Keurig Dr Pepper Inc.

The stable rating outlook on KDP reflects our expectations that it will grow earnings and cash flow and rapidly reduce leverage. We believe KDP will generate 3%-4% top-line growth and maintain the EBITDA margin over 32% over the next two years. We forecast KDP will generate $1.6 billion in DCF in 2020 and $1.4 billion in 2021. This should enable the company to reduce leverage toward the mid-3x area in third-quarter 2020 (two years after the close of the merger). We could lower our rating on KDP if the company cannot reduce leverage to below 4x in 2020 due to not achieving anticipated cost-cutting goals, operating performance deterioration (possibility because of a prolonged severe recession), or if management's financial policies

...Keurig Dr Pepper Inc. (KDP) is executing well in this unpredictable and difficult environment. KDP has seen a spike in demand, initially because of pantry loading and now because of strong replenishment demand due to shelter-in-place mandates related to the COVID-19 pandemic. KDP's volume grew 5.6% for K-Cup pods, despite a significant decrease in away-from-home business late in the first quarter. Its package segment posted a 9.1% increase, with volume mix up 8.7% in the quarter. Consolidated sales, excluding foreign exchange, rose 4.5%, and the EBITDA margin expanded to 30.1% from 29.2% in the year-ago quarter because of positive mix, productivity programs, and merger synergies. We expect at-home consumption to exceed lost sales in the away-from-home channel in calendar year 2020, but sales will be flat in the second quarter because of the massive number of closures of restaurants, bars, entertainment venues, and office buildings. We believe KDP's broad product portfolio and its scalable,...

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