Keurig Dr Pepper (KDP) Burlington, Mass., and Plano, Texas, announced its first quarter results, which ended March 31, reporting a 4.4 percent net sales growth to $2.61 billion, compared with $2.5 billion a year ago. Additionally, the company reported growth in all four segments. On a constant currency basis, net sales increased 4.5 percent, it says.
As previously announced, KDP completed a strategic refinancing that extended its debt maturities and enhanced its liquidity profile, including a $1.5 billion senior notes issuance and the refinancing and upsizing of its 364-day revolving credit facility. The refinancing, which did not change the company's total debt balance or deleveraging commitments, increased KDP's liquidity to a level that the company believes will exceed its liquidity needs, even in the event of a protracted downturn.
Chairman and Chief Executive Officer Bob Gamgort stated: "We delivered Q1 performance in line with our long-term targets, building on the business strength demonstrated since our merger in mid-2018 and setting us up for a strong 2020. However, we are now operating in a distinctly different environment that has required us to pivot significantly. The extraordinary steps we've taken to keep our teams safe and working, coupled with our broad portfolio and seven distinct routes to market, position us to continue to successfully navigate this unprecedented time.
“I recognize the significant role KDP employees are playing in our future success, and I can't thank them enough for their tireless efforts to ensure we continue to meet the needs of our customers and consumers,” he continued. “Finally, while the timing of the macroeconomic recovery remains uncertain, we remain confident in our ability to deliver the guidance we reaffirmed today, particularly our Adjusted EPS and deleveraging commitments.”
Part of the reason that net sales advanced 4.5 percent in the first quarter of 2020 was due to the company’s strong volume/mix growth of 5 percent, which was partially offset by lower net price realization of 0.5 percent, it explains. The volume/mix growth reflected particular strength in the Packaged Beverages segment, which included an uptick from the impact of COVID-19 late in the quarter, partially offset by slowdowns in the fountain foodservice business in the Beverage Concentrates segment and the away-from-home business in the Coffee Systems segment, both of which experienced an unfavorable impact from COVID-19 late in the quarter.
The company’s in-market performance also was very strong in the first quarter of 2020, with market share advancing in the majority of the company's key categories, including carbonated soft drinks (CSDs), premium unflavored water, shelf-stable fruit drinks and shelf-stable apple juice and apple sauce. This performance reflected the strength of Dr Pepper and Canada Dry CSDs, CORE hydration and evian premium water, Snapple juice drinks and Motts apple juice and applesauce. In coffee, retail consumption of single-serve pods manufactured by KDP grew more than 6 percent in IRI tracked channels with dollar market share of KDP manufactured pods remaining strong at 81 percent.
Operating income decreased 6.4 percent to $466 million in the first quarter of 2020, compared with $498 million in the year-ago period, largely reflecting the unfavorable year-over-year impact of items affecting comparability, which includes an $86 million non-cash impairment charge on an equity investment. Also impacting the quarter was inflation, primarily in input costs and logistics, higher operating costs associated with increased consumer demand, tariffs and the unfavorable comparison to a $10 million gain on the renegotiation of a manufacturing contract in the prior year. Excluding items affecting comparability, adjusted operating income increased 10.1 percent to $684 million, compared with $621 million a year ago. Additionally, adjusted operating margin advanced 140 basis points to 26.2 percent, while adjusted operating income grew 10.5 percent on a constant currency basis.
First quarter segment results
In the first quarter segment results, KDP’s coffee systems generated first quarter net sales of $973 million, an increase of 0.5 percent, compared with $968 million in the year-ago period. This gain reflects a higher volume/mix of 3.7 percent and favorable foreign currency translation of 0.1 percent, which was partially offset by lower net price realization of 3.3 percent resulting from strategic price investments. The volume/mix increase of 3.7 percent reflected strong pod volume growth of 5.6 percent, despite a significant decline late in the quarter in the away-from-home coffee business due to both office closures and hospitality slowdown caused by COVID-19. Brewer volume declined 2.4 percent in the quarter, reflecting comparison to the double-digit growth recorded in the year-ago period, as well as the expected shift of brewer shipments from the first quarter to later in the year as a result of the timing impact of COVID-19 on brewer supply from certain regions in Asia.
Operating income declined 7.2 percent to $272 million in the first quarter of 2020, compared with $293 million in the year-ago period, reflecting the unfavorable year-over-year impact of items affecting comparability, strategic pricing, tariffs, and an increase in other operating costs. Partially offsetting these drivers were the benefits of continued productivity and merger synergies, a network optimization program gain of $16 million on the asset sale-leaseback of a manufacturing facility and the strong pod volume growth. Excluding items affecting comparability, Adjusted operating income in the quarter increased 3.6 percent to $347 million, compared to $335 million in the year-ago period, and adjusted operating margin advanced 110 basis points to 35.7 percent.
