Molson Coors Beverage Company — Q3 2013 Form 10-Q Summary
Business context and reporting period
Molson Coors Brewing Company is a global brewer operating through Canada, MillerCoors in the United States, Europe, and Molson Coors International. The filing covers the thirteen weeks ended September 28, 2013 and the thirty-nine weeks ended September 28, 2013, compared with the corresponding periods ended September 29, 2012. Financial statements are unaudited and presented in U.S. dollars. Fiscal results are seasonal and quarterly performance is not necessarily indicative of the full year.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | First 39 weeks 2013 | First 39 weeks 2012 |
|---|---|---|---|---|
| Net sales | $1,171.2 million | $1,195.5 million | $3,177.7 million | $2,886.3 million |
| Gross profit | $501.2 million | $508.5 million | $1,276.5 million | $1,180.4 million |
| Operating income | $178.7 million | $304.0 million | $651.6 million | $704.7 million |
| Net income attributable to MCBC | $121.8 million | $198.4 million | $435.8 million | $383.0 million |
| Diluted EPS | $0.66 | $1.09 | $2.37 | $2.11 |
| Underlying diluted EPS from continuing operations | $1.45 | $1.37 | $3.27 | $3.22 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $1,030.0 million | $840.0 million |
| Underlying free cash flow | Not provided for the quarter | Not provided for the quarter | $746.8 million | $745.0 million |
Q3 gross margin was approximately 42.8%, compared with approximately 42.5% in the prior-year quarter. Q3 operating margin was approximately 15.3%, compared with 25.4%, primarily reflecting substantially higher special items. First-nine-month gross margin was approximately 40.2%, compared with 40.9% in the prior-year period.
- Worldwide beer volume declined 0.9% in Q3 to 17.007 million hectoliters; first-nine-month volume increased 11.4%, principally because Central Europe was included for a full period following the 2012 StarBev acquisition.
- Underlying after-tax income increased 7.7% in Q3 to $268.1 million. Underlying EBITDA increased 0.6% to $464.3 million in Q3 and 5.8% to $1,154.7 million for the first nine months.
- Cash and cash equivalents were $406.9 million at September 28, 2013, compared with $624.0 million at December 29, 2012.
- Total long-term debt, including the current portion, was $3,314.3 million, and short-term borrowings were $577.5 million. Total debt obligations reported in the contractual-obligations table were $3,897.2 million.
- Net cash used in investing activities was $310.6 million, including $218.2 million of capital expenditures and a $924.0 million investment in MillerCoors partially offset by an $822.4 million return of capital.
- Dividends paid were $175.7 million for the first nine months, and dividends declared and paid were $0.32 per share per quarter.
Material changes versus the prior comparable period
- Q3 net sales decreased 2.0%, while first-nine-month net sales increased 10.1%, largely reflecting the inclusion of Central Europe for a full nine months in 2013.
- Q3 reported net income attributable to MCBC declined 38.6% and diluted EPS declined from $1.09 to $0.66. The principal factor was a $150.9 million non-cash impairment charge for the Jelen and Ostravar European brands, included in $163.0 million of Q3 special items versus $35.9 million in the prior-year quarter.
- First-nine-month reported net income increased 13.8% and diluted EPS increased from $2.11 to $2.37, despite higher special items, because the prior-year period included acquisition-related financing and integration costs and other non-recurring charges.
- Canada pretax income declined 12.4% in Q3, driven by lower volume, weak economic conditions, higher promotional activity, and unfavorable currency effects.
- MillerCoors equity income increased 12.3% in Q3 to $148.3 million, supported by pricing, brand mix, and cost reductions, partly offset by lower volumes and input inflation.
- Europe underlying pretax income increased 5.7% to $95.0 million in Q3, but reported pretax results were a $69.5 million loss after the impairment charge.
- The company repaid its $575.0 million convertible notes on July 30, 2013, settled most of the €500 million convertible note for $614.7 million in cash, and fully repaid its €120 million term loan. These repayments were partly funded with commercial paper and Euro-denominated revolving-credit borrowings.
- Operating cash flow increased by $190.0 million year over year, while cash declined by $217.1 million from year-end due primarily to debt repayment, capital expenditures, MillerCoors funding, dividends, and derivative settlements.
Guidance, outlook, commentary, and risks
- Management expects continued weak consumer demand and changing consumer preferences. Canada volume and profit trends were expected to remain under pressure in Q4 from macroeconomic and promotional challenges, with unfavorable comparisons for marketing and general and administrative costs.
- Europe was expected to face weak economic conditions and demand volatility, particularly in Serbia, Romania, and Bulgaria, with higher Q4 marketing and general and administrative spending.
- Management expected 2013 corporate marketing and general and administrative expense of approximately $105 million, capital expenditures of approximately $300 million, consolidated net interest expense of approximately $170 million, pension contributions of approximately $150 million including the company’s MillerCoors share, and pension expense of approximately $50 million.
- 2013 underlying effective tax rate guidance was 13% to 15%, including approximately four percentage points of one-time benefits. Management stated that the normalized medium-term underlying rate is expected to be 20% to 24%.
- Europe and Canada goodwill, the Molson core brand, and certain European brands were identified as vulnerable to future impairment if cash flows, economic recovery, discount rates, or market multiples deteriorate. The Jelen, Ozujsko, and Branik brands had aggregate estimated fair value only approximately 1% above carrying value.
- Molson was litigating Miller’s attempted termination of the Canadian license agreement. An injunction prevented termination pending a trial scheduled for December 2013. The agreement generated $72.9 million of first-nine-month 2013 net sales, and the related intangible asset had a $60.8 million carrying value.
- The U.K. pension plan valuation could materially increase long-term funding obligations. The company also remains exposed to environmental matters, Kaiser-related indemnities, foreign currency, commodity prices, interest rates, and derivative liabilities.
- On November 5, 2013, after the reporting date, the company agreed with Anheuser-Busch InBev to terminate the Modelo Molson Imports joint venture effective February 28, 2014, in exchange for a CAD 70 million payment.
Most important facts for investors to verify
- Whether the $150.9 million European brand impairment is isolated or signals further impairment risk for the Europe, Canada, Molson, Ozujsko, or Branik assets.
- The outcome and economic impact of the Miller Canadian license litigation, including the potential effect on the $60.8 million related intangible asset and future sales.
- Liquidity following the convertible-note repayments, including $391.1 million of commercial paper and $162.3 million of Euro revolving-credit borrowings outstanding at quarter-end.
- The timing and cash impact of the remaining cross-currency swaps, including the $134.0 million net liability at quarter-end and the subsequent $51.4 million settlement disclosed for early Q4.
- The results of the U.K. pension valuation and any resulting increase in required contributions.
- The sustainability of underlying earnings growth amid declining Q3 volumes, weak consumer demand, promotional pressure, commodity inflation, and higher planned marketing spending.
- The CAD 70 million Modelo joint-venture termination payment and the operational and financial effects of ending the MMI arrangement in February 2014.
- The correction of immaterial foreign-currency tax adjustments affecting previously reported 2013 comprehensive income and accumulated other comprehensive income.