Molson Coors Beverage Company: FY2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020. The filing is an annual Form 10-K rather than a standalone fourth-quarter filing, although fourth-quarter items are discussed. Molson Coors operates primarily through North America and Europe segments following a January 1, 2020 management and reporting-structure change.
Business Context
Molson Coors produces and distributes beer and other beverages, including hard seltzers, cannabis- and CBD-related beverages through joint ventures, non-alcohol products, cider, canned wine and other emerging categories. Core brands include Coors Light, Miller Lite, Molson Canadian, Carling, Staropramen and Blue Moon. The company has approximately 17,000 employees and no customer represented more than 10% of consolidated sales.
The coronavirus pandemic materially disrupted the business, particularly higher-margin on-premise sales in bars, restaurants and venues. Management expects pandemic-related effects to continue materially affecting results in 2021 and potentially beyond.
Financial Performance and Key Metrics
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Financial volume | 84.479 million hectoliters | 92.722 million | Down 8.9% |
| Worldwide brand volume | 82.033 million hectoliters | 88.946 million | Down 7.8% |
| Net sales | $9,654.0 million | $10,579.4 million | Down 8.7% |
| Gross profit | $3,768.3 million | $4,201.2 million | Down 10.3% |
| Gross margin | 39.0% | 39.7% | Down approximately 70 bps |
| Operating income (loss) | $(408.9) million | $764.4 million | Declined materially |
| Net income (loss) attributable to MCBC | $(949.0) million | $241.7 million | Turned to loss |
| Diluted EPS | $(4.38) | $1.11 | Turned negative |
| Operating cash flow | $1,695.7 million | $1,897.3 million | Down 10.6% |
| Capital expenditures paid | $574.8 million | $593.8 million | Down 3.2% |
Reported operating and net losses were heavily affected by special items, most notably the $1,484.3 million goodwill impairment charge for the Europe reporting unit. The company also recorded $301.8 million of income tax expense, including approximately $135 million related to final U.S. hybrid tax regulations. The reported effective tax rate was negative 46.9%, reflecting the nondeductible goodwill impairment and other discrete items.
Segment Results
| Segment | FY2020 net sales | Year-over-year change | FY2020 income before taxes |
|---|---|---|---|
| North America | $8,237.0 million | Down 4.4% | $1,080.5 million, up 67.5% |
| Europe | $1,431.9 million | Down 27.9% | $(1,603.7) million |
North America financial volume declined 6.0% and brand volume declined 5.1%. Positive pricing, lower marketing and general and administrative expenses, and lower special charges partly offset pandemic-related volume declines, inflation and transportation costs. Europe financial volume declined 17.3% and brand volume declined 14.8%, driven by extensive on-premise closures and restrictions, particularly in the U.K. and other European markets.
Cash Flow, Liquidity and Debt
- Cash and cash equivalents were $770.1 million at December 31, 2020, compared with $523.4 million at year-end 2019.
- Net cash used in investing activities was $413.6 million, including $574.8 million of capital expenditures and approximately $150 million of proceeds from the sale of the Irwindale brewery.
- Net cash used in financing activities was $1,070.4 million. The company repaid its $500 million 2.25% notes and CAD $500 million 2.75% notes at maturity during 2020.
- Total debt, including current and long-term debt, was approximately $8.2 billion at December 31, 2020. Principal maturities include approximately $1.019 billion in 2021, $505.2 million in 2022, $397.8 million in 2023 and $982.0 million in 2024.
- The company had the full $1.5 billion revolving credit facility available and no outstanding revolving-credit or commercial-paper borrowings at year-end. A U.K. COVID Corporate Financing Facility provided up to GBP 300 million of additional capacity, also unused at year-end.
- The revolving-credit facility covenant was amended in June 2020. The maximum net-debt-to-EBITDA ratio was 5.25x at December 31, 2020, stepping down to 4.75x, 4.50x and 4.00x during 2021. The company reported compliance with its debt covenants.
- The board suspended regular quarterly dividends in May 2020. Management expected the board could be in a position to reinstate a dividend in the second half of 2021, subject to conditions and board approval.
Material Changes Versus the Prior Comparable Period
- Net sales decreased 8.7%, financial volume decreased 8.9% and worldwide brand volume decreased 7.8%.
- The company moved from a 2019 profit to a 2020 net loss, principally due to the Europe goodwill impairment, lower volume, pandemic-related costs and additional tax expense.
