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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Keurig Dr Pepper Inc.    KDP

KEURIG DR PEPPER INC.

(KDP)
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KEURIG DR PEPPER : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

10/29/2020 | 04:11pm EST
The following discussion should be read in conjunction with our audited
consolidated financial statements and notes thereto in our Annual Report, as
filed on February 27, 2020.
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Exchange Act, including, in particular, statements about
anticipated benefits and expenses of the DPS Merger and other transactions,
including estimated synergies, deleveraging and associated cash management, and
cost savings, the impact of COVID-19, future events, future financial
performance, plans, strategies, expectations, prospects, competitive
environment, regulation, labor matters and availability of raw materials.
Forward-looking statements include all statements that are not historical facts
and can be identified by the use of forward-looking terminology such as
"outlook," "guidance," "anticipate," "expect," "believe," "could," "estimate,"
"feel," "forecast," "intend," "may," "plan," "potential," "project," "should,"
"target," "will," "would," and similar words, phrases or expressions and
variations or negatives of these words in this Quarterly Report on Form 10-Q. We
have based these forward-looking statements on our current views with respect to
future events and financial performance. Our actual financial performance could
differ materially from those projected in the forward-looking statements due to
the inherent uncertainty of estimates, forecasts and projections, and our
financial performance may be better or worse than anticipated. Given these
uncertainties, you should not put undue reliance on any forward-looking
statements. All of the forward-looking statements are qualified in their
entirety by reference to the factors discussed under "Risk Factors" in Part I,
Item 1A of our Annual Report and in Part II, Item 1A of this Quarterly Report on
Form 10-Q, as well as our subsequent filings with the SEC. Forward-looking
statements represent our estimates and assumptions only as of the date that they
were made. We do not undertake any duty to update the forward-looking
statements, and the estimates and assumptions associated with them, after the
date of this Quarterly Report on Form 10-Q, except to the extent required by
applicable securities laws.
This Quarterly Report on Form 10-Q contains the names of some of our owned or
licensed trademarks, trade names and service marks, which we refer to as our
brands. All of the product names included in this Quarterly Report on Form 10-Q
are either our registered trademarks or those of our licensors.
OVERVIEW
KDP is a leading beverage company in North America, with a diverse portfolio of
flavored (non-cola) CSDs, NCBs, including water (enhanced and flavored),
ready-to-drink tea and coffee, juice, juice drinks, mixers and specialty coffee,
and is a leading producer of innovative single serve brewing systems. With a
wide range of hot and cold beverages that meet virtually any consumer need, KDP
key brands include Keurig, Dr Pepper, Canada Dry, Snapple, Bai, Mott's, Core,
Green Mountain and The Original Donut Shop. KDP has some of the most recognized
beverage brands in North America, with significant consumer awareness levels and
long histories that evoke strong emotional connections with consumers. KDP
offers more than 125 owned, licensed, and partner brands, including the top ten
best-selling coffee brands and Dr Pepper as a leading flavored CSD in
the U.S., according to IRi, available nearly everywhere people shop and consume
beverages.
KDP operates as an integrated brand owner, manufacturer and distributor. We
believe our integrated business model strengthens our route-to-market and
provides opportunities for net sales and profit growth through the alignment of
the economic interests of our brand ownership and our manufacturing and
distribution businesses through both our DSD system and our WD delivery system.
KDP markets and sells its products to retailers, including supermarkets, mass
merchandisers, club stores, pure-play e-commerce retailers, and office
superstores; to restaurants, hotel chains, office product and coffee
distributors, and partner brand owners; and directly to consumers through its
websites. Our integrated business model enables us to be more flexible and
responsive to the changing needs of our large retail customers and allows us to
more fully leverage our scale and reduce costs by creating greater geographic
manufacturing and distribution coverage.
The beverage market is subject to some seasonal variations. Our cold beverage
sales are generally higher during the warmer months, while hot beverage sales
are generally higher during the cooler months. Overall beverage sales can be
influenced by the timing of holidays and weather fluctuations. Sales of brewing
systems and related accessories are generally higher during the second half of
the year due to the holiday shopping season.
COFFEE SYSTEMS
Our Coffee Systems segment is primarily a producer of innovative single serve
brewing systems and specialty coffee in the U.S. and Canada. Our brewing systems
are aimed at changing the way consumers prepare and enjoy coffee and other
beverages, both at home and away from home in places such as offices,
restaurants, cafeterias, convenience stores and hotels. We develop and sell a
variety of Keurig brewers, brewer accessories and other coffee-related
equipment. In addition to coffee, we produce and sell a variety of other
specialty beverages in K-Cup pods (including hot and iced teas, hot cocoa and
other beverages) for use with Keurig brewing systems. We also offer traditional
whole bean and ground coffee in other package types, including bags, fractional
packages and cans.

