KDP - Key Takeaways From Keurig Dr Pepper Fourth Quarter Results

Summary

• Net sales increased by 12% during the quarter with all four segments growing at a double-digit rate.
• During 2022 management was able to finalize a strategic refinancing, extending $3 billion of bond maturities to 2029, 2032, and 2052.
• Keurig Dr Pepper has made a significant investment in the growing sports supplement market, with an $836 million investment for 30% of Nutrabolt.

Business Overview and Investment Thesis

Keurig Dr Pepper ( KDP ) is a leading coffee and beverage company in North America, with annual revenues in excess of $14 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. KDP is active in the approx. $200 billion North American non-alcoholic beverage market where the company maintains an unrivaled distribution system that enables its portfolio of more than 125 owned, licensed and partner brands.

KDP is an attractive company that offers stable returns in a quite stable market, as such its growth is highly linked to inorganic growth through acquisitions. The company currently holds a market valuation of $50 billion, with the market providing a dividend yield of approx. 2.2%. KDP is able to generate substantial free cash flows of approx. $2.5 billion on yearly basis, however it also has to repay a significant amount of debt in the coming years. After the fourth quarter results I continue to believe it would be wise to hold and either wait for a more attractive entry point or wait until more debt has been repaid.

4Q-22 Results

During the fourth quarter of FY 2022 KDP increased revenues by 12.1% to $3.8 billion, compared to $3.4 billion during the same period last year. This increase was achieved by the double-digit growth rate achieved in all of the company´s segments. Nonetheless, operating income decreased to $673 million as a result of higher cost of sales and a goodwill impairment charge of $166 million. Furthermore, the company´s net income decreased to $453 million as it did not record a gain on sale of equity method investment as it did during the same period last year.

The company did not break down the cash flow statement for the fourth quarter, however we can take a look at the yearly cash flow statement and balance sheet at the end of 2022.

KDP reported a cash flow from operations totaling $2.8 billion during FYE 2022. This is a slight decrease compared to the FYE 2021 as the company saw a surge in inventory levels which caused a cash outflow of $398 million. The company again recorded a free cash flow of $2.5 billion for the year which it used to pay dividends of $1.1 billion, make investments in companies totaling $932 million and to repurchase $379 million of common stock. As a result, the company ended the year with a slightly lower cash position of $535 million compared to $567 million at the end of 2021.

Key Takeaways

Double Digit Revenue Growth in All Segments:

Coffee Systems net sales for the fourth quarter increased by 12.7% to $1.5 billion, compared to $1.3 billion during the same period last year. Packaged Beverages net sales for the fourth quarter increased 9.9% to $1.7 billion. Beverage Concentrates net sales for the fourth quarter increased 14.3% to $447 million. Finally, Latin America Beverages segment increased revenues by 24.3% to $189 million. It should be noted that most of these increases were led by higher net price realization, displaying the strong demand KDP´s brands have despite increases in pricing. As a result of this growth, KDP achieved revenues of $14 billion during the year which by itself is another accomplishment by the company.

Management Continues to Enhance KDP Debt Maturity Profile:

In April 2022, KDP started a strategic refinancing, issuing $3 billion worth of notes maturing in 2029, 2032, and 2052. The proceeds were used to prepay and retire the remaining of 2023 notes and portions of 2025, 2028, 2038, 2048 notes. As such KDP´s management essentially, extended the company´s debt maturity profile, with 70% of the company's debt coming due after 2028. As a result, the company recorded a $169 million of loss on early extinguishment of debt. However, this gives KDP the necessary financial flexibility to keep repaying debt while comfortable returning value to shareholders and make growth investments. For example, the 30% equity acquisition of Nutrabolt, which gives the company exposure to the rapidly growing sport supplement market.

KDP Strategic Investment in the Growing Sport Supplement Market:

In December 2022 KDP announced its strategic investment into Nutrabolt. Nutrabolt is a rapidly growing, global active health and wellness company with a portfolio of brands, including C4 Energy which is one of the fastest-growing performance energy drink brands in the U.S. KDP made a cash investment in Nutrabolt of $863 million in exchange for preferred equity with a 5% annual coupon paid in cash or in-kind. The investment provides KDP with an ownership stake of approximately 30%, making KDP the largest investor in Nutrabolt behind its Founder, Chairman and CEO, Doss Cunningham.

This investment gives KDP exposure to the growing $12 billion sport-supplement market, this market is expected to increase to $22.7 billion by 2027. Finally, it should be noted that Nutrabolt is not a small company, with the company already recording revenues of $650 million during 2020.

Bottom Line

KDP continues to deliver good results with all its segments increasing revenues by double digits. Further to this management continues to give the company the necessary financial flexibility by extending debt maturities. This give KDP the opportunity to return value to shareholders while at the same time investing in growth opportunities such as the 30% equity acquisition of Nutrabolt. This acquisition gives KDP exposure to the growing sports supplement market which is expected to grow to $22.7 billion by 2027. These are great news by the company, nonetheless, I continue to rate KDP as a hold as debt still remains high. It is true that the debt maturity profile is somewhat comfortable due to the extensive free cash flow the company is able to generate, however I would encourage investors to be patient and wait for a more attractive entry point or wait until more debt has been repaid.

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