Business Context and Reporting Period
Molson Coors Brewing Company is a global brewer operating through U.S., Canada, Europe and International segments, with brands including Coors, Miller, Molson, Carling, Staropramen and Blue Moon. This unaudited Form 10-Q covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018. Results are seasonal and the quarter is not necessarily indicative of full-year performance.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $2,303.3 million | $2,331.5 million | (1.2%) |
| Financial volume | 20.101 million hectoliters | 20.813 million hectoliters | (3.4%) |
| Gross profit | $890.3 million | $795.8 million | +11.9% |
| Gross margin | 38.7% | 34.1% | +460 bps |
| Operating income | $222.1 million | $429.5 million | (48.3%) |
| Operating margin | 9.6% | 18.4% | (820 bps) |
| Net income attributable to MCBC | $151.4 million | $278.1 million | (45.6%) |
| Diluted EPS | $0.70 | $1.28 | (45.3%) |
| Effective tax rate | 18% | 21% | Lower |
| Net cash from operating activities | $(98.5) million | $315.2 million | Decrease of $413.7 million |
| Capital expenditures paid | $198.0 million | $208.3 million | Decrease of $10.3 million |
Gross profit benefited from positive pricing, cost savings and commodity hedge gains, while reported operating income was reduced by the absence of the prior-year special gain. Consolidated net income included $23 million of unrealized gains on HEXO warrants and approximately $34.1 million of unrealized commodity hedge gains.
Liquidity, Debt and Capital Resources
- Cash and cash equivalents were $234.4 million at March 31, 2019, down from $1,057.9 million at December 31, 2018.
- Total long-term debt, including the current portion, was $9,497.8 million; current debt and short-term borrowings totaled $1,641.1 million, including $604.2 million of commercial paper.
- The company repaid its EUR 500 million variable-rate notes and $500 million of 1.90% notes during the quarter, partially funded with commercial paper.
- $895.8 million remained available under the $1.5 billion revolving credit facility. No borrowings were outstanding on that facility at quarter-end.
- The company stated that it was in compliance with debt covenants and all debt payment obligations. Long-term credit ratings were BBB-/Stable from S&P, Baa3/Stable from Moody’s and BBB(Low)/Stable from DBRS.
- Capital expenditures incurred were $95.7 million, while cash paid for capital expenditures was $198.0 million. Full-year 2019 capital expenditures were expected to be approximately $700 million.
Material Changes Versus the Prior Comparable Period
- Worldwide brand volume declined 4.7%, with declines in all reporting segments. Financial volume declined 3.4%.
- Net sales decreased 1.2% because of lower volume and unfavorable foreign currency movements, partly offset by positive net pricing in every segment.
- Operating income declined primarily because Q1 2018 included a $328.0 million purchase-price adjustment gain related to the Miller International business. Q1 2019 included $13.0 million of special-item charges versus a $314.8 million special-item benefit in Q1 2018.
- Net cash used in operating activities was $98.5 million, compared with $315.2 million of operating cash flow in Q1 2018. The change reflected the prior-year $328.0 million settlement proceeds and unfavorable working-capital timing.
- U.S. income before taxes increased 2.9% to $269.4 million, supported by pricing and lower marketing, general and administrative expenses.
- Canada income before taxes increased to $21.8 million from $9.1 million, largely because of the HEXO warrant gain and lower administrative expenses, despite volume declines.
- Europe’s pretax loss improved to $27.5 million from $29.9 million because of favorable margin effects, partly offset by increased marketing investment.
- International moved to a pretax loss of $0.3 million from income of $3.7 million, primarily because of lower Puerto Rico volumes, foreign exchange and cost inflation.
- The company adopted the new lease accounting standard on January 1, 2019, recognizing approximately $154 million of operating lease right-of-use assets and approximately $164 million of lease liabilities at adoption. Opening retained earnings increased by approximately $32 million from the adoption effects.
Guidance, Outlook, Commentary and Risks
- Management expected 2019 consolidated net interest expense of approximately $300 million.
- Management expected a 2019 effective tax rate of 18% to 22% and a preliminary long-term rate of 20% to 24%, subject to further guidance regarding the 2017 Tax Act.
- The company intended to continue deleveraging in 2019, maintain its investment-grade rating and revisit share repurchases after further debt reduction. The board intended to reinstitute a dividend payout ratio of 20% to 25% of annual trailing EBITDA in the second half of 2019 and thereafter.
- Management emphasized premiumization, innovation and core-brand support across regions. It cited improving U.S. trends for Coors Light and continued share gains for Miller Lite, premiumization initiatives in Canada and Europe, and growth in selected International markets.
- Planned or ongoing brewery projects include the Chilliwack, British Columbia brewery, expected to be completed in the third quarter of 2019, and a Longueuil, Quebec brewery, not expected to be completed until 2021. The Montreal brewery sale was anticipated to close in the second quarter of 2019, with timing subject to change.
- U.S. brewery-system implementations, including planned implementations at Albany and Irwindale in the second half of 2019, could affect shipment timing and volumes.
- Key operating risks include declining beer volumes and market share, commodity and transportation-cost inflation, aluminum and fuel price volatility, foreign exchange movements, European economic conditions, and uncertainty surrounding the U.K.’s exit from the European Union.
- Goodwill and indefinite-lived intangible assets remained significant. Europe and Canada reporting units were considered at risk of impairment based on their relatively narrow excess fair values at the October 1, 2018 testing date; future impairment charges remain possible if assumptions are not achieved.
- Accrued litigation, dispute and environmental reserves were $13.0 million at March 31, 2019. Several shareholder-related lawsuits connected with prior financial-statement restatements had potential losses that could not be estimated.
- The company may be unable to collect approximately $40 million of historically claimed but unpaid federal beer-duty refunds following a U.S. Treasury regulation effective in February 2019.
- Guarantee liabilities for certain equity-method investments were $50.1 million. Kaiser-related indemnity liabilities were $14.6 million, with maximum potential remaining claims of $89.3 million.
- Management concluded that disclosure controls were effective and that the previously disclosed material weakness involving accounting for income-tax effects of acquired partnership interests had been remediated as of March 31, 2019.
Facts Investors Should Verify
- Whether volume declines, particularly in the U.S. and Canada, stabilize and whether pricing and premiumization can offset continued cost inflation.
- The sustainability of operating cash flow after the seasonal working-capital outflow and the company’s ability to fund approximately $700 million of 2019 capital expenditures while deleveraging.
- Debt refinancing needs, commercial-paper reliance, covenant headroom and progress toward the company’s leverage and dividend objectives.
- The valuation and volatility of HEXO warrants and the impact of commodity, foreign exchange and interest-rate hedges on reported earnings.
- Execution and final costs for the Chilliwack and Longueuil brewery projects, the Montreal brewery sale and planned brewery closures.
- Potential impairment exposure in the Europe and Canada reporting units and the carrying value of substantial goodwill and indefinite-lived brands.
- Developments in the Stone Brewing trademark litigation, shareholder lawsuits, tax-refund claims, Kaiser indemnities and other contingencies.
- Whether the remediated internal control procedures remain effective in subsequent filings.