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Our Coffee Systems segment manufactures over 75% of the pods in the single
serve K-Cup pod format in the U.S. We manufacture and sell 100% of the K-Cup
pods of our own brands, such as Green Mountain Coffee Roasters, The Original
Donut Shop, Laughing Man, REVV, and Van Houtte. We have licensing and
manufacturing agreements with our partner brands, including brands such as
Starbucks, Dunkin' Donuts, Folgers, Newman's Own Organics, McCafé, Peet's
Coffee, Caribou Coffee, Eight O'Clock, Maxwell House, and Tim Hortons, and
private label arrangements. Our Coffee Systems segment also has agreements for
manufacturing, distributing, and selling K-Cup pods for tea under brands such as
Celestial Seasonings, Lipton and Tazo in addition to K-Cup pods of our own
brand, Snapple. We also produce and sell K-Cup pods for cocoa, including through
a licensing agreement for the Swiss Miss brand, and hot apple cider.
Our Coffee Systems segment manufactures its K-Cup pods in facilities in North
America that include specialty designed proprietary high-speed packaging lines
using freshly roasted and ground coffee as well as tea, cocoa and other
products. We offer high-quality coffee including certified single-origin,
organic, flavored, limited edition and proprietary blends. We carefully select
our coffee beans and appropriately roast the coffees to optimize their taste and
flavor differences. We engineer and design most of our single serve brewing
systems, where we then utilize third-party contract manufacturers located in
various countries in Asia for brewer appliance manufacturing. We distribute our
Coffee Systems products using third-party distributors, retail partners and
through e-commerce, including our website at www.keurig.com.
PACKAGED BEVERAGES
Our Packaged Beverages segment is principally a brand ownership, manufacturing
and distribution business. In this segment, we primarily manufacture and
distribute packaged beverages of our brands. Additionally, in order to maximize
the size and scale of our manufacturing and distribution operations, we also
distribute packaged beverages for our partner brands and manufacture packaged
beverages for other third parties in the U.S. and Canada.
Our larger NCB brands in this segment include Snapple, Mott's, Bai, Clamato,
Hawaiian Punch, Core, Yoo-Hoo, ReaLemon, Vita Coco coconut water, evian water,
Mr and Mrs T mixers, and Forto Coffee. Our larger CSD brands in this segment
include Dr Pepper, Canada Dry, 7UP, A&W, Sunkist soda, Squirt, Big Red, RC Cola,
Vernors and A Shoc.
Approximately 95% of our 2019 Packaged Beverages net sales came from the
manufacturing and distribution of our own brands and the contract manufacturing
of certain private label and emerging brand beverages. The remaining portion of
our 2019 Packaged Beverages net sales came from the distribution of our partner
brands such as Vita Coco coconut water, evian water, Neuro drinks, High
Brew RTD Coffee, Forto Coffee shots, A Shoc energy drinks, Peet's RTD Coffee and
Runa energy drinks. We provide a route-to-market for third party brand owners
seeking effective distribution for their new and emerging brands. These brands
give us exposure in certain markets to fast growing segments of the beverage
industry with minimal capital investment.
Our Packaged Beverages products are manufactured in multiple facilities across
the U.S. and are sold or distributed to retailers and their warehouses by our
own distribution network or by third party distributors.
We sell our Packaged Beverages products through our DSD and our WD systems, both
of which include sales to all major retail channels, including supermarkets,
fountains, mass merchandisers, club stores, e-commerce, vending machines,
convenience stores, gas stations, small groceries, drug chains and dollar
stores.
BEVERAGE CONCENTRATES
Our Beverage Concentrates segment is principally a brand ownership business
where we manufacture and sell beverage concentrates in the U.S. and Canada. Most
of the brands in this segment are CSD brands. Key brands include Dr Pepper,
Canada Dry, Crush, Schweppes, Sun Drop, Sunkist soda, A&W, 7UP, Squirt, Big Red,
RC Cola and Hawaiian Punch. Almost all of our beverage concentrates are
manufactured at our plant in St. Louis, Missouri.
Beverage concentrates are shipped to third party bottlers, as well as to our own
manufacturing systems, who combine them with carbonation, water, sweeteners and
other ingredients, package the combined product in aluminum cans, PET containers
and glass bottles, and sell them as a finished beverage to retailers. Beverage
concentrates are also manufactured into syrup, which is shipped to fountain
customers, such as fast food restaurants, who mix the syrup with water and
carbonation to create a finished beverage at the point of sale to consumers.
Dr Pepper represents most of our fountain channel volume.
Our Beverage Concentrates brands are sold by our bottlers through all major
retail channels including supermarkets, fountains, mass merchandisers, club
stores, vending machines, convenience stores, gas stations, small groceries,
drug chains and dollar stores.
LATIN AMERICA BEVERAGES
Our Latin America Beverages segment is a brand ownership, manufacturing and
distribution business, with operations in Mexico representing
approximately 90% of the segment's 2019 net sales. This segment participates
mainly in carbonated mineral water, flavored CSD, bottled water and vegetable
juice, with particular strength in carbonated mineral water, vegetable juice
categories and grapefruit flavored CSDs. The largest brands include Peñafiel,
Squirt, Clamato, Aguafiel and Crush.

