WATERBURY, Vt. – Keurig Green Mountain, Inc. (Keurig) (NASDAQ: GMCR), a leader in specialty coffee, coffee makers, teas and other beverages with its innovative brewing technology, today announced its business results for the 13 weeks ended December 27, 2014.
“Keurig is pleased to deliver earnings per share in line with our outlook. Revenue came in below our expectations primarily due to a weaker than expected holiday season for brewers, including the effect of the voluntary recall on certain MINI Plus brewers, and greater than expected retailer portion pack inventory reductions.
We believe these factors are transitory and, while the impact to the holiday season for our hot platform was disappointing, we remain very enthusiastic about our opportunity to grow and premiumize at-home beverages across both our hot and cold platforms,” said President and CEO, Brian Kelley.
First Quarter Fiscal 2015 Financial Review
Net Sales by Product
Net sales of $1.4 billion were in-line with the prior year quarter primarily driven by lower brewer and accessory sales partially offset by growth in portion packs.
Net sales growth in the quarter was negatively impacted by approximately 3 percentage points due to certain retailer customers ordering portion packs more aggressively in the fourth quarter of fiscal year 2014 ahead of our SAP implementation and approximately 1 percentage point from foreign currency exchange rates.
Excluding the impact of foreign currency exchange rates and SAP pre-ordering, total net sales grew approximately 4% and total Keurig beverage system sales grew approximately 5%.
Net sales for the U.S. segment increased 2% while sales of the Canada segment declined 12% on a reported basis and 6% excluding the impact of foreign currency exchange rates.
Total portion pack net sales increased 9% in the quarter while brewers and accessories net sales declined 18%. Total net sales growth was negatively impacted by a 17% decrease in other product net sales in the quarter.
Portion Packs
- The 9% increase in portion pack net sales compared to the prior year period was due to a 13% increase in equivalent servings2 volume and a 2 percentage point increase due to net price realization partially offset by a 6 percentage point decrease due to product mix and a roughly 1 percentage point negative impact from foreign currency exchange rates.
Brewers and Accessories
- For the quarter, 4.5 million Keurig® system brewers were sold including 4.3 million sold by Keurig and 0.2 million reported sold by Keurig’s licensed brewer partners. This brewer shipment number does not account for consumer returns.
- The 18% decline in Keurig’s brewer and accessory net sales compared to the prior year period was due to a 12% decline in brewer sales volume, driven largely by weaker sales of MINI Plus brewers. Brewer net price realization declined by 8 percentage points and foreign currency exchange rates negatively impacted net sales by roughly 1 percentage point. This was partially offset by 3 percentage points of positive brewer mix.
- Additionally, accessory net sales declined 15% compared to the prior year period.
Other Products
- Sales of other products declined $14 million, or 17%, during the quarter from the prior year period primarily due to the continuing demand shift from traditional coffee package formats to portion packs.
- For the quarter, gross margin was even with prior year at 33.5% of net sales. The following table quantifies the changes in gross margin period to period:
GAAP SG&A increased 5%, representing 17.9% of net sales for the quarter as compared to 17.1% in the prior year period. Non-GAAP SG&A increased 4% representing 16.9% of sales for the quarter as compared to 16.3% in the prior period. The increase in SG&A was driven by higher research and development expenses including significant investments in the forthcoming Keurig cold system.
- GAAP operating income declined 5%, representing 15.6% of net sales for the quarter, down 70 basis points from 16.3% in the prior year period.
- Non-GAAP operating income declined 4%, representing 16.6% of net sales in the quarter, down 60 basis points from 17.2% in the prior year period.
- The Company’s effective income tax rate was 35.7% for the quarter as compared to 36.6% in the prior year period.
- Diluted weighted average shares outstanding for the first quarter were 164 million, up 8% from 152 million in the prior year period as a result of 16.7 million shares and 1.4 million shares issued in connection with the Coca-Cola and Lavazza equity transactions3, respectively. Such transaction-related dilution was offset, in part, by the Company’s share repurchases under its previously announced share repurchase authorizations including a $700 million accelerated share repurchase (ASR) agreement.
- GAAP diluted EPS declined 10% from the prior year period to $0.82.
- Non-GAAP diluted EPS declined 8% from the prior year period to $0.88. Non-GAAP EPS excluding the dilution from the Coca-Cola and Lavazza Equity Transactions and foreign exchange was even with the prior year period.
