Molson Coors Brewing Company (NYSE: TAP; TSX: TPX) today reported results for the 2018 first quarter. Molson Coors president and chief executive officer Mark Hunter said:
“Adoption of Pension and Other Postretirement Benefit Accounting Pronouncement Applied Retrospectively”
"In the first quarter, which is seasonally the smallest profit quarter of the year for us, our Canadian, European and International businesses maintained their underlying progress from 2017. The U.S. beer industry had a softer-than-anticipated start to the year, which impacted both top- and bottom-line performance and which, when coupled with the U.S. distributor inventory destocking and the anticipated cycling of the indirect tax provision benefit in Europe last year, led to an underlying EBITDA reduction of 18.5 percent for our company in the first quarter. We do not see these results as indicative of our full-year performance versus our plan, and we remain committed to delivering our 2018 guidance."
Mark continued, "Looking more closely at Q1, there are three specific negative performance drivers, one of which is already behind us and another which we expect to fully reverse by year end:
- The first relates to cycling the reversal of the indirect tax provision benefit in Europe, which negatively impacted net sales and pretax income by approximately $50 million -- and is now behind us.
- The second relates to a reduction in U.S. sales to wholesalers (STWs), which declined by 6.7 percent as we under-shipped versus last year. U.S. distributor inventory levels were lower than planned, compounded by the roll out of our new ordering system at the Golden brewery, which has taken longer to ramp up than expected. Compared to last year, we under-shipped by approximately 450,000 hectoliters, which represents approximately $30 million of gross profit, and we expect this to reverse on a full-year basis, with the negative first quarter profit impact reversing primarily in the second half of this year.
- The third performance driver relates to overall industry softness with our U.S. brand volume down by 3.8 percent, as poor weather dampened overall industry demand. Our market share trends, however, remained consistent with 2017.
"Across Molson Coors, our teams are focused on our first priority, which is to drive margin expansion, bottom-line growth and strong free cash flow to enable deleverage. Our second priority remains to deliver an improved top line through our First Choice commercial excellence approach, which provides the most sustainable source of profit growth over the medium to long term. Capital allocation within our business continues to be guided by our Profit after Capital Charge, or PACC approach, as we seek to deliver Total Shareholder Returns. Our regional business plans are clear and consistent with these priorities, and we remain committed to delivering our full-year 2018 plans."
Quarterly Highlights (versus First Quarter 2017 Results)
- Net sales: $2.33 billion, decreased 4.8 percent, due to lower financial and royalty volumes, negative global mix, adoption of the new revenue recognition accounting standard (discussed in the Appendix below), and the approximate $50 million impact of cycling the indirect tax provision in Europe that was reversed a year ago. These factors were partially offset by positive global pricing and foreign currency movements. Net sales in constant currency declined 7.2 percent.
- Net sales per HL: $112.02 on a reported financial-volume basis, increased 0.1 percent. Net sales per HL on a brand-volume basis(1) in constant currency decreased 2.6 percent, driven by cycling the indirect tax provision reversal, adoption of the new revenue recognition accounting standard and geographic sales mix, partially offset by positive global net pricing.
- Volume: Worldwide brand volume of 19.1 million hectoliters decreased 3.1 percent driven by U.S., Canada and International declines. Global priority brand volume decreased 5.6 percent. Financial volume of 20.8 million hectoliters decreased 4.9 percent, and was adversely impacted by reductions in brand volumes, wholesale inventories and contract brewing.
- U.S. GAAP net income attributable to MCBC increased 33.4 percent as a result of a $328 million cash payment received in January 2018 related to a purchase price adjustment to our acquisition of the Miller International business, along with positive global net pricing, cost savings, and lower interest expense, partially offset by unrealized mark-to-market losses on our commodity positions (versus gains a year ago), lower financial volume, the impact of cycling the indirect tax provision benefit, and higher input cost inflation.
- Underlying net income (non-GAAP) decreased 39.4 percent, driven by lower financial volume, the impact of cycling the indirect tax provision benefit, global mix, and higher input cost inflation, partially offset by positive net pricing, cost savings, and lower interest expense.
- The company looks at value creation from the MillerCoors transaction through the lens of the sum of three numbers. In the first quarter, these numbers were:
- Underlying net earnings of $104.3 million, plus…
- $53 million of transaction-related cash tax benefits and…
- $13 million of transaction-related after-tax book amortization.
- To calculate this measure on a per-share basis, the company had 216.6 million weighted average diluted shares outstanding in the first quarter.
- Underlying EBITDA: Decreased 18.5 percent on a reported basis and decreased 19.7 percent on a constant-currency basis, driven by lower financial volume, the impact of cycling the indirect tax provision benefit, global mix, and higher input cost inflation, partially offset by positive global net pricing and cost savings.
- U.S. GAAP cash from operations: Net cash from operating activities for the first quarter of 2018 was $315.2 million, which represents an improvement of $433.5 million from cash used of $118.3 million in the prior year results, driven by the $328 million cash payment received in January 2018 related to a purchase price adjustment for our acquisition of the Miller International business, as well as working capital improvements and lower cash paid for pension contributions and interest.
- Underlying free cash flow: cash use of $195.1 million, which excludes the January 2018 cash payment received related to our acquisition of the Miller International business. This result represents a reduction in cash used of $26.2 million from the prior year, driven by the same factors as the increase in cash from operations, partially offset by higher cash paid for capital expenditures.
- Debt: Total debt at the end of the first quarter was $11.118 billion, and cash and cash equivalents totaled $197.9 million, resulting in net debt of $10.920 billion.
(1) Brand Volume Basis NSR/HL: Effective in the first quarter of 2018, we have revised our net sales revenue (NSR) per HL performance discussions to be on a brand volume basis, with all per-hectoliter calculations including owned and actively managed brands, along with royalty volume, in the denominator, as well as the financial impact of these sales in the numerator, unless otherwise indicated. See appendix for definitions.
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