 240 basis points to 28.2%.
KDP Adjusted Pro forma Outlook for 2019
The Company expects 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%, consistent with the Company's long-term merger target of 2-3%, despite the impact of the changes in the Allied Brands portfolio in the Packaged Beverages segment.
- Merger synergies of $200 million in 2019, consistent with the Company's long-term merger target for $200 millionper year over the 2019-2021 period.
- Other non-operating income/expense is expected to approximate $30 million of expense in 2019 and assumes no gains related to changes in the Allied Brands portfolio, such as the impacts in 2018 from BODYARMOR and Core, which recorded income of $24 million and $12 million, respectively.
- Adjusted interest expense is expected to be in the range of $570 million to $590 million, reflecting ongoing deleveraging and the continued benefit of unwinding interest rate swap contracts.
- 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.
- The Company continues to expect significant cash flow generation and rapid deleveraging, with a targeted leverage ratio below 3.0x in two to three years from the July 2018 closing of the merger.
ABOUT KEURIG DR PEPPER
Keurig Dr Pepper (KDP) is a leading 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 a highly competitive 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® 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 "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.
