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Molson Coors (TAP) Beats Q3 Earnings Estimates, Stock Down

Zacks Equity Research

Molson Coors Brewing Company TAP reported mixed third-quarter 2019 results, wherein the top line missed estimates but the bottom line beat the same. However, adjusted earnings and sales declined on a year-over-year basis. This marked a beat after two straight earnings miss and the fourth consecutive negative sales surprise. The top line was impacted by soft volume across all segments, owing to a challenging industry backdrop.

Further, the company announced a revitalization plan to achieve sustainable top-line growth by improving efficiency and unlocking resources to reinvest in business opportunities.

Shares of Molson Coors declined nearly 2.9% in the pre-market trading session. However, the Zacks Rank #3 (Hold) company’s shares have gained 1.3% in the past three months against the industry’s decline of 15.9%.

 



Delving Deeper

Molson Coors’ underlying adjusted earnings of $1.48 per share declined 19.6% year over year but beat the Zacks Consensus Estimate of $1.46. The decline was attributed to soft volume, inflation, higher underlying effective tax rate and cycling a favorable resolution of a vendor dispute in the United States. This was partly negated by positive global pricing and mix, cost savings, and reduced incentive compensation, restructuring charges and marketing expenses.

Molson Coors Brewing Company Price, Consensus and EPS Surprise

 

Molson Coors Brewing Company Price, Consensus and EPS Surprise

Molson Coors Brewing Company price-consensus-eps-surprise-chart | Molson Coors Brewing Company Quote


The aforementioned factors, except for the effects of the higher underlying effective tax rate, led to a decline in the company’s underlying EBITDA, which moved down 7.1% to $702.6 million year over year. Further, underlying EBITDA slipped 5.6% year over year in constant currency.

Net sales declined 3.2% to $2,841.6 million, missing the Zacks Consensus Estimate of $2,861 million. The top-line miss can be attributed to lower volumes, partially offset by solid net sales per hectoliter growth. On a constant-currency basis, net sales fell 2%.

Notably, net sales per hectoliter rose 2.5% on a reported financial-volume basis. Moreover, net sales per hectoliter on a brand volume basis improved 3% in constant currency, owing to favorable pricing in all segments and positive global mix due to the company’s focus on portfolio premiumization.

Molson Coors’ worldwide brand volume declined 2.4% to 24.7 million hectoliters and financial volume fell 5.5% to 25 million hectoliters. The decline was mainly attributed to soft volume in all segments, driven by a challenging industry environment. In addition to these, financial volume was hurt by the timing of customer inventory levels in the United States and Canada as well as lower contract brewing volume.

Segmental Details

The company operates through the following geographical segments.

Canada: Molson Coors’ Canada net sales declined 5.8% to $366.3 million on a reported basis and 4.9% in constant currency, driven by volume declines. This was partly compensated by 2.7% rise in net sales per hectoliter (brand volume basis), in constant currency, driven by higher net pricing. Canada brand volume fell 5.1% and financial volume decreased 8.4%, owing to industry declines. Financial volume was further impacted by reduced contract manufacturing volume and negative impacts of timing of customer inventory levels. Underlying EBITDA moved down 13.9% to $96.9 million year over year, with a constant-currency decline of 12.3%.

United States: Molson Coors now has complete ownership rights to all the brands in the MillerCoors portfolio for the U.S. market. Net sales for the segment dropped 2.3% to $1,890.5 million on reported and constant-currency basis mainly due to lower shipment volumes. This was partly offset by 4.3% increase in net sales per hectoliter (on a brand-volume basis) due to positive net pricing and sales mix.

However, U.S. brand volume declined 3.9%, owing to declines in the Economy and Premium Light segments, offset by rise in the Above Premium portfolio trends. Sales-to-wholesalers (STWs) volume, excluding contract brewing, declined 6.2% on lower brand volume and quarterly timing of distributor inventories. The segment’s underlying EBITDA declined 8.6% year over year to $481.1 million.

Europe: The segment reported net sales decline of 3.4% to $558 million but rose 1.7% in constant currency. Net sales in constant currency benefited from 2.9% increase in net sales per hectoliter (brand-volume basis) in constant currency due to positive pricing and favorable sales mix, offset by lower brand volume. Europe brand and financial volume declined 0.7% and 0.3%, respectively, on soft industry demand. Underlying EBITDA declined 5.1% year over year to $136.8 million but rose 0.6% in constant currency.

