Coffee Service

Keurig Dr Pepper bullish on Q2 sales gains

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July 31, 2020

Keurig Dr Pepper Inc. officials lauded the beverage company's financial results for the second quarter as sales grew, largely driven by growing demand for at-home products versus the foodservice and hospitality sectors.

Officials were upbeat about the performance for the quarter ended June 30 despite a slight drop in net income and earnings.

On a GAAP basis, net sales in the second quarter of 2020 increased 1.8% to $2.86 billion, compared to $2.81 billion in the year-ago period and diluted earnings per share totaled 21 cents, compared to 22 cents in the year-ago period. Constant currency net sales in the second quarter advanced 2.9% versus a year ago.

The company continues to expect constant currency net sales growth in the range of 3% to 4%, and full-year adjusted diluted EPS growth in the range of 13% to 15%, or $1.38 to $1.40 per diluted share.

"Our second quarter results demonstrated the ability of our broad beverage portfolio, unique routes to market and culture of execution to deliver growth in the most challenging of environments," Bob Gamgort, chairman and CEO, said in a prepared statement. "Despite the expectation for significant volatility ahead, we remain confident in both our business model and organization to continue to execute well to deliver on the guidance we reaffirmed today."

"We have been required to focus resources on the areas of our business that are aligned with changing consumer trends, such as at-home coffee, multipack cold beverages, large-format retail, and e-commerce to offset significant weakness in away from home coffee, on premise beverage consumption and convenience stores," Gamgort said during the earnings call.

Significant growth in brewers and K-Cup coffee pods for at-home consumption more than offset a significant drop-off in the office coffee and hospitality businesses.

Strong in-market execution led to share growth in the majority of KDP's packaged cold beverage segments, which more than offset the decline in convenience and gas channels due to reduced consumer mobility.

Beverage concentrate declined due to the fountain foodservice component of the business, which services restaurants and hospitality, reflecting changes in consumer behavior.

What does the future hold?

This naturally raised the question of whether the channel changes in reaction to the COVID-19 lockdowns are bringing temporary trends in consumer behavior. In responses, Gamgort said he doesn't expect the future to look exactly like the past.

"The COVID crisis has accelerated consumer adoption of e-commerce for food and beverage and we see no evidence of this trend slowing when the crisis abates," he said.

Nor has there been any move away from brands to private label, both on the cold beverage side and the coffee side.

In coffee, retail consumption of single-serve pods manufactured by KDP grew nearly 15% in IRi tracked channels, with dollar market share of KDP manufactured pods remaining strong at 82% and improving share trends in KDP's owned and licensed brand portfolio.

"On the coffee side of the business, you're actually seeing a skew towards more premium brands in this environment," Gamgort said. "And I believe that's because as people trade off from making or purchasing coffee outside of the home to making it at home, they want to take their brands with them and the coffee shop brands that they can get now in our system are skewed towards the premium end, so that's very bullish."

Market share also made gains in carbonated sodas, premium unflavored water, shelf stable fruit drinks, shelf stable vegetable juice and shelf stable apple juice and apple sauce. The company credited this performance to the strength of Dr Pepper and Canada Dry CSDs, CORE hydration and evian premium water, Snapple juice drinks, Clamato vegetable juice and Motts apple juice and apple sauce.

New product introductions, most notably Dr Pepper & Cream Soda and Canada Dry Bold and, to a lesser extent, Snapple Lemonades, supported the strength of the packaged beverages segment, while the new The Original Donut Shop One Step Lattes and ongoing successful brewer innovation, including the most recent K-Duo and K-Slim introductions, supported the strength of the coffee systems segment.

GAAP income declines

GAAP operating income decreased 4.4% to $561 million in the second quarter of 2020, compared to $587 million in the year-ago period, including the unfavorable year-over-year impact of items affecting comparability, which included certain COVID-19 related expenses, as well as lower pricing, inflation in input costs and logistics and higher operating costs associated with increased consumer demand.

Partially offsetting these factors were lower marketing and other discretionary expenses, productivity and merger synergies and growth in net sales. Excluding items affecting comparability, adjusted operating income increased 10.4% to $775 million, compared to $702 million in the year-ago period, and adjusted operating margin advanced 210 basis points to 27.1%. On a constant currency basis, adjusted operating income grew 11.1%.

GAAP net income in the second quarter of 2020 decreased 5.1% to $298 million, or 21 cents per diluted share, compared to GAAP net income of $314 million, or 22 cents per diluted share, in the year-ago period, reflecting the decline in GAAP operating income, a higher effective tax rate resulting from the comparison to favorable discrete tax items and valuation adjustments in the prior year period and higher interest expense, as well as the unfavorable year-over-year impact of items affecting comparability, partially offset by an increase in non-operating income.

The company generated strong free cash flow totaling $524 million in the second quarter of 2020, enabling KDP to reduce bank debt by approximately $274 million. The company's management leverage ratio declined from 4.9 times at the end of the second quarter of 2019 to 4.0 times at the end of the second quarter of 2020, primarily driven by ongoing debt reduction and earnings growth. Since the close of the merger in July 2018, KDP's management leverage ratio has declined 2.0 times.

For an update on how the coronavirus pandemic has affected convenience services, click here.