Business Context and Reporting Period
Molson Coors Brewing Company filed an unaudited Form 10-Q for the three months ended March 31, 2015. The company operates through Canada, the equity-accounted MillerCoors U.S. business, Europe, and Molson Coors International. Results are seasonal and the first quarter is not necessarily indicative of full-year performance. All amounts are in U.S. dollars unless noted.
Financial Performance and Key Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $700.0 million | $816.0 million | (14.2%) |
| Gross profit | $245.2 million | $292.8 million | (16.2%) |
| Operating income | $125.3 million | $204.2 million | (38.6%) |
| Net income attributable to MCBC | $81.1 million | $163.4 million | (50.4%) |
| Net income from continuing operations attributable to MCBC | $79.2 million | $165.3 million | (52.1%) |
| Diluted EPS from continuing operations | $0.42 | $0.89 | (52.8%) |
| Underlying income attributable to MCBC | $86.1 million | $102.2 million | (15.8%) |
| Underlying diluted EPS | $0.46 | $0.55 | (16.4%) |
| Underlying EBITDA | $228.6 million | $251.2 million | (9.0%) |
| Net cash provided by operating activities | $(202.6) million | $149.7 million | Declined $352.3 million |
Gross margin was approximately 35.0%, compared with 35.9% in the prior-year quarter. The decline in reported earnings reflected lower volumes, unfavorable foreign exchange, higher tax expense, and the absence of substantial prior-year gains. Positive pricing and mix, cost reductions, lower interest expense, and higher MillerCoors earnings partially offset these factors.
- Worldwide beer volume declined 3.5% to 11.501 million hectoliters; financial volume declined 4.8%.
- Equity income in MillerCoors increased 5.3% to $129.3 million, supported by pricing, mix, and cost control despite lower volumes.
- Effective tax rate increased to approximately 14% from 3%; the prior-year period benefited from larger discrete tax benefits.
- Dividends paid were $76.2 million, or $0.41 per share.
- Capital expenditures paid were $73.7 million; management expects approximately $300 million of 2015 capital expenditures, excluding equity-method ventures.
Liquidity, Debt, and Cash Flow
- Cash and cash equivalents were $317.6 million at March 31, 2015, versus $624.6 million at December 31, 2014.
- Total long-term debt, including the current portion, was $3.019 billion; short-term borrowings and the current portion of long-term debt totaled $941.2 million.
- The company had $622.2 million available under its $750 million revolving credit facility after commercial paper borrowings.
- Commercial paper outstanding was $127.8 million, and the company had $26.8 million outstanding under a European revolving facility.
- Debt-free net working capital was negative $34.8 million, compared with positive $103.0 million at year-end 2014.
- Underlying free cash flow was $(162.2) million, compared with $(64.6) million in Q1 2014. The deterioration was primarily due to lower earnings, working-capital timing, higher taxes, and a $227.1 million discretionary U.K. pension contribution.
- Total defined-benefit plan contributions were $233.9 million in the quarter. Full-year 2015 contributions are expected to be approximately $260 million.
- The company stated that operating cash flow, MillerCoors distributions, and available borrowing capacity should be adequate for anticipated operating needs, debt service, dividends, repurchases, and capital expenditures over the next twelve months.
Material Changes Versus the Prior Comparable Period
- Reported net sales fell 14.2%, although management estimated a 3.0% decline excluding foreign-currency effects.
- Canada pretax income declined to $30.9 million from $88.3 million. The prior-year period included $63.2 million of income from terminating the Modelo Molson Imports joint venture.
- Europe reported a pretax loss of $4.1 million versus income of $27.0 million. The change reflected weak demand, lower volume, negative mix, lost distribution and contract-brewing revenues, higher severance, and $11.8 million of accelerated depreciation related to the planned Alton brewery closure.
- MillerCoors net income increased 4.6% to $304.6 million, while its domestic sales volume declined 2.7% and domestic net sales per hectoliter increased 1.6%.
- Comprehensive loss attributable to MCBC was $556.3 million, primarily due to a $626.8 million after-tax foreign-currency translation loss.
- Total assets decreased to $12.952 billion from $13.996 billion, primarily reflecting foreign-exchange effects on goodwill and intangible assets.
- A new four-year authorization permits up to $1.0 billion of share repurchases. In April 2015, the company entered into an accelerated share repurchase agreement with an initial payment of approximately $50 million.
- On April 1, 2015, the company acquired Mount Shivalik Breweries in India, adding two breweries and more than doubling its Indian brewing capacity. Financial effects were to be recorded beginning in Q2 2015.
Guidance, Outlook, Commentary, and Risks
- Management expects 2015 results to remain pressured by foreign-currency movements, termination of three major business contracts, and a higher effective tax rate.
- The U.K. Modelo distribution arrangement ended at December 31, 2014; the Heineken contract-brewing arrangement ended at the end of April 2015; and the Canadian Miller distribution license ended March 31, 2015. Management expects these changes to reduce pretax profit for the remainder of 2015.
- Management expects 2015 Corporate marketing, general and administrative expense of approximately $110 million, excluding foreign exchange effects; consolidated net interest expense of approximately $120 million; and an underlying tax rate of 18% to 22%.
- The Ontario beer framework, agreed in principle but subject to definitive documents, is expected to impose an additional CAD 100 million annual tax on beer volume sold in Ontario, phased in over four years beginning November 1, 2015. It also includes restrictions on certain price increases, expanded retail access, and CAD 100 million of planned Brewers' Retail capital spending. The ultimate financial impact remains uncertain.
- European goodwill and certain brand intangibles, including Jelen, Ozujsko, Niksicko, and the Molson core brand, remain at risk of future impairment if projected cash flows, economic recovery, market multiples, or discount-rate assumptions deteriorate.
- The company received European regulatory assessments totaling approximately $76 million and estimated a possible loss range of zero to approximately $82 million. The assessments are being challenged.
- A proposed Ontario class action alleges price fixing and market allocation involving The Beer Store and seeks CAD 1.4 billion in damages. The company considers the claim without merit and intends to defend it.
- Legacy Kaiser indemnity obligations remain, including a maximum potential claim of $109.5 million for purchased tax credits and a separate indemnity exposure capped at the $68.0 million sale price of the disposed interest.
- Other risks include foreign-exchange volatility, European economic weakness, competitive pressure, consumer migration toward value brands, pension funding requirements, commodity and interest-rate exposure, and dependence on distributions from MillerCoors.
Most Important Facts for Investors to Verify
- Whether currency rates and the termination of the U.K. and Canadian contracts produce the expected full-year earnings impact.
- The final Ontario beer framework, including the CAD 100 million annual tax, pricing restrictions, implementation timing, and effects on Canada cash flows and brand valuations.
- The outcome and potential exposure from the European regulatory assessments and the Ontario class-action litigation.
- Progress and final costs associated with the Alton brewery closure, U.K. supply-chain changes, and related special items.
- Whether the company achieves its 2015 outlook for approximately $300 million of capital expenditures, $260 million of pension contributions, $120 million of net interest expense, and an 18% to 22% underlying tax rate.
- Future impairment testing results for the at-risk Europe and Canada goodwill and brand intangibles.
- The final share count and average repurchase price under the April 2015 accelerated share repurchase agreement.