Molson Coors Beverage Company — Q1 2023 Form 10-Q Summary
Business context and reporting period
Molson Coors Beverage Company produces and markets beer and adjacent beverages through its Americas and EMEA&APAC segments. The filing covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022. Results are unaudited, presented in U.S. dollars, and affected by seasonal factors.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $2,346.3 million | $2,214.6 million | 5.9% increase |
| Gross profit | $770.7 million | $927.8 million | 16.9% decrease |
| Gross margin | 32.8% | 41.9% | Down 9.1 percentage points |
| Operating income | $158.2 million | $224.4 million | 29.5% decrease |
| Operating margin | 6.7% | 10.1% | Down 3.4 percentage points |
| Net income attributable to MCBC | $72.5 million | $151.5 million | 52.1% decrease |
| Diluted EPS | $0.33 | $0.70 | 52.9% decrease |
| Operating cash flow | $3.4 million | $(119.3) million | $122.7 million improvement |
| Capital expenditures paid | $181.4 million | $243.8 million | Decrease of $62.4 million |
| Cash and cash equivalents | $328.2 million | $600.0 million at Dec. 31, 2022 | Decrease of $271.8 million |
Financial volume declined 0.2% to 17.006 million hectoliters. Consolidated net sales benefited from 8.4% price and sales-mix improvement, including pricing actions and premiumization, partly offset by lower volume and a 2.3% unfavorable currency impact.
Segment performance and material changes
- Americas: Net sales increased 5.6% to $1,939.0 million, while income before taxes increased 168.0% to $233.4 million. Volume declined 0.5%. Results benefited from pricing, favorable mix, lower MG&A after cycling the $56.0 million Keystone litigation accrual recorded in Q1 2022, and the absence of the $28.6 million Truss asset impairment recorded in Q1 2022.
- EMEA&APAC: Net sales increased 7.6% to $410.1 million, and pretax loss improved to $25.4 million from $32.2 million. Volume increased 0.8%, but inflationary pressure reduced discretionary purchases in parts of Central and Eastern Europe.
- Cost pressure: Cost of goods sold increased 22.4%, and cost per hectoliter increased 22.7%, driven by commodity derivative mark-to-market effects, higher material, conversion and energy costs, and portfolio mix. Cost savings and currency benefits only partially offset these pressures.
- Unallocated results: Pretax loss was $106.1 million versus income of $118.8 million in the prior-year quarter, primarily reflecting unfavorable unrealized commodity derivative movements. Commodity swaps generated a $28.5 million loss in cost of goods sold in Q1 2023 versus a $238.6 million gain in Q1 2022.
- Taxes: The effective tax rate increased to 28% from 21%, primarily due to $7.5 million of discrete tax expense versus a $0.9 million discrete tax benefit in Q1 2022.
Cash flow, debt and liquidity
- Cash decreased $271.8 million during the quarter to $328.2 million, primarily due to capital expenditures, dividends and share repurchases.
- Operating cash flow was positive but limited at $3.4 million. Investing cash use was $177.4 million, and financing cash use was $102.5 million, including $89.5 million of dividends and $14.6 million of share repurchases.
- Total long-term debt, including the current portion, was $6.55 billion; current debt and short-term borrowings were $412.7 million. The company had no borrowings under its $1.5 billion revolving credit facility and no commercial paper borrowings at March 31, 2023.
- The company reported compliance with all debt covenants and payment obligations. The maximum net-debt-to-EBITDA covenant ratio was 4.00x. Management stated that available cash, operating cash flow and borrowing capacity should be adequate for expected requirements over the following 12 months.
- Approximately 80% of cash was held outside the United States, primarily in foreign currencies, which may create repatriation, tax and currency risks.
- The company paid a quarterly dividend of $0.41 per share and repurchased 275,000 Class B shares for $14.6 million. Approximately $134.0 million remained available under the repurchase authorization at March 31, 2023.
Guidance, outlook, commentary and risks
- Management did not provide specific quantitative full-year guidance in the supplied filing text.
- Cost inflation in materials, conversion and energy is expected to continue to pressure results for the remainder of 2023 and possibly beyond. Mitigation actions include pricing, hedging, premiumization and cost savings, but management cautioned that pricing may reduce demand, encourage trade-down or weaken competitiveness.
- The Russia-Ukraine conflict continues to affect EMEA&APAC sales and global input costs. The company suspended exports to Russia and terminated the license to produce its brands there.
- Americas goodwill remains exposed to future impairment if forecast cash flows, growth, market multiples, discount rates or broader macroeconomic conditions deteriorate. No triggering event was identified in Q1 2023.
- The Keystone trademark litigation remains unresolved. The company recorded a $57.1 million liability, including post-judgment interest, and the ultimate amount could change based on post-trial rulings or appeals.
- Aggregate accrued liabilities for litigation, disputes and environmental matters were $79.4 million. The company also reported $34.9 million of guarantee liabilities and $11.3 million of Kaiser-related indemnity accruals; remaining potential Kaiser claims were $69.1 million.
- A Colorado environmental notice alleged permit and reporting violations at the Golden brewery; the likely maximum monetary penalty was not expected to be significant. Potential changes to Ontario's beer distribution framework could adversely affect the Americas segment if enacted.
Important facts for investors to verify
- Whether pricing and premiumization can offset sustained inflation without causing material volume declines or consumer trade-down.
- The normalization and cash-flow effects of commodity derivative mark-to-market gains and losses.
- Progress on operating cash flow, working capital and cash replenishment following the $271.8 million quarterly cash reduction.
- Upcoming debt maturities, particularly the CAD 500 million notes due July 2023 and EUR 800 million notes due July 2024, and the company’s refinancing or repayment plans.
- The outcome and timing of the Keystone litigation, including potential appeals and changes to the recorded accrual.
- Potential impairment of Americas goodwill and indefinite-lived brands under weaker industry or macroeconomic conditions.
- Developments involving the Ontario Master Framework Agreement, Colorado environmental proceedings and Kaiser-related indemnities.