MOLSON COORS BEVERAGE CO quarterly report, Q2 FY2021

Molson Coors Beverage Company — Q2 2021 Form 10-Q Summary

Business context and reporting period

Molson Coors Beverage Company reported unaudited results for the three and six months ended June 30, 2021, compared with the corresponding 2020 periods. The company operates through North America and Europe and reports in U.S. dollars. Results remained affected by COVID-19 restrictions, particularly in on-premise channels, while reopening trends improved during the second quarter.

Key financial metrics

Metric	Q2 2021	Q2 2020	Six months 2021	Six months 2020
Net sales	$2,939.4 million	$2,503.4 million	$4,837.8 million	$4,606.2 million
Gross profit	$1,271.5 million	$1,046.8 million	$2,002.5 million	$1,670.6 million
Operating income	$580.8 million	$458.0 million	$758.0 million	$365.5 million
Net income attributable to MCBC	$388.6 million	$195.0 million	$472.7 million	$78.0 million
Diluted EPS	$1.79	$0.90	$2.17	$0.36
Operating cash flow	Not separately provided	Not separately provided	$748.5 million	$1,059.9 million

Q2 net sales increased 17.4%, driven by higher financial volume, favorable pricing, brand and channel mix, and currency. Six-month net sales increased 5.0%.
Q2 financial volume increased 5.5%, while six-month financial volume declined 2.4%. Worldwide brand volume increased 3.1% in Q2 and declined 2.4% year to date.
Approximate Q2 gross margin was 43.3%, compared with 41.8% in the prior-year quarter. Approximate net income margin was 13.2%, compared with 7.8%.
The effective tax rate declined to 25% in Q2 from 51% and to 27% for the first six months from 66%, primarily because of lower discrete tax expense. The company recorded approximately $18 million of Q2 discrete tax expense from the U.K. tax-rate increase.
Cash and cash equivalents were $1,308.9 million at June 30, 2021, compared with $770.1 million at December 31, 2020.
Capital expenditures paid were $211.9 million in the first six months, compared with $345.1 million in the prior-year period.
Total debt, including the current portion, was $8,210.5 million at June 30, 2021. Current debt and short-term borrowings were $1,525.1 million, including $1.0 billion of notes due July 2021.
The company had no borrowings under its $1.5 billion revolving credit facility or commercial paper program at June 30, 2021. Approximately $140 million of net commercial paper borrowings were outstanding as of July 29, 2021, leaving approximately $1.4 billion available.

Material changes versus the prior comparable period

North America Q2 net sales increased 10.1% to $2,422.4 million; income before taxes increased 4.1% to $428.2 million. Results benefited from pricing, mix, higher volume, cost savings and lower special-item charges, partly offset by inflation and higher marketing expense.
Europe Q2 net sales increased 69.5% to $520.5 million; income before taxes improved to $47.4 million from a $11.0 million loss. Reopening of on-premise venues, favorable mix, pricing and currency were key contributors.
Q2 special-item charges declined to $9.0 million from $64.3 million. Six-month charges declined to $19.9 million from $150.9 million, principally reflecting lower restructuring and asset-abandonment costs.
Marketing, general and administrative expense increased 30.0% in Q2 and 6.1% for the first six months, reflecting higher marketing investment, incentive