Molson Coors Beverage Company — Q3 2020 Form 10-Q Summary
Business context and reporting period
Molson Coors Beverage Company filed an unaudited Form 10-Q for the three and nine months ended September 30, 2020. The company operates primarily through North America and Europe segments following a January 2020 management restructuring. Results were materially affected by COVID-19-related closures and capacity restrictions in bars, restaurants, sporting venues and other on-premise channels.
Financial performance and key metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $2,753.5 million | $2,841.6 million | $7,359.7 million | $8,093.2 million |
| Financial volume | 23.789 million hectoliters | 25.044 million | 64.803 million | 70.956 million |
| Gross profit | $1,202.5 million | $1,156.2 million | $2,873.1 million | $3,235.0 million |
| Approximate gross margin | 43.7% | 40.7% | 39.0% | 40.0% |
| Operating income (loss) | $508.3 million | $(237.3) million | $873.8 million | $453.5 million |
| Approximate operating margin | 18.5% | (8.4%) | 11.9% | 5.6% |
| Net income (loss) attributable to MCBC | $342.8 million | $(402.8) million | $420.8 million | $78.0 million |
| Diluted EPS | $1.58 | $(1.86) | $1.94 | $0.36 |
| Operating cash flow | Not separately provided | Not separately provided | $1,493.2 million | $1,288.2 million |
Q3 net sales declined 3.1% and financial volume declined 5.0% year over year. Nine-month net sales declined 9.1% and financial volume declined 8.7%. Worldwide brand volume fell 5.2% in Q3 and 6.6% for the first nine months.
Cash and cash equivalents were $731.3 million at September 30, 2020, compared with $523.4 million at December 31, 2019. Nine-month capital expenditures paid were $456.4 million. Net cash used in investing activities was $451.3 million and net cash used in financing activities was $841.3 million.
Total debt, including the current portion and short-term borrowings, was approximately $8.4 billion at September 30, 2020, comprising $8.1 billion of long-term debt including current maturities and $232.7 million of short-term borrowings. The company had approximately $1.3 billion available under its $1.5 billion revolving credit facility at September 30, 2020. It was in compliance with debt covenants.
Material changes versus the prior comparable period
- Profitability improved substantially because Q3 2019 included a $668.3 million North America goodwill impairment charge. Q3 2020 special items were $59.7 million versus $703.3 million in Q3 2019.
- Q3 2020 gross profit increased despite lower sales, supported by pricing, product and package mix, cost savings and lower marketing and general and administrative expenses.
- North America income before taxes increased to $400.8 million from a $287.4 million loss, while Europe income before taxes declined to $40.9 million from $52.9 million. Europe’s nine-month loss before taxes was $46.9 million versus income of $57.9 million in 2019.
- Marketing, general and administrative expense declined to $634.5 million in Q3 and $1,788.7 million for the nine months, reflecting reduced marketing activity, cost mitigation and revitalization-plan savings.
- Operating cash flow increased by $205.0 million year over year, primarily due to favorable working-capital timing and lower interest paid. More than $200 million of temporary tax-payment deferrals supported working capital and cash flow.
- The company repaid $500 million of 2.25% notes in March 2020 and CAD 500 million of 2.75% notes in September 2020, while issuing or retaining commercial paper borrowings to support liquidity.
- Regular quarterly dividends were suspended in May 2020 for the remainder of 2020.
Guidance, outlook, risks and unusual items
- The company withdrew its detailed 2020 and longer-term financial outlook because the pandemic and on-premise demand remained too unpredictable.
- Management expected on-premise sales to remain below pre-pandemic levels, with off-premise growth only partially offsetting the decline. Management also expected continued packaging constraints, particularly for aluminum cans.
- Management expected Q4 U.S. domestic shipments to exceed brand-volume trends as distributor inventories were rebuilt, with higher Q4 marketing spending to support core brands, Blue Moon LightSky, Vizzy and Coors Seltzer.
- COVID-19-related items included $31.1 million of net-sales reductions for keg relief programs, $12.6 million of cost-of-goods-sold charges for keg obsolescence and return costs, and $15.5 million of temporary employee pay.
- The revitalization plan is expected to reduce global employment by approximately 600 positions. Aggregate restructuring costs are estimated at approximately $90 million to $120 million, substantially recognized by the end of fiscal 2021.
- Special items included $110.5 million of North America asset-abandonment charges and $30.0 million of impairment related to an India disposal group classified as held for sale. The Irwindale brewery closure and expected sale to Pabst were expected to be completed in Q4 2020; the Montreal brewery closure was expected in 2021.
- The company recorded approximately $135 million of discrete tax expense from final U.S. hybrid regulations, with potential cash tax outflows of up to that amount in 2021. A further approximately $6 million of Q3 tax expense resulted from U.K. tax-rate legislation.
- Goodwill and indefinite-lived intangible assets remained exposed to future impairment if the pandemic is prolonged or operating performance, market capitalization, discount rates or market multiples deteriorate.
- Material contingencies included litigation with Stone Brewing, securities and derivative shareholder actions, regulatory disputes over beer-duty refunds, Ontario beer-distribution legislation, guarantees of approximately $49.4 million, and Kaiser-related indemnities with a maximum remaining potential claim of $62.4 million.
- The company formed a 50/50 Yuengling joint venture, with operations expected to commence in the second half of 2021. It also continued expansion into hard seltzer, cannabis beverages, CBD products, canned wine and other beverages.
Important facts for investors to verify
- Whether renewed or extended COVID-19 restrictions further reduce higher-margin on-premise sales, particularly in Europe and the U.K.
- Progress on inventory normalization, aluminum-can availability and the expected Q4 shipment recovery.
- Cash generation after temporary tax-payment deferrals expire and potential 2021 cash tax payments of up to approximately $135 million.
- Net debt, leverage and compliance with the amended revolving-credit-facility covenant, including the 5.25x maximum net-debt-to-EBITDA ratio at September 30, 2020 and scheduled future reductions.
- Completion and proceeds of the Irwindale brewery sale, timing and cost of the Montreal closure, and remaining revitalization-plan charges.
- Potential goodwill or indefinite-lived intangible-asset impairments if pandemic-related weakness persists.
- Outcome of the beer-duty refund appeal, Ontario distribution legislation, Stone Brewing litigation and shareholder-related proceedings.
- Sustainability of the dividend suspension, capital-expenditure reductions and investment-grade credit ratings, which were BBB-/Negative from Standard & Poor’s, Baa3/Stable from Moody’s and BBB(Low)/Negative from DBRS.