MOLSON COORS BEVERAGE CO annual report, FY2018

Molson Coors Beverage Company 2018 Form 10-K Summary

Business context and reporting period

Molson Coors is a global brewer operating through U.S., Canada, Europe and International segments. The filing covers the fiscal year ended December 31, 2018, with comparisons primarily to the restated year ended December 31, 2017. The filing is an annual report, although the request references 2018 Q4. MillerCoors was fully consolidated following the 2016 acquisition from Anheuser-Busch InBev.

Key financial metrics

Metric	2018	2017	Change
Net sales	$10,769.6 million	$11,002.8 million	Down 2.1%
Financial volume	96.627 million hectoliters	99.563 million hectoliters	Down 2.9%
Gross profit	$4,184.8 million	$4,766.1 million	Down 12.2%
Gross margin	38.9%	43.3%	Down approximately 440 basis points
Operating income	$1,631.8 million	$1,677.7 million	Down 2.7%
Operating margin	15.2%	15.2%	Approximately flat
Net income attributable to MCBC	$1,116.5 million	$1,565.6 million	Down 28.7%
Diluted EPS	$5.15	$7.23	Down 28.8%
Cash flow from operations	$2,331.3 million	$1,866.3 million	Up 24.9%
Capital expenditures paid	$651.7 million	$599.6 million	Up 8.7%

Net income and EPS were significantly affected by the approximately $567 million one-time tax benefit recognized in 2017 from U.S. tax reform. The 2018 effective tax rate was 16.6%, compared with a negative 14.8% in 2017.

At December 31, 2018, cash and cash equivalents were $1,057.9 million, compared with $418.6 million at year-end 2017. Total debt, including current maturities and short-term borrowings, was approximately $10.5 billion, including $1.6 billion due within one year. Long-term debt was $8,893.8 million, and the company had no borrowings under its $1.5 billion revolving credit facility.

The company reported investment-grade ratings of BBB-/Stable from Standard & Poor’s, Baa3/Stable from Moody’s and BBB(Low)/Stable from DBRS. The revolving facility maximum leverage covenant was 4.75x debt to EBITDA, declining to 4.00x at December 31, 2020; the company reported compliance with its debt restrictions.

Material changes versus the prior comparable period

Worldwide brand volume declined 1.9%; financial volume declined 2.9%, led by declines in the U.S. and Canada.
U.S. net sales declined 3.3% and income before taxes declined 5.3%, primarily due to lower volume, input-cost inflation, negative mix and higher special charges.
Canada net sales declined 4.5% and income before taxes declined 25.3%, reflecting lower volumes, unfavorable mix and mark-to-market losses on warrants associated with the Truss joint venture.
Europe net sales increased 3.2% and volume increased 2.1%, but income before taxes declined 20.6% due primarily to the absence of a 2017 indirect-tax provision release, higher excise-tax effects, investments and foreign exchange.
International improved its pretax loss to $2.7 million from $19.7 million, despite a 7.5% decline in financial volume.
Operating cash flow increased by $465.0 million, helped by lower pension contributions, lower interest paid and $328.0 million of cash received from ABI under the acquisition purchase-price settlement.
The company repaid CAD 400 million of notes and $379 million of commercial paper during 2018, continuing its deleveraging program.
Marketing, general and administrative expense declined 8.2%, while cost of goods sold increased 5.6%, partly reflecting commodity and freight inflation and unfavorable commodity-hedge mark-to-market movements.

Guidance, outlook, commentary and unusual items

Management expects approximately $700 million of total cost savings for the 2017-2019 program, including approximately $205 million in 2019. A 2020-2022 program is expected to deliver approximately $450 million.
2019 capital expenditures are expected to be approximately $700 million, including construction of new breweries in British Columbia and Montreal.
2019 consolidated net interest expense is expected to be approximately $300 million.
Management expects a 2019 effective tax rate of 18% to 22% and a preliminary long-term rate of 20% to 24%.
The quarterly dividend was expected to remain at $0.41 per share until leverage reaches approximately 3.75x debt to EBITDA, expected around mid-2019. Share repurchases remain suspended.
Management plans increased investment in above-premium, craft, cider, flavored malt beverage and hard-seltzer offerings, including Blue Moon, Peroni, Arnold Palmer Spiked, Sol and Henry’s Hard.
Special items included a $328.0 million gain from the ABI purchase-price settlement, $34.7 million of restructuring charges, asset-abandonment charges and $7.1 million of costs related to exiting China. Net special items were a $249.7 million benefit.
Commodity hedge positions generated a $166.2 million unrealized mark-to-market loss in cost of goods sold, compared with a $123.3 million gain in 2017.
The company formed Truss LP with HEXO to develop cannabis-infused non-alcoholic beverages in Canada, retaining a 57.5% controlling interest. The venture remains subject to regulatory and consumer-acceptance uncertainty.
The company identified a material weakness in internal control over financial reporting involving income-tax accounting for acquired partnership interests. The 2016 and 2017 financial statements were restated; management and the auditor concluded that internal controls were not effective as of December 31, 2018.
Europe and Canada goodwill reporting units were considered at risk of future impairment. Their fair-value cushions were approximately 11% and 6%, respectively, as of the October 1, 2018 testing date.

Principal risks and contingencies

Declining or shifting beer consumption, loss of market share, competition from craft beer, imports, cider, flavored malt beverages, wine and spirits, and dependence on several core brands.
High leverage, substantial debt maturities, interest-rate and LIBOR exposure, refinancing risk and covenant limitations.
Commodity-price inflation, particularly aluminum, fuel, packaging and agricultural inputs, including the effect of U.S. aluminum tariffs.
Foreign-exchange exposure, especially to the Canadian dollar, British pound and European currencies.
Uncertainty surrounding the U.K.’s exit from the European Union, including possible trade, regulatory, supply-chain and currency effects.
Potential future goodwill or intangible-asset impairment, particularly in Canada and Europe.
Supply-chain concentration, brewery closures and transition costs related to the Canadian brewery network and other facilities.
Legal proceedings, including the Stone Brewing trademark litigation, for which a potential loss was not estimable at filing.
Approximately $38 million of historically claimed but not yet received federal duty, tax and fee refunds may not be collectible following a Treasury regulation effective in February 2019.
Environmental, pension, postretirement, Kaiser indemnity and other contractual obligations; total disclosed contractual obligations were $18.2 billion.

Investor verification checklist

Verify the remediation status of the material weakness and whether subsequent filings report effective internal controls.
Reconcile reported 2017 and 2016 figures to the restated amounts, particularly deferred taxes, retained earnings and EPS.
Assess the sustainability of 2018 operating cash flow excluding the $328 million ABI settlement proceeds.
Review 2019 debt maturities of approximately $1.6 billion and the company’s refinancing and deleveraging progress.
Monitor Canada and Europe reporting-unit performance, valuation cushions and potential impairment charges.
Evaluate whether the $205 million 2019 cost-savings target can offset inflation, tariffs and volume declines without weakening brand investment.
Track U.S. and Canadian volume, market share, pricing and mix trends, particularly for Coors Light, Miller Lite and Molson Canadian.
Review developments in the Stone Brewing litigation, U.K. regulatory changes, Truss/HEXO operations and the disputed $38 million refund receivable.