Business Context and Reporting Period
Molson Coors Brewing Company is a global brewer with operations in Canada, the United States through its 42% equity investment in MillerCoors, Europe and Molson Coors International. This unaudited Form 10-Q covers the three and six months ended June 30, 2015, compared with the corresponding 2014 periods. Results are seasonal and quarterly results are not necessarily indicative of full-year performance.
Financial Results and Key Metrics
| Metric | Q2 2015 | Q2 2014 | Change |
|---|---|---|---|
| Net sales | $1,005.7 million | $1,188.5 million | (15.4%) |
| Gross profit | $425.8 million | $505.2 million | (15.7%) |
| Gross margin | 42.3% | 42.5% | Down 0.2 points |
| Operating income | $314.3 million | $364.8 million | (13.8%) |
| Operating margin | 31.3% | 30.7% | Up 0.6 points |
| Net income attributable to MCBC | $229.0 million | $290.9 million | (21.3%) |
| Diluted EPS from continuing operations | $1.23 | $1.56 | (21.2%) |
| Underlying income from continuing operations | $263.8 million | $292.7 million | (9.9%) |
| Underlying diluted EPS | $1.41 | $1.57 | (10.2%) |
| Underlying EBITDA | $455.3 million | $476.2 million | (4.4%) |
For the six months ended June 30, 2015, net sales were $1,705.7 million, down 14.9%; net income attributable to MCBC was $310.1 million, down 31.8%; diluted EPS from continuing operations was $1.65 versus $2.46; underlying income was $349.9 million, down 11.4%; and underlying EBITDA was $683.9 million, down 6.0%.
Worldwide beer volume declined 1.9% in the second quarter and 2.6% year to date. Reported results were significantly affected by foreign currency translation, particularly the weaker Canadian dollar and European currencies. Excluding foreign currency, second-quarter net sales declined 3.3%.
Cash Flow, Debt and Liquidity
- Six-month net cash provided by operating activities was $198.1 million, versus $576.0 million in 2014. The decline primarily reflected a $227.1 million discretionary U.K. pension contribution, higher taxes paid and lower income.
- Underlying free cash flow was $241.1 million, down from $331.7 million.
- Capital additions paid were $139.8 million; management expects approximately $300 million of 2015 capital expenditures, excluding MillerCoors and other equity-method ventures.
- Cash and cash equivalents were $413.8 million at June 30, 2015, down from $624.6 million at December 31, 2014. Approximately 78% of cash was held outside the United States.
- Total long-term debt, including the current portion, was $3.025 billion, including CAD 900 million of notes due September 2015. Short-term borrowings and the current portion of long-term debt totaled $832.4 million.
- The company had $685.0 million available under its $750 million revolving credit facility after commercial paper borrowings. It reported compliance with debt covenants and all debt payment obligations.
- Six-month dividends paid were $152.3 million, or $0.82 per share. The company repurchased 0.7 million Class B shares for $50 million during the quarter under an accelerated share repurchase agreement.
Material Changes Versus the Prior Comparable Period
- Canada: Second-quarter net sales declined 13.9% and pretax income declined 12.2%. Volume was down 6.6%, principally reflecting the termination of the Miller brands distribution agreement. Positive pricing, mix and cost savings partially offset the decline.
- United States/MillerCoors: Equity income increased 8.1% to $205.5 million in the quarter and 7.0% to $334.8 million for the first half. Benefits included lower brewing and packaging input costs, lower fuel expense, pricing and supply-chain savings, despite lower volumes.
- Europe: Second-quarter net sales declined 16.6% and pretax income declined 42.0%. Results reflected foreign exchange, lower volume, termination of the Modelo distribution and Heineken contract-brewing arrangements, and unfavorable mix.
- MCI: Volume increased, supported by India and Latin America, but net sales declined 14.9% and pretax loss widened to $12.2 million. The company recorded $6.4 million of charges related to restructuring its China business.
- Special-item expense increased to $33.7 million in the quarter and $42.3 million for the first half, compared with $2.7 million of expense and a $49.8 million benefit, respectively, in the prior-year periods.
- The company completed the closure of its Alton brewery in the U.K., incurred charges related to closing a Toronto bottling line, and recognized a net $10.0 million Europe termination charge associated with Carlsberg and Heineken arrangements.
- On April 1, 2015, MCI acquired Mount Shivalik Breweries in India for $51.1 million net of cash acquired, adding two breweries and more than doubling Indian brewing capacity.
Guidance, Outlook, Commentary and Risks
- Management expects 2015 results to remain challenged by unfavorable foreign currency, termination of the Modelo, Heineken and Miller agreements, and a higher effective tax rate.
- Management expects 2015 underlying tax expense to reflect an effective tax rate of 18% to 22%, consolidated net interest expense of approximately $120 million, corporate marketing, general and administrative expense of approximately $110 million excluding foreign exchange, and defined-benefit pension contributions of approximately $260 million.
- The company expects significant brand and information-technology investment in the second half of 2015. U.S. underlying operating margins are expected to be relatively flat for the year, while the investments are expected to weigh on near-term earnings.
- Management targets MCI profitability in 2016 excluding foreign currency effects and expects India and portfolio expansion to support longer-term growth.
- Ontario’s proposed beer framework would impose an additional CAD 100 million annual tax on beer volume, phased in over four years beginning November 1, 2015, restrict certain price increases through the second quarter of 2017, and require BRI to make CAD 100 million of capital investments over four years. The final impact remains uncertain.
- European regulatory assessments total approximately $81 million, with an estimated potential loss range of zero to approximately $98 million. The company intends to appeal and has not indicated that a material loss is probable.
- A proposed Ontario class action alleges price fixing and market allocation involving The Beer Store and the LCBO and seeks CAD 1.4 billion in damages. The company considers the claim without merit and intends to defend it.
- Goodwill and certain brand intangibles in the Canada and Europe reporting units remain sensitive to weaker volumes, prolonged economic weakness, adverse consumer trends, foreign exchange, higher discount rates and failure to achieve cost savings. At-risk European intangible assets had a carrying value of $758.9 million, and the Molson core brand had a carrying value of $2.4299 billion at June 30, 2015.
- Former Kaiser operations remain subject to indemnity exposure, including a maximum potential claim of $112.8 million for purchased tax credits and a separate cap of $68.0 million for tax, civil and labor claims.
Facts Investors Should Verify
- Verify the September 2015 maturity and refinancing or repayment of the CAD 900 million notes and the company’s subsequent debt issuance.
- Monitor the final Ontario beer framework, including the additional tax, pricing restrictions, BRI investment requirements and effects on Canada’s goodwill and brand valuations.
- Track the Ontario class-action litigation and the European regulatory assessments, including any changes to accrued liabilities or disclosed loss ranges.
- Reconcile reported GAAP results with underlying income, underlying EBITDA and underlying free cash flow, particularly the effects of special items, foreign exchange and pension contributions.
- Assess whether the terminated contracts, brand investments, brewery closures and China restructuring stabilize volumes and margins during the second half of 2015.
- Review the status of the CAD 900 million debt maturity, the planned debt issuance hedged by forward-starting interest-rate swaps, and available revolving-credit capacity.