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In Mexico, we manufacture and distribute our products through our bottling
operations and third party bottlers and distributors. We sell our finished
beverages through all major Mexican retail channels, including small outlets,
supermarkets, hypermarkets, convenience stores and on-premise channels. In the
Caribbean, we distribute our products through third party bottlers and
distributors. We have also begun to distribute certain products in other
international jurisdictions through various third party bottlers and
distributors.
VOLUME
In evaluating our performance, we consider different volume measures depending
on whether we sell beverage concentrates, finished beverages, K-Cup pods or
brewers.
Beverage Concentrates Sales Volume
In our Beverage Concentrates segment, we measure our sales volume as concentrate
case sales. The unit of measurement for concentrate case sales equals 288 fluid
ounces of finished beverage, the equivalent of 24 twelve ounce servings.
Concentrate case sales represent units of measurement for concentrates sold by
us to our bottlers and distributors. A concentrate case is the amount of
concentrate needed to make one case of 288 fluid ounces of finished beverage. It
does not include any other component of the finished beverage other than
concentrate. Our net sales in our concentrate businesses are based on our sales
of concentrate cases.
Packaged Beverages and Latin America Beverages Sales Volume
In our Packaged Beverages and Latin America Beverages segments, we measure
volume as case sales to customers. A case sale represents a unit of measurement
equal to 288 fluid ounces of packaged beverage sold by us. Case sales include
both our owned brands and certain brands licensed to and/or distributed by us.
Coffee Systems K-Cup Pod and Appliance Sales Volume
In our Coffee Systems segments, we measure our sales volume as the number of
appliances and the number of individual K-Cup pods sold to our customers.
COMPARABLE RESULTS OF OPERATIONS
Management believes that there are certain non-GAAP financial measures that
allow management to evaluate our results, trends and ongoing performance on a
comparable basis. In order to derive the adjusted financial information, we
adjust certain financial statement captions and metrics prepared under U.S. GAAP
for certain items affecting comparability. See Non-GAAP Financial Measures for
further information on the certain items affecting comparability used in the
preparation of the financial information. These items are referred to within
this Management's Discussion and Analysis discussion as Adjusted income from
operations, Adjusted interest expense, Adjusted provision for income taxes,
Adjusted net income and Adjusted diluted EPS.
EXECUTIVE SUMMARY
Impact of COVID-19 on our Financial Statements
The impact of COVID-19 on our third quarter net sales performance presented both
headwinds and tailwinds across the business and within the segments, requiring
strong portfolio, package and channel mix management to optimize overall
performance. The diversity of the Company's broad portfolio and extensive route
to market network enabled it to successfully navigate these mix impacts posed by
the pandemic to drive overall performance and deliver a strong third quarter
compared to the prior year period.
•      Coffee Systems experienced growth in K-Cup coffee pods for at-home

consumption and strong double-digit growth in brewers, which more than

offset the continued significant decline in away-from-home consumption due

to weaknesses in the office coffee channel, as elevated work-from-home

trends persisted throughout the quarter. Sales in the e-commerce channel

       were again very strong, as consumers continue to shift purchases to the
       on-line channel, including at the Keurig.com retail site.


•      Packaged Beverages experienced a net benefit from strong in-market

execution, driven by net sales and market share growth in the majority of

the segment's beverage portfolio. Performance in large-format channels

       continued to be strong across multi-pack and take-home packages, and
       performance in the convenience and gas channels improved during the
       quarter, as consumer mobility increased.


•      Beverage Concentrates experienced a decline due to the fountain
       foodservice component of the business, which services restaurants and
       hospitality, as a result of the impact of shutdowns and reductions in
       occupant capacity, which improved throughout the quarter, reflecting a
       modest reopening of quick-serve and other fast-casual restaurants.

• Latin America Beverages experienced a modest decline in sales volumes

       driven by limited consumer mobility in Mexico.



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The current environment has increased operating costs, requiring us to take
deliberate action. In addition to strong portfolio, package and channel mix
management to optimize overall net sales performance, we maintained our strong
cost discipline, which included the following:
•      Reduced marketing expense, given the current COVID-19 landscape which has
       reduced the effectiveness and return on these marketing investments; and

• Significantly reduced all other discretionary costs, such as travel and

entertainment expenses, within the business.



As a result of these items, COVID-19 is impacting our results, both positively
and negatively, and should be taken into account when reviewing this
Management's Discussion and Analysis. Refer to the section Uncertainties and
Trends Affecting our Business - COVID-19 Pandemic Disclosures below for further
information.
The following table sets forth our reconciliation of significant
COVID-19-related expenses. Employee compensation expense and employee protection
costs, which impact our SG&A expenses and cost of sales, are included as the
COVID-19 item affecting comparability and is excluded in our Adjusted financial
measures. In addition, reported amounts under U.S. GAAP also include additional
costs, not included as the COVID-19 item affecting comparability, as presented
in tables below.

                                Items Affecting Comparability(1)
                                                          Employee       Allowances for
                            Employee Compensation        Protection      Expected Credit
(in millions)                     Expense(2)              Costs(3)          Losses(4)       Inventory Write-Downs(5)        Total
For the third quarter of
2020:
Coffee Systems            $              7             $           5     $           -     $                       -     $      12
Packaged Beverages                      32                         4                 -                             -            36
Beverage Concentrates                    -                         -                 -                             -             -
Latin America Beverages                  -                         1                 -                             -             1
Total                     $             39             $          10     $           -     $                       -     $      49

For the first nine months
of 2020:
Coffee Systems            $             14             $           7     $           2     $                       8     $      31
Packaged Beverages                      73                        22                 8                             -           103
Beverage Concentrates                    -                         -                 4                             -             4
Latin America Beverages                  -                         1                 -                             -             1
Total                     $             87             $          30     $          14     $                       8     $     139



(1)    Employee compensation expense and employee protection costs are both
       included as the COVID-19 items affecting comparability in the
       reconciliation of our Adjusted Non-GAAP financial measures.


(2) Reflects temporary incremental frontline incentive pay and the associated

       taxes in order to maintain essential operations during the COVID-19
       pandemic. Impacts both cost of sales and SG&A expenses. Beginning in
       mid-September 2020, we have discontinued the incremental frontline
       incentive pay program.

(3) Includes costs associated with personal protective equipment, temperature

       scans, cleaning and other sanitization services. Impacts both cost of
       sales and SG&A expenses.

(4) Allowances reflect the expected impact of the economic uncertainty caused

       by COVID-19, leveraging estimates of credit worthiness, default and
       recovery rates for certain of our customers. Impacts SG&A expenses.


(5)    Inventory write-downs include obsolescence charges of $8 million for the
       first nine months of 2020. Impacts cost of sales.

Financial Overview • Net sales increased $150 million, or 5.2%, to $3,020 million for the third

quarter of 2020 compared with $2,870 million in the prior year period.

This performance reflected higher volume/mix of 6.6%, partially offset by

       lower net price realization of 0.8% and unfavorable FX translation of
       0.6%, primarily in our Latin America Beverages segment.

• Net income increased $139 million to $443 million for the third quarter of

2020 as compared to $304 million in the prior year period, reflecting

strong growth in income from operations, driven primarily by the continued

benefit of productivity and merger synergies, lower marketing expense and

higher volume/mix, partially offset by $49 million of additional pre-tax

expenses associated with COVID-19. Other favorable drivers included lower

interest expense due to continued deleveraging and the impact of a lower

effective tax rate, partially offset by a non-cash impairment on an equity

       investment.



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• Adjusted net income increased $106 million to $557 million for the third

quarter of 2020 as compared to Adjusted net income of $451 million in the

prior year period, reflecting the continued benefit of productivity and

merger synergies, lower marketing expense and volume/mix growth, which

were partially offset by lower net price realization and higher

manufacturing and operating costs associated with increased consumer

retail demand for our products. Other drivers included lower interest

expense due to continued deleveraging and the impact of a lower effective

       tax rate.


•      Diluted EPS increased 47.6% to $0.31 per diluted share as compared to
       $0.21 in the prior year period.


•      Adjusted diluted EPS increased 21.9% to $0.39 per diluted share as
       compared to Adjusted diluted EPS of $0.32 per diluted share in the prior
       year period.


•      During the first nine months of 2020, we made net repayments of $541

million related to our commercial paper notes, KDP Revolver, 2019 KDP Term

       Loan and our Notes. Additionally, we repaid $290 million and added $128
       million of structured payables during the first nine months of 2020.


•      In July 2020, we entered into a long-term franchise agreement with Polar

Beverages to manufacture and distribute Polar Seltzer sparkling seltzer

waters. The manufacture and distribution of Polar Beverages products will

launch in early markets in the fourth quarter of 2020 and is anticipated

to reach nationwide distribution throughout our DSD network in the first

half of 2021.

• Effective September 18, 2020, at market close, our common stock ceased to

be listed on the New York Stock Exchange and on September 21, 2020, the

following business day, our common stock began trading on Nasdaq's Global

Select Market at market open. Our stock ticker remains "KDP".

• Effective October 19, 2020, we were added to the Nasdaq-100 Index.

• On October 28, 2020, we announced an agreement that will allow us to sell

       and distribute certain KDP brands in 18 counties in New York and New
       Jersey. Honickman is selling these rights to a third party and we will
       enter into a simultaneous transaction with the third-party to gain

long-term access to these rights in exchange for the payment of an annual

       fee.


RESULTS OF OPERATIONS
We eliminate from our financial results all intercompany transactions between
entities included in our consolidated financial statements and the intercompany
transactions with our equity method investees.
References in the financial tables to percentage changes that are not meaningful
are denoted by "NM". See Uncertainties and Trends Affecting our Business -
COVID-19 Pandemic Disclosures for more information about the specific costs
related to COVID-19.
Non-GAAP financial measures are provided in addition to U.S. GAAP measures. Such
non-GAAP financial measures are excluded from the Results of Operations by
Segment when there is no difference between the non-GAAP and the corresponding
U.S. GAAP measure. See Non-GAAP Financial Measures for more information,
including reconciliations to the corresponding U.S. GAAP measures.

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