Molson Coors Brewing Company TAP reported dismal results for first-quarter 2018 – which usually generates lowest profits for the company in comparison to other quarters. During the first quarter of 2018, both top and bottom lines dropped year over year and missed the Zacks Consensus Estimate.
Results were hampered by impacts from cycling of indirect tax provision benefit in Europe, which lowered net sales and pre-tax income by about $50 million. However, this was a quarter-specific hurdle. Results also bore the brunt of overall softness in the U.S. beer space, as well as lower U.S. sales to wholesalers (STWs) volumes.
The dismal show weighed on investors’ sentiment, as Molson Coors’ shares are down 5.2% in the pre-market trading hours. Also, this Zacks Rank #4 (Sell) stock has plunged 19.5% in a year, as against the industry’s growth of 10.4%.
Molson Coors’ earnings of 48 cents per share crashed about 40% year over year and came way below the Zacks Consensus Estimate of 80 cents. The slump is accountable to indirect tax provision benefit cycling, soft financial volumes, unfavorable global mix and input cost inflation. This was partly compensated by cost savings, improved pricing and reduced interest costs.
Net sales fell 4.8% to $2,331.5 million, which missed the Zacks Consensus Estimate of $2,436 million. The sales decline stemmed from soft financial and royalty volumes, unfavorable global mix, impact of indirect tax provision cycling in Europe and adoption of a new revenue recognition accounting standard. This was somewhat cushioned by positive currency translations and better pricing. On a constant currency basis, net sales tumbled 7.2%.
Notably net sales per hectoliter inched up 0.1% on a reported financial-volume basis, while it dipped 2.6% on a constant-currency brand-volume basis owing to the same factors that hurt net sales.
Molson Coors’ worldwide brand volume inched lower by 3.1% to 19.1 million hectoliters owing to soft U.S., International and Canada volumes. Global priority brand volumes dipped 5.6%, while financial volumes declined 4.9% to 20.8 million hectoliters. Financial volumes were hurt by lower brand volumes, wholesale inventories and contract brewing.
Underlying EBITDA was $426 million in the quarter, marking an 18.5% drop from the year-ago period. Further, underlying EBITDA slumped 19.7% on a constant currency basis due to the factors that weighed on underlying earnings per share.
The company operates through the following geographical segments.
Canada: Molson Coors Canada net sales dipped 2.5% to $283.8 million in the quarter. Net sales per hectoliter slipped 2.9% in local currency due to adoption of new revenue accounting standard. Further, Canada brand volume fell 3.3% on account of soft industry performance as well as elevated inventories at Quebec. Financial volumes (which includes contract brewing volumes) descended 4.8% as both brand volumes and contract brewing volumes decreased. Underlying EBITDA jumped 2.5% to $44.7 million, thanks to favorable currency and sales mix, partly negated by soft brand volume and lower pricing.
United States: Molson Coors now has complete ownership rights to all the brands in the MillerCoors portfolio for the U.S. market. Segment net sales dropped 5.8% to $1,647.8 million. Domestic net revenue per hectoliter, which excludes contract brewing and company-owned-distributor sales, improved 1.1% on a brand volume basis despite being hit by change in revenue accounting standard. The upside stemmed from favorable pricing, partly countered by negative mix. However, U.S. brand volume decreased 3.8% accountable to soft Premium Light volumes. In fact, sales-to-wholesalers volume (STWs), excluding contract brewing volume, declined 6.7%, mainly as a result of U.S. industry headwinds and unfavorable timing of wholesale inventories. The segment’s underlying EBITDA plunged 12.2% to $388.9 million thanks to reduced STW volumes, COGS inflation, unfavorable mix sales and reduced volumes. Better pricing, lower MG&A costs and cost savings provided some respite.
Europe: The segment reported net sales decline of 1.9% to $374.3 million in the quarter. Europe net sales per hectoliter went down 18.3% in local currency due to cycling the gain from indirect tax provision, along with the impact of updated excise-tax rules in a European market. This was partly offset by improved sales mix. Europe brand volume showed slight improvement, courtesy of growth across some above-premium brands. This also led to increased market share. Financial volume (including contract brewing and factored brands, excluding royalty volume) went up by 1%. Underlying EBITDA plunged 65.2% year over year to $24.5 million.
International: Segment net sales tumbled 7% $57.5 million. Net sales per hectoliter, on a brand-volume basis, dipped 0.5% on a currency-neutral basis. Improved pricing couldn’t offset losses from lower sales mix. Further, International brand volume shrank 7.1% in the quarter, marred by loss of Modelo contract loss in Japan and soft volumes in Mexico. This was partly cushioned by organic growth in various important markets. Segment underlying EBITDA came in at $7.1 million in the quarter, higher than $5 million in the year-ago period. This was backed by decreased MG&A costs and improved pricing.
Other Financial Updates
Molson Coors ended the quarter with cash and cash equivalents of $197.9 million, whereas net debt stood at $10.920 billion.
The company’s net cash from operating activities in the quarter came in at $315.2 million, which marks a significant improvement from the year-ago period. The company used underlying free cash flow of $195.1 million.
Molson Coors remains committed toward achieving margin growth, bottom-line improvement and solid free cash flow. Also, the company aims to augment top line through its First Choice commercial excellence plans. The company also remains focused on disciplined capital allocation, driven by its Profit after Capital Charge, or PACC approach. With its regional plans in line with these strategic priorities, management remains optimistic about its 2018 goals.
Management retained its previously issued forecasts for 2018. Molson Coors continues to anticipate generating cost savings of roughly $210 million in 2018, while it expects cost savings to reach $600 million by 2019. Further, in 2018, it expects to deliver underlying free cash flow of around $1.5 billion in 2018, (plus or minus 10%). Capital spending is expected to be roughly $670 million (plus or minus 10%). Underlying tax rate for the year is likely to range from 18-22%, thanks to the latest tax reforms.
Molson Coors expects 2018 to remain impacted by new revenue recognition standard (which became effective in 2018 beginning) and the updated pension guidance.
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