- On-premise sales shifted sharply toward off-premise channels. North America on-premise volume and net sales represented approximately 9% each in 2020, versus approximately 16% and 17%, respectively, in 2019. Europe’s estimated on-premise market share declined to approximately 20% in 2020 from approximately 40% in 2019.
- Special items increased to $1,740.2 million from $708.8 million, primarily because of the Europe goodwill impairment and brewery closure and asset impairment charges.
- The company delivered approximately $270 million of cost savings in 2020 and expects its next-generation cost-savings program to deliver approximately $600 million through 2022, including approximately $150 million associated with the revitalization plan.
- The company incurred $42.4 million of aggregate keg-relief and keg-obsolescence charges, including a $30.3 million reduction to net sales and $12.1 million in cost of goods sold. It also incurred $15.5 million of temporary “thank you” pay for certain North American brewery employees.
Guidance, Outlook and Management Commentary
- Management expects the pandemic to continue causing significant adverse effects on net sales and profit in 2021, with on-premise recovery lagging pre-pandemic levels. Off-premise strength is not expected to fully offset on-premise declines.
- Management expects industry-standard aluminum-can supply constraints to return to normal availability by the end of the first quarter of 2021, although supply-chain risks remain.
- Management expects approximately $270 million of consolidated net interest expense in 2021, plus or minus 5%, based on year-end 2020 foreign exchange rates and interest rates.
- Management expects a 2021 effective tax rate of 20% to 23%, subject to tax guidance, regulations and legislative changes.
- The company intends to continue deleveraging in 2021 and maintain an investment-grade rating.
- The revitalization strategy emphasizes core brands, above-premium products, hard seltzers, innovation and expansion beyond beer. Planned or recently launched initiatives include Vizzy, Coors Seltzer, Topo Chico Hard Seltzer, Proof Point, Blue Moon LightSky, Yuengling expansion, RTD cocktails, coffee, energy drinks, cannabis/CBD products and non-alcohol beverages.
- Restructuring charges related to the revitalization plan are estimated at $100 million to $120 million in aggregate and are expected to be substantially recognized by the end of 2021. Approximately 600 employees have been reduced globally under the plan.
Principal Risks, Contingencies and Unusual Items
- Further pandemic-related restrictions, prolonged on-premise weakness, consumer behavior changes, vaccine uncertainty and economic deterioration could reduce sales, margins, cash flow and liquidity.
- The North America goodwill balance of approximately $6.2 billion was considered at risk of future impairment. Its fair value cushion was approximately 7% at the October 1, 2020 testing date; a 50-basis-point increase in the discount rate would have reduced the cushion to approximately 3%.
- The Staropramen indefinite-lived brand asset, with a carrying value of approximately $621.7 million, had an estimated fair value cushion of approximately 9%; a 50-basis-point discount-rate increase would have reduced the cushion to approximately 1%.
- Ontario legislation, if enacted, could terminate or alter the existing beer distribution and retail framework and negatively affect the North America segment.
- The company has approximately $1.6 billion of long-term supply commitments for raw materials, packaging and energy, plus approximately $779 million of advertising and promotional commitments.
- Unrecognized tax benefits totaled $247.1 million at year-end, and the company stated that the amount could decrease by up to $150 million within the next 12 months as settlements and statute expirations occur.
- Legal, environmental and other accrued contingent liabilities totaled $17.9 million. Separate Kaiser indemnity reserves totaled $11.0 million, and the company continues to face uncertain litigation and environmental exposures.
- Foreign exchange, aluminum and other commodity prices remain material risks. The company uses derivatives and supplier contracts to manage exposures but remains subject to market and counterparty risk.
Investor Verification Checklist
- Verify the timing and magnitude of on-premise recovery in North America and Europe, including whether off-premise growth can offset lost higher-margin sales.
- Track North America volume, market share, hard seltzer performance and the ability of new products to support the revitalization plan.
- Reassess the North America goodwill and Staropramen impairment cushions as 2021 forecasts, discount rates and market multiples change.
- Confirm progress toward approximately $600 million of cumulative cost savings through 2022 and the remaining revitalization-plan restructuring charges.
- Monitor 2021 debt maturities, covenant headroom, deleveraging progress, credit-rating outlook and potential dividend reinstatement.
- Review the potential cash impact of the U.S. hybrid tax regulations, including up to approximately $100 million of expected 2021 cash tax outflows.
- Follow the Ontario distribution legislation, packaging supply conditions, commodity costs, foreign exchange movements and material legal or environmental contingencies.