Molson Coors Reports Higher Worldwide Volume, Gross Margin, Net Income & Underlying After-Tax Income for the First Quarter

Molson Coors Brewing Company (NYSE: TAP; TSX: TPX) today reported a 28.1 percent increase in underlying after-tax income for the first quarter 2016, driven by worldwide volume growth and lower cost of goods sold. These factors more than offset negative sales mix, higher brand spending globally, and a higher underlying tax rate this year. On a U.S. GAAP basis, net income from continuing operations attributable to MCBC more than doubled to $159.3 million, driven by strong underlying performance and a gain on the sale of our Vancouver brewery.

Molson Coors president and chief executive officer Mark Hunter said, “In the first quarter, we continued to focus on our First Choice ambition and on building a stronger brand portfolio, delivering value-added innovation, strengthening our core brand positions through incremental marketing investments, and continuing to premiumize our portfolio. We began to see the benefits flow to our top-line performance, as we grew worldwide volume, improved core brand momentum in key markets, introduced fast-growing innovations in all our businesses, and achieved strong above-premium growth globally, including in craft, flavored malt beverages and cider. We also continued to strengthen our business through improvements to our sales execution and revenue management capabilities, increased efficiency of our operations, and implementation of common global systems. As a result, Molson Coors reported significantly expanded gross, operating and pretax margins globally, along with growth of more than 28 percent in total-company underlying after-tax earnings, and more than 15 percent growth in underlying EBITDA versus a year ago. At the same time, we completed a common stock offering in January to fund about 20 percent of the pending MillerCoors transaction, and we made solid progress in our planning for the integration of MillerCoors and the Miller global brand portfolio. Completion of this game-changing transaction is still expected in the second half of this year, and we intend to be ready to go on day one following the close."

Mark added, "In the balance of 2016, we will continue to focus on our First Choice for consumers and customers ambition — all driven through our Profit After Capital Charge lens and with the intent to drive total shareholder returns."

Underlying EBITDA and Free Cash Flow

Underlying EBITDA was $263.4 million in the first quarter, a 15.2 percent increase from a year ago.

Underlying free cash flow through the first quarter of 2016 was a cash use of $206.5 million due to seasonality. This represents an increase in cash used of $44.3 million from the prior year, primarily driven by a decreased benefit from working capital changes when adjusting for special and non-core items. Note that this free cash flow result excludes proceeds from the sale of the Company’s Vancouver brewery, which were received on April 1, 2016, and will be excluded from the calculation of underlying free cash flow in the second quarter.

Foreign Exchange

The Company’s first quarter underlying consolidated pretax income includes the negative effect of foreign currency movements totaling $0.3 million. Negative currency impacts in the quarter were $1.4 million in Canada, $0.4 million in Europe, and $0.2 million in International. Foreign currency movements were $1.7 million positive in Corporate.

Effective Income Tax Rates

The Company’s first quarter effective income tax rate was 11.4 percent on a reported basis and 20.1 percent on an underlying basis. The underlying effective tax rate was higher than prior year primarily due to higher underlying pretax income this year and the cycling of certain discrete tax benefits a year ago.

Debt

Total debt at the end of the first quarter was $3.037 billion, and cash and cash equivalents totaled $2.603 billion, resulting innet debt of $0.434 billion, which is significantly lower than the prior year primarily due to the proceeds received from our January 2016 equity offering.

First Quarter Business Segment Results

The following are the Company’s first quarter 2016 results by business segment:

United States Business (MillerCoors)⁽²⁾

Molson Coors underlying U.S. segment equity income increased 22.1 percent to $157.9 million in the quarter.

MillerCoors Operating and Financial Highlights

MillerCoors underlying net income for the quarter increased 22.2 percent to $372.1 million, driven by higher net pricing, positive sales mix, timing of shipments and lower cost of goods sold.

MillerCoors domestic sales-to-retailers volume (STRs) declined 1.3 percent for the quarter on a trading-day-adjusted basis. Domestic sales-to-wholesalers volume (STWs) increased 1.3 percent. Domestic net revenue per hectoliter, which excludes contract brewing and company-owned-distributor sales, grew 1.5 percent due to favorable net pricing and positive sales mix. Total company net revenue per hectoliter, including contract brewing and company-owned-distributor sales, increased 1.3 percent. Contract brewing volumes decreased 1.3 percent.

Cost of goods sold (COGS) per hectoliter decreased 5.0 percent, driven by lower aluminum and fuel pricing, along with supply chain cost savings. These factors were partially offset by brewery inflation. Marketing, general and administrative (MG&A) expense increased 5.3 percent, driven primarily by higher employee-related expenses and information technology investments.