Balance Sheet & Cash Flow Highlights
Frances G. Rathke, Chief Financial Officer stated, “We ended the first quarter with net cash and other cash assets of over $600 million, and combined with a strong and flexible balance sheet, we remain well positioned to invest in innovation and organic growth while continuing to return meaningful cash to shareholders.
This includes our dividend, which was raised by 15% last quarter and a share repurchase authorization which stands at $1.1 billion at the end of the first quarter.”
(1) Free cash flow is calculated by subtracting capital expenditures for fixed assets from net cash provided by operating activities as reported in the unaudited statement of cash flows.
Share Repurchases
During the first quarter, the Company repurchased a total of 586,000 shares at a cost of $81 million. From the inception of its Board authorized share repurchase program through the end of the Company’s first fiscal quarter of 2015, the Company has repurchased a total of 17.5 million shares at an average price of $67.94 for a total cost of $1,188 million.
This was achieved through a combination of the previously announced ASR, open market purchases and 10(b)5-1 plans, including $490 million of ASR repurchases subject to final price adjustment.
Dividend Declaration
Keurig’s Board of Directors has declared a regular quarterly cash dividend of $0.2875 per share of the Company’s common stock. The quarterly cash dividend will be paid on April 30, 2015 to shareholders of record as of the close of business on March 31, 2015.
Business Outlook and Other Forward-Looking Information
“Looking ahead, as a result of certain factors that impacted the first quarter, we now expect revenue to grow mid- to high-single digits in fiscal year 2015,” said Kelley.
“Our innovative technology and growing installed base continue to attract premier beverage brands and, with the signing of recent agreements, we have further extended our unrivalled network of partnerships. We are focused on what we believe is a significant opportunity to grow and premiumize at-home hot beverages and we are on track to launch our Keurig cold system in the fall.”
The Company updated its outlook for fiscal year 2015 and provided its outlook for the second quarter:
Fiscal Year 2015
- Net sales growth in the mid-single to high-single digits compared to fiscal year 2014
- An annual effective tax rate of approximately 34% to 35%
- Non-GAAP EPS growth of mid-single digits. This outlook: ◦ Includes an approximate $0.27 dilutive impact from the fiscal 2014 Coca-Cola and Lavazza Equity Transactions
◦ Includes an estimated $0.15 headwind from foreign currency exchange
◦ Excludes any additional actions the Company may take to offset dilution during fiscal year 2015
◦ Excludes the amortization of identifiable intangibles related to the Company’s acquisitions and legal and accounting expenses related to the Company’s pending securities and stockholder derivative class action litigation and antitrust litigation
- Free cash flow in the range of $225 million to $325 million
- Capital investment in the range of $425 million to $475 million
Second Quarter 2015
- Net sales growth in the mid-single digits over the second quarter of fiscal year 2014
- An effective tax rate of approximately 36% to 37%
- Non-GAAP EPS in a range of $1.00 to $1.05 which: ◦ Includes an approximate $0.08 dilutive impact of the fiscal 2014 Coca-Cola and Lavazza Equity Transactions
◦ Includes an estimated $0.07 headwind from foreign currency exchange
◦ Excludes any additional actions the Company may take to offset dilution during the quarter
◦ Excludes the amortization of identifiable intangibles related to the Company’s acquisitions and legal and accounting expenses related to the Company’s pending securities and stockholder derivative class action litigation and antitrust litigation
1 Certain items in this press release are designated as “Non-GAAP” and represent non-GAAP financial measures that exclude certain items. Please see the attached “GAAP to Non-GAAP Reconciliation” to find disclosure and reconciliation of non-GAAP financial measures, as well as a discussion in this release as to why the Company is presenting such non-GAAP measures.
2 Equivalent servings translates our multiple pack sizes, including K-Cup, K-Carafe and Bolt packs, into a common serving
3 The Company issued 16.7 million shares as part of the transaction with The Coca-Cola Company, which closed February 27, 2014 and another 1.4 million shares as part of the transaction with Luigi Lavazza S.p.A, which closed April 7, 2014 (the Coca-Cola and Lavazza Equity Transactions).
Conference Call and Webcast
Keurig will be discussing these financial results with analysts and investors in a conference call and live webcast available via the Internet at 5:00 p.m. ET today, February 4, 2015. The call is accessible via live webcast from the events section of the Investor Relations portion of the Company’s website at http://investor.keuriggreenmountain.com/events.cfm. The Company archives the latest conference call for a period of time. A replay of the conference call also will be available by telephone at (719) 457-0820, passcode 1811595 from 9:00 p.m. ET on February 4, 2015 through 9:00 p.m. ET on Monday, February 9, 2015.