International: Net sales for the segment declined 15.7% to $56.5 million and 15.5% in constant currency. This was driven by lower net sales per hectoliter and brand volume. Net sales per hectoliter, on a brand-volume basis, declined 7.6% and International brand volume dropped 8.6%, owing to negative geographic mix, offset by positive net pricing. The segment’s underlying EBITDA was $7.7 million, reflecting year-over-year improvements of 165.5% on a reported basis and 189.7% on a constant currency basis. This is primarily attributed to lower MG&A expenses, offset by soft volume.

Other Financial Updates

Molson Coors ended the reported quarter with cash and cash equivalents of $410.2 million, and total debt of $9,252 million. This resulted in net debt of $8,842 million as of Sep 30, 2019.

Net cash used in operating activities for the nine months ended Sep 30, 2019, was $1,288.2 million. Underlying free cash flow was $884.8 million.

Revitalization Plan Details

Under the Revitalization plan, the company intends to invest in iconic brands and growth opportunities in the above-premium beer space; expand beyond beer without hampering the support for its existing large brands; and creating digital competencies for commercial functions, supply-chain-related system capabilities and employees.

To facilitate these investments, the company plans to generate savings of nearly $150 million by simplifying structure. It plans to streamline its business units into two segments — North America and Europe. Currently, the company has a corporate center and four business units, including MillerCoors in the United States, Molson Coors Canada, Molson Coors Europe and Molson Coors International.

The North America business unit will include operations in the United States, Canada and corporate center. The Europe unit will operate as a stand-alone segment. The existing Molson Coors International segment will be split, with Latin America operations reporting under the North America business unit, and Africa and the Asia Pacific reporting under the European business unit. The company expects these changes in its operating structure to be effective by January 2020, which will be reflected in operating results, starting from the first quarter of 2020.

Additionally, the company plans to reduce its office footprint to drive efficiency and enable growth. For this, it will close the Denver office and designate the Chicago office as the headquarters of the North America business unit. Further, it will consolidate functional support roles from various offices across the country to its Milwaukee, WI-based office. Consequently, the company expects to reduce headcounts by nearly 400-500, primarily in the existing United States, Canada and International segments as well as Corporate operations. The company expects these consolidations to be completed by the end of 2021. These actions are likely to attract cash and non-cash charges of about $120-$180 million, which will be spread across the balance of this year as well as 2020 and 2021.

Moreover, the company expects to change its name to Molson Coors Beverage Company to more precisely present its intent to expand beyond beer and into other growth adjacencies. Its name change will be legalized in January 2020.

Outlook

Management reiterated its guidance for 2019 and provided an initial view for 2020. Molson Coors is on track with its target of generating total cost savings of $700 million between 2017 and 2019. In 2019, the company expects to deliver underlying free cash flow of around $1.4 billion (plus or minus 10%).

Capital spending is expected to be roughly $700 million (plus or minus 10%). Underlying tax rate for the year is likely to be 18-22%. Additionally, net interest expenses are projected to be $275 million (plus or minus 5%).

Further, consolidated underlying COGS per hectoliter is likely to increase in a mid-single digit on a constant-currency basis. The company recently paid out a dividend of 57 cents on Sep 13, 2019. This was in line with its ongoing target of 20-25% of the prior year’s underlying EBITDA.

For 2020, the company expects flat to low-single-digit decline in net sales, on a constant currency basis. Underlying EBITDA is expected to decline in mid-single digits year over year. Underlying free cash flow is anticipated to be $1.1 billion (plus or minus 10%).

Further, the company expects cost savings of $450-$600 million under the 2020-2022 program.

Don’t Miss These Better-Ranked Beverage Stocks

Britvic PLC BTVCY, with long-term earnings per share growth rate of 4.5%, currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Boston Beer Company Inc SAM has long-term earnings per share growth rate of 10%. The stock carries a Zacks Rank #2 (Buy) at present.

Carlsberg AS CABGY, also a Zacks Rank #2 stock, has long-term earnings per share growth rate of 5%.

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