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Molson Coors' 1Q Earnings, Revs Lag

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Global brewer Molson Coors Brewing Company (TAP - Free Report) reported first quarter 2013 adjusted earnings of 30 cents per share, missing the Zacks Consensus Estimate of 35 cents per share by 14.3%. The results declined 36.2% from the prior-year earnings of 47 cents per share, mainly due to debt service costs related to the acquisition of StarBev operations (June 2012). Unfavorable currency impact, increased marketing spending for brands, and poor weather in key markets also led to the decline in the quarter.

Revenues and Operating Profits

Net sales, including excise tax, grew 19.8% to $828.5 million in the quarter compared with $691.4 million reported a year ago due to the addition of the StarBev operations. Revenues, however, lagged the Zacks Consensus Estimate of $862 million. Total worldwide beer volume increased 20.3% in the quarter to 11.9 million hectoliters.

Underlying (excluding special and other non-core items) pre-tax income plummeted 38.5% year over year to $63.3 million in the first quarter of 2013. Currency headwinds reduced the underlying pre-tax income by $6 million in the quarter.

Segment Details

The company operates through the following geographical segments.

Canada: Molson Coors’ Canada segment net sales declined 1.7% to $395.6 million in the quarter due to 1.9% decline in sales volume. The segment reported underlying pretax income of $37.3 million, down 18.9% from the prior-year quarter due to lower volume, higher marketing spending and unfavorable currency impact. On a constant currency basis, underlying pretax income declined 17%.

United States (MillerCoors): MillerCoors’ net sales climbed 1.6% to $1.79 billion in the first quarter of 2013. MillerCoors’ underlying net income decreased 1.2% to $271.9 million due to lower beer volumes, higher commodity costs and increased marketing spending to support the launch of Redd’s Apple Ale and Third Shift Amber Lager brands.

Europe: The segment includes the operations of the U.K. segment combined with the results of operations for Central Europe, excluding the Central Europe global export and license business.

The segment reported net sales of $406.4 million in the first quarter of 2013, up 2.3% from the prior-year quarter driven by StarBev operations. Sales volume declined 1%, primarily due to poor weather in March across the region, along with increased competition in Romania and Hungary.

The segment’s underlying pretax income improved $8.6 million to a loss of $3.8 million in the first quarter, driven by positive net pricing and lower acquisition costs. Unfavorable currency, however, reduced Europe results by approximately $3 million.

Molson Coors International (‘MCI’): Segment net sales declined 3.9% to $27.0 million in the quarter. The segment reported underlying pretax loss of $6.1 million, much better than a loss of $8.6 million in the prior-year quarter due to lower marketing expense, the net positive impact of business transfers between Europe and International segments, elimination of losses in the China joint venture, which was deconsolidated in the third quarter of 2012 and a strong performance in the Latin America export business. Sales volume increased 64% in the segment due to the inclusion of the Central Europe export business.

Our Recommendation

Overall, we are encouraged with the company’s strong brand portfolio, continuous innovation and cost-saving initiatives. Moreover, we believe that the company’s acquisition of the StarBev business significantly enhanced the company’s portfolio of premium brands. It has also created opportunities for the company in Central Europe to extend its key brands, taking advantage of the attractive beer market.

In addition, Molson Coors continues to focus on its strategy of maximizing profitable growth opportunities in the core markets and expanding into new and emerging markets. The company is also undertaking restructuring initiatives to reduce overhead costs and boost profitability.

However, the company’s susceptibility to the global economic downturn, predominantly in mature and low-growth markets, coupled with currency headwinds undermine its growth prospects and profitability. Also, debt servicing costs related to the StarBev acquisition will impact earnings in the coming quarters. Molson Coors currently holds a Zacks Rank #3 (Hold).

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