Molson Coors Brewing Company 2017 Q3 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2017. Molson Coors operates through U.S., Canada, Europe and International segments and owns major brands including Coors Light, Miller Lite, Molson Canadian, Carling, Staropramen and Blue Moon.
Comparability is substantially affected by the October 11, 2016 acquisition of SABMiller’s interests in MillerCoors and related Miller international assets. MillerCoors was fully consolidated beginning on that date; therefore, management also presents unaudited pro forma 2016 information as if the acquisition had occurred on January 1, 2016.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net sales | $2,883.2 million | $947.6 million | $8,423.2 million | $2,591.0 million |
| Gross profit | $1,293.6 million | $406.3 million | $3,704.6 million | $1,073.5 million |
| Operating income | $506.7 million | $289.2 million | $1,413.4 million | $800.3 million |
| Net income attributable to MCBC | $280.0 million | $202.5 million | $804.6 million | $537.5 million |
| Diluted EPS | $1.29 | $0.94 | $3.72 | $2.53 |
| Gross margin | 44.9% | 42.9% | 44.0% | 41.4% |
| Operating margin | 17.6% | 30.5% | 16.8% | 30.9% |
Reported year-over-year changes are not meaningful because 2016 included only MCBC’s 42% equity-method share of MillerCoors for most of the comparable period. On a pro forma basis, Q3 net sales declined 2.1%, net income attributable to MCBC declined 12.1%, and diluted EPS declined 12.2%. For the nine-month period, pro forma net sales declined 1.1%, net income declined 9.2%, and diluted EPS declined 9.5%.
Total worldwide brand volume increased 60.4% in Q3 and 64.1% for the nine months, primarily due to the acquisition and growth in Europe and International. Pro forma financial volume declined 4.8% in Q3 and 2.7% for the nine months.
Cash flow, liquidity and debt
- Operating cash flow was $1,145.4 million for the first nine months, compared with $630.2 million in the prior-year period.
- Investing cash flow was $(398.0) million, including $466.0 million of property additions.
- Financing cash flow was $(367.8) million, including $2,601.5 million of debt repayments, $1,536.0 million of debt issuance proceeds, approximately $1.0 billion of commercial paper borrowings and $264.9 million of dividends paid.
- Cash and cash equivalents were $971.3 million at September 30, 2017, compared with $560.9 million at December 31, 2016.
- Total current debt and short-term borrowings were $1,745.0 million, including approximately $1.0 billion of commercial paper. Long-term debt was $10,574.2 million, for total debt of approximately $12.3 billion before considering cash.
- The company issued approximately $1.5 billion of senior notes in March 2017 and fully repaid its term loans by July 19, 2017. It had approximately $495 million available under its $1.5 billion revolving multi-currency facility at quarter-end.
- Management stated that the company was in compliance with debt covenants and had met all debt payment obligations. Credit ratings were BBB-/Stable, Baa3/Stable and BBB(Low)/Stable.
- Capital expenditures incurred were $390.5 million, with $466.0 million paid, and full-year 2017 capital expenditures were expected to be approximately $650 million.
Material changes versus the prior comparable period
- The MillerCoors acquisition changed the company from an equity-method presentation to full consolidation, materially increasing reported sales, assets, debt, depreciation and amortization.
- On a pro forma basis, weaker volume, higher tax expense, increased brand investment and higher amortization more than offset favorable pricing and mix, cost savings, lower interest expense and commodity-derivative gains.
- Q3 U.S. pro forma income before taxes increased 5.3%, despite lower volume, due to pricing, cost savings, lower marketing and administrative spending and higher net interest income.
- Canada income before taxes declined 15.5% in Q3 and 48.3% for the nine months, reflecting weaker volumes, competitive pressure, higher costs and incremental amortization.
- Europe income before taxes was essentially flat in Q3 but increased 29.4% for the nine months, benefiting from volume growth, favorable mix and the release of an approximately $50 million indirect-tax provision.
- International remained loss-making, with a pretax loss of $6.0 million in Q3 and $12.2 million for the nine months, although the nine-month loss improved from $38.4 million.
- The effective tax rate increased to 34% in Q3 and 29% for the nine months, compared with 9% and 10%, respectively, primarily because 100% of MillerCoors income was included and prior-year acquisition-related tax benefits did not recur.
- Foreign currency translation generated $607.0 million of other comprehensive income for the nine months, while derivative and non-derivative instruments generated a $116.1 million loss in other comprehensive income.
Guidance, outlook, risks and unusual items
- Management continued to prioritize integration of MillerCoors and the Miller brands, cost savings, debt reduction, portfolio premiumization and improved returns on invested capital.
- Management expected approximately $310 million of 2017 pension contributions, including a $200 million discretionary MillerCoors contribution already made, and approximately $27 million of full-year net pension benefit.
- Corporate net interest expense was expected to be approximately $360 million for 2017.
- The quarterly dividend was maintained at $0.41 per share. Share repurchases remained suspended while the company focused on deleveraging.
- Management expected additional brewery-related charges, including approximately CAD 95 million of accelerated depreciation through the planned 2021 closure of the existing Montreal brewery. Vancouver closure-related charges and approximately CAD 9 million of additional accelerated depreciation were also expected through the planned 2019 closure.
- The Europe segment had approximately $11 million of exposure to financially distressed Agrokor customers, fully reserved at September 30, 2017.
- Risks include declining beer volumes, changing consumer preferences, competitive pressure, foreign exchange, commodity prices, high leverage, integration execution, impairment of goodwill or brands, regulatory changes and tax-rate volatility.
- The company remains subject to indemnity obligations associated with the former Kaiser Brazil business. Exposure for tax, civil and labor claims is capped at the $68.0 million sale price of the relevant interest, while potential claims related to purchased tax credits were approximately $110.7 million at September 30, 2017.
- A Canadian proposed class action alleges price fixing and market allocation involving The Beer Store and seeks approximately CAD 1.4 billion in damages. Management considers the claim without merit and expects to defend it vigorously.
- Operating leases were not yet recognized on the balance sheet; the company expected future lease-accounting adoption to add right-of-use assets and lease liabilities. Revenue-recognition adoption was expected to affect the presentation of certain customer payments and the timing of promotional discounts, but management did not expect a significant full-year impact.
Important facts for investors to verify
- Reconcile reported results with pro forma results because the acquisition makes reported year-over-year growth rates misleading.
- Assess debt reduction, commercial paper reliance, refinancing needs and the approximately $495 million of revolver availability.
- Track U.S. and Canada volume trends, especially premium-light and core brands, against pricing and mix gains.
- Evaluate whether projected MillerCoors synergies and cost savings offset integration costs, brand investment and amortization.
- Monitor goodwill and brand-asset impairment sensitivity, particularly in Europe and Canada.
- Review the timing and cost of Montreal, Vancouver and Burton South brewery closures and related capital spending.
- Assess tax-rate normalization, pension funding requirements, foreign exchange exposure and commodity-derivative volatility.
- Confirm the status and potential financial impact of the Agrokor receivables, Kaiser indemnities and Ontario class-action litigation.