Net sales for the first quarter of 2020 advanced 9.1 percent to $1.22 billion, compared with $1.12 billion in the year-ago period, reflecting strong volume/mix growth of 8.7 percent and higher net price realization of 0.4 percent. The increase in volume/mix reflected strength in premium water, CSDs, juice and applesauce, partially driven by heightened consumer demand due to stock-up behavior late in the quarter related to COVID-19. Driving the net sales performance in the quarter were evian, Dr Pepper, Motts, Canada Dry, Core, A Shoc, A&W, 7UP and Squirt, as well as increased contract manufacturing.
Operating income increased approximately 27 percent to $189 million in the first quarter of 2020, compared to $149 million in the prior-year period. This reflects the strong net sales growth, continued productivity and merger synergies, and a network optimization program gain of $26 million on the asset sale-leaseback of three facilities, the company says. Additionally, these growth drivers were partially offset by higher manufacturing costs to meet the surge in consumer demand late in the quarter, inflation in packaging, labor and logistics costs, the unfavorable comparison versus year-ago of a $10 million gain related to the renegotiation of a manufacturing contract, and an increase in other operating costs. Also impacting the comparison was a slight year-over-year impact of items affecting comparability. Excluding these items, adjusted operating income increased 27 percent to $203 million, compared to $160 million in the year-ago period and adjusted operating margin advanced 240 basis points to 16.7 percent of net sales.
Net sales for the first quarter of 2020 increased 0.7 percent to $306 million, compared with $304 million in the year-ago period, reflecting higher net price realization of 2.4 percent, which was partially offset by unfavorable volume/mix of 1.7 percent. The volume/mix decline reflected a significant channel shift away from on-premise business, which is shipped directly, as demand dropped off quickly late in the quarter due to COVID-19, partially offset by a slower build of the at-home business, as inventories in the company's partner bottling network were worked down.
Dr Pepper continued to demonstrate net sales strength in the quarter, partially offset by Crush. Shipment volume versus year-ago declined 2.4 percent in the first quarter of 2020, reflecting an immediate impact of COVID-19 on the fountain foodservice business late in the quarter, partially offset by growth in concentrate shipment volume for retail product. Bottler case sales increased 1.0 percent in the first quarter of 2020.
Operating income decreased 2 percent to $197 million in the first quarter of 2020, compared with $201 million a year ago. This reflects the benefit of the net sales growth, which was more than offset by higher marketing investments in the quarter. Operating margin decreased 170 basis points versus year-ago to 64.4 percent.
Latin America Beverages
Net sales for the first quarter of 2020 increased 0.9 percent to $117 million, compared with net sales of $116 million in the year-ago period. This reflects a higher net price realization of 5.9 percent, which was partially offset by unfavorable volume/mix of 0.7 percent and an unfavorable foreign currency translation of 4.3 percent. On a constant currency basis, net sales increased 5.2 percent in the quarter.
Operating income increased to $27 million in the first quarter of 2020, compared with $11 million in the year-ago period, reflecting a favorable foreign currency transaction impact, the net sales growth, continued productivity and a modest year-over year benefit from items affecting comparability. Partially offsetting these growth drivers were inflation in input costs, manufacturing and logistics. Excluding items affecting comparability, adjusted operating income more than doubled in the first quarter of 2020 to $27 million, compared to $12 million in the year-ago period, resulting in adjusted operating margin advancing 1,280 basis points versus year-ago to 23.1 percent.
KDP outlook for 2020
KDP notes that the impacts and volatility of COVID-19 are expected to be significant in 2020, and the timing and pacing of reopening the economy and ultimately transitioning into what is likely to be a new normal are highly uncertain. Nevertheless, given the company's broad portfolio and unmatched distribution network that spans seven distinct routes to market, KDP is reaffirming its guidance for 2020.
Specifically, for the full-year 2020, KDP expects constant currency net sales growth in the range of 3 percent to 4 percent, with performance likely at the low end of the range. The company expects full-year 2020 adjusted diluted EPS growth in the range of 13 percent to 15 percent, or $1.38 to $1.40 per diluted share. This is the result of the significant visibility and control that KDP maintains over its cost structure, including aggressive cost management, productivity programs and merger synergies. As such, the company continues to expect its management leverage ratio to be in the range of 3.5x to 3.8x at year end 2020 and its management leverage ratio to be below 3.0x in two to three years from the July 2018 merger closing, it says.