Depreciation and amortization expenses for MillerCoors were $117.1 million in the first quarter, which include the accelerated depreciation related to the planned closure of the Eden brewery of $35.9 million. Additions to tangible and intangible assets totaled $89.9 million in the first quarter.

Canada Business

Canada underlying pretax income increased 20.7 percent to $37.3 million in the quarter, primarily due to a temporary reduction in distribution costs, lower pension expenses, and results of cost savings initiatives. These factors were partially offset by the impact of lower volume, higher brand investments and a $1.4 million negative impact from foreign currency movements. On a constant-currency basis, underlying pretax income increased 25.2 percent.

STRs decreased 5.2 percent on a reported basis in the first quarter primarily due to the termination of the Miller brands agreement and increased competitor trade spending and pricing activities, as well as weak economic conditions in Western Canada. Excluding the Miller brands from our results⁽³⁾, our STRs declined 1.6 percent and market share declined just over one-half point. Molson Coors Canada sales volume decreased 4.7 percent in the first quarter. Net sales per hectoliter decreased 1.0 percent in local currency, driven by negative mix.

COGS per hectoliter decreased 8.7 percent in local currency, due to a temporary reduction in distribution costs and lower pension expenses, along with cost savings and a shift in sales mix toward lower-cost products. MG&A expense decreased 0.3 percent in local currency, driven by lower overhead costs, partially offset by higher brand investments.

Europe Business

Europe underlying pretax income decreased $5.0 million to a loss of $0.5 million in the quarter, due to higher brand investments and amortization expenses, lower net pension benefit, the termination of the Heineken contract brewing arrangement in the U.K., and unfavorable foreign currency movements, partially offset by higher sales volume and lower overhead costs. Foreign currency movements negatively impacted underlying results by $0.4 million.

Europe sales volume increased 5.2 percent, driven by growth in seven out of 11 countries in the region, along with the timing of Easter and the addition of the Staropramen and Rekorderlig brands in the U.K. this year. Europe net sales per hectoliter decreased 0.5 percent in local currency, due to lower contract brewing volume. Excluding the impact from the termination of the Heineken brewing agreement, positive brand and geographic mix was partially offset by negative net pricing in the quarter.

COGS per hectoliter increased 0.6 percent in local currency, driven by mix shift to higher-cost brands and geographies.

MG&A expense increased 5.9 percent in local currency, due to higher marketing investments and brand amortization expenses, partially offset by lower overhead costs.

International Business

The International segment posted an underlying pretax loss of $2.3 million in the first quarter, versus a loss of $5.4 million a year ago, primarily driven by favorable sales mix and lower MG&A expenses due to the substantial restructure of our China business in 2015. Foreign currency movements negatively impacted underlying pretax results by $0.2 million in the first quarter.

Total International sales volume, including royalty volume, decreased 0.7 percent, driven by the repatriation of our Staropramen U.K. volume to our Europe segment, along with the volume impact of our China restructure. These factors were largely offset by volume from our launch of Coors Light in Colombia and strong growth in Latin America, India and Japan. Net sales per hectoliter increased 9.7 percent, driven by favorable sales mix changes.

COGS per hectoliter increased 10.4 percent, due to sales mix changes. International MG&A expense decreased 13.0 percent, due to lower marketing investments and overhead costs.

Corporate

Underlying Corporate pretax loss totaled $53.4 million for the first quarter, a $3.9 million improvement versus a $57.3 million loss in the prior year, driven by lower underlying interest expense and favorable foreign currency movements.

Special and Other Non-Core Items⁽⁴⁾

The following special and other non-core items have been excluded from underlying results:

During the quarter, Molson Coors recognized a net special benefit of $108.6 million, primarily driven by a $110.4 million gain on the sale of our Vancouver brewery in British Columbia, which was completed in the first quarter. This was partially offset by asset abandonment costs of $1.1 million in Canada related to the Vancouver brewery and $2.3 million in Europe related to the closure of our Alton, Plovdiv and Burton South breweries.

During the quarter, MillerCoors recognized special charges of $36.9 million related to the planned closure of the Eden, North Carolina, brewery. Our proportionate share of the special charges is $15.5 million.

Other non-core items resulted in a $51.4 million net loss, which was driven by costs incurred in connection with the pending acquisition of MillerCoors and the Miller global brand portfolio, which were slightly offset by unrealized mark-to-market net gains on commodity hedges.