Molson Coors Beverage Company — Form 10-Q Summary
Business context and reporting period
Molson Coors Brewing Company reported unaudited results for the three and six months ended June 30, 2017. The company operates through U.S., Canada, Europe and International segments and owns a portfolio of beer, craft, specialty and adjacent beverage brands.
Comparisons are significantly affected by the October 11, 2016 acquisition of SABMiller’s interest in MillerCoors and related Miller international assets. MillerCoors was fully consolidated beginning on that date; management therefore emphasizes pro forma comparisons for operating trends.
Financial performance and key metrics
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Six months ended June 30, 2017 | Six months ended June 30, 2016 |
|---|---|---|---|---|
| Net sales | $3,091.3 million | $986.2 million | $5,540.0 million | $1,643.4 million |
| Gross profit | $1,335.2 million | $424.0 million | $2,411.0 million | $667.2 million |
| Operating income | $537.5 million | $267.8 million | $906.7 million | $511.1 million |
| Net income attributable to MCBC | $323.3 million | $172.3 million | $524.6 million | $335.0 million |
| Diluted EPS | $1.49 | $0.80 | $2.42 | $1.59 |
| Operating cash flow | Not separately provided | Not separately provided | $818.5 million | $282.4 million |
Second-quarter reported gross margin was approximately 43.2%, operating margin approximately 17.4%, and net margin attributable to MCBC approximately 10.5%. First-half gross margin was approximately 43.5% and operating margin approximately 16.4%.
- Second-quarter continuing-operations income attributable to MCBC was $321.7 million, or $1.49 per diluted share.
- On a pro forma basis, second-quarter net sales declined 0.6%, while continuing-operations income attributable to MCBC increased 4.0% and diluted EPS increased 4.2% versus the comparable 2016 pro forma period.
- Pro forma financial volume declined 0.4% in the second quarter and 1.5% in the first half. Worldwide brand volume increased 63.9% and 66.2%, respectively, primarily because of the acquisition and reporting changes.
- Cash and cash equivalents were $502.9 million at June 30, 2017, compared with $560.9 million at December 31, 2016.
- Net working capital was negative $132.5 million at June 30, 2017, excluding the current portion of debt and short-term borrowings from the calculation.
- Total debt, including current debt and short-term borrowings, was approximately $11.9 billion at June 30, 2017. Long-term debt was $11.2 billion and short-term borrowings/current debt were $686.6 million.
- Capital expenditures paid during the first half were $354.0 million; management expected full-year 2017 capital expenditures of approximately $750 million.
- The company paid dividends of $176.6 million in the first half, or $0.82 per share.
Material changes versus the prior comparable period
- Reported sales, operating income and earnings increased primarily because MillerCoors was fully consolidated in 2017, whereas the prior-year period included only MCBC’s 42% equity-method share.
- On a pro forma basis, second-quarter performance benefited from positive pricing and mix, cost savings, lower marketing spending and higher brand volume, partially offset by higher unrealized mark-to-market losses.
- U.S. pretax income increased 15.9% on a pro forma basis in the second quarter, supported by pricing, mix, cost savings and lower selling, general and administrative spending. Domestic U.S. sales-to-retailers declined 1.9%.
- Canada pretax income decreased 22.4% in the second quarter, primarily because of volume declines, higher brand amortization and higher cost of goods sold.
- Europe pretax income increased 24.2% in the second quarter, supported by volume growth, pricing and mix, the addition of Miller brands and lower brand investment.
- International pretax loss improved to $7.7 million from $33.4 million, largely because the prior-year period included a $30.8 million impairment related to alcohol prohibition in Bihar, India.
- Net interest expense increased to $89.2 million in the second quarter and $185.8 million in the first half, reflecting acquisition-related debt. However, the company issued approximately $1.5 billion of senior notes in March 2017 and repaid substantial term-loan principal.
- Foreign currency translation produced a $392.1 million after-tax benefit to other comprehensive income in the first half, compared with a $113.7 million benefit in the prior-year period.
Guidance, outlook, commentary and unusual items
- Management continued to focus on integrating MillerCoors and the Miller brands, realizing synergies, improving pricing and mix, controlling working capital and deleveraging.
- Management maintained its goal of flat U.S. volume in 2018 and growth in 2019. It also plans continued investment in premium, craft, flavored malt beverage, cider and adjacent beverage categories.
- Expected 2017 defined-benefit pension contributions were approximately $300 million to $320 million, including a planned $200 million discretionary MillerCoors contribution in the third quarter. Expected 2017 net pension benefit was approximately $24 million.
- Expected 2017 consolidated net interest expense was approximately $370 million.
- The quarterly dividend was expected to remain $0.41 per share. Share repurchases were suspended while the company prioritizes debt reduction.
- On July 19, 2017, after quarter-end, the company repaid the remaining $400 million term loan using commercial paper; the term loans were fully repaid as of that date.
- On July 7, 2017, the company replaced its $750 million revolving facility with a five-year $1.5 billion facility and increased its commercial paper program to $1.5 billion.
- Special items were a net expense of $16.5 million in the second quarter and $20.3 million in the first half. Items included brewery closure and asset-abandonment costs. The company expects additional charges related to brewery closures and restructuring.
- The company recorded an $11 million allowance against approximately $17 million of receivables from customers associated with financially distressed Croatian retailer Agrokor.
- A previously recorded approximately $50 million European indirect-tax contingency was released in the first quarter after the company prevailed in court; the regulator subsequently withdrew its assessments.
- The company faces a Canadian proposed class action seeking approximately CAD 1.4 billion related to alleged price fixing and market allocation involving The Beer Store. Management considers the claim without merit and intends to defend it vigorously.
- Other risks include foreign exchange, commodity prices, consumer demand, competitive pressure, regulatory changes affecting alcohol sales, pension funding, integration execution and potential impairment of goodwill or brand intangibles. Europe goodwill was identified as particularly sensitive to unfavorable changes in projected cash flows and valuation assumptions.
- Management believes operating cash flow and available borrowing capacity will be adequate for operating needs, debt service, dividends and planned capital expenditures for the twelve months following the filing.
Most important facts for investors to verify
- Separate acquisition-driven growth from underlying performance by using the company’s pro forma comparisons rather than reported year-over-year changes.
- Track U.S. and Canada volume trends, particularly Coors Light, Miller Lite and Molson Canadian, as volume remains pressured in several core markets.
- Verify progress toward debt reduction, including the post-quarter-end repayment of the remaining $400 million term loan and the resulting commercial-paper balance.
- Assess whether operating cash flow can fund approximately $750 million of annual capital expenditures, $300 million to $320 million of pension contributions and ongoing dividends.
- Monitor integration savings, acquisition-related costs, marketing investment and the effect of amortization from acquired intangible assets.
- Evaluate exposure to Agrokor receivables, the Ontario litigation, Kaiser indemnities, environmental matters and other contingencies.
- Review sensitivity of Europe goodwill and brand intangibles to weaker volumes, higher costs, adverse macroeconomic conditions, foreign exchange movements or regulatory restrictions.
- Confirm the eventual impact of new lease and revenue-recognition standards; management expected limited core revenue impact but possible reclassification of customer payments and promotional discounts.