Keurig Dr PepperKDP reported results individually for Dr Pepper Snapple Group ("DPS") and Keurig Green Mountain ("KGM") for the period ended Jun 30, 2018, as the merger of the two companies was completed after the end of the second quarter. The company stated that the integration of the combined company is well in progress, as clear from the recent appointment of the new leadership team.
The company will report the combined results of KGM and DPS, starting in the third quarter of 2018. Further, the management reiterated the 2018 outlook for the combined company. It also expects to deliver on the long-term value creation guidelines provided in the Investor Day on Mar 20, 2018.
Keurig Dr Pepper's shares have shown little movement following the earnings release. However, this Zacks Rank #5 (Strong Sell) stock has rallied 6.7% since it started trading under the ticker symbol "KDP" on Jul 10 compared with the industry 's increase of 2.3%.
DPS Second-Quarter 2018 Results
Adjusted earnings per share of $1.30 improved 4% year over year and surpassed the Zacks Consensus Estimate of 30 cents. Net sales of $1,886 million rose 5% from the year-ago quarter but missed the Zacks Consensus Estimate of $2,846 million. Sales growth mainly stemmed from 3% increase due to favorable mix and 2% rise in volume, which included increased contract manufacturing. Modest pricing gains also aided sales while unfavorable currency translations were detrimental.
Keurig Dr Pepper, Inc Price, Consensus and EPS Surprise
Top line gains in the reported quarter were also attributed to the innovations for Canada Dry and persistent strength in the Bai brand as well as the robust performance of Mott's juices and several Allied Brands.
Adjusted operating income dipped 6.4% year over year to $363 million, driven by higher commodity costs - particularly for plastics, aluminum and apples; increased logistics expenses; and higher planned marketing investments as well as administrative expenses, mainly in the Packaged Beverage segment. These higher costs were not fully offset by pricing actions and productivity benefits.
KGM Second-Quarter 2018 Results
KGM's net sales of $949 million were almost flat with the prior-year quarter. Gains from a 3.2% increase in volume/mix and 0.5% favorable currency effects were mostly compensated by a moderation in strategic pricing actions, which was initiated in 2016.
Volumes increase in the reported quarter was mainly driven by high-single-digit pod volume growth, stemming from increased household penetration of the Keurig single-serve system in the United States. However, a decline in net price realization, owing to strategic pricing actions and soft brewer sales as a result of the timing of brewer innovation, primarily hurt top-line growth.
Adjusted operating income rose 10.8% to $288 million while adjusted operating margin expanded 290 basis points (bps) to 30.3%. The increase was backed by significant productivity savings gains and stringent management of SG&A overhead costs, partly negated by higher planned advertising investments.
Further, KGM's strong cash flow generation and robust operating performance led it to considerably lower net debt. The company cleared $481 million in debt in the second quarter compared with the net debt as of Dec 31, 2017. Further, the company has reduced term loans and revolving credit facility by nearly $1.1 billion, since the end of the second quarter of 2017, in sync with its strategy of rapid deleveraging.
Combined Company (KDP) Outlook
The company has reiterated the combined company outlook for 2018 and the longer term, which was provided in its Investor Day on Mar 20, 2018.
For 2018, Keurig Dr Pepper anticipates adjusted earnings per share of $1.02-$1.07, after the impact of preliminary Purchase Price Accounting adjustments. Further, the company expects sales to grow 1-2% in 2018.
For the long term, the company expects to generate deal synergies of nearly $600 million between 2019 and 2021, with about $200 million savings anticipated every year. These synergies, combined with strong margin expansion at Keurig Green Mountain and growth at historic levels for DPS, are likely to result in the combined company EPS growth rate of 15-17% between now and 2021.
Additionally, the company expects significant cash flow generation and rapid deleveraging, targeting a leverage ratio of less than 3.0 in two to three years.
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Some better-ranked stocks in the broader consumer staples sector are Archer Daniels Midland Company ADM , with a Zacks Rank #1 (Strong Buy), The Boston Beer Company, Inc. SAM and Dean Foods Company DF , both carrying a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .
Archer Daniels has rallied 24.7% year to date. The company delivered an average positive earnings surprise of 18.6% in the last four quarters.
Boston Beer has long-term earnings growth rate of 9.5%. Moreover, the stock has surged 16.3% in the last three months.
Dean Foods delivered positive earnings surprise of 16.7% in the last-reported quarter. Furthermore, the company has long-term earnings growth rate of 13.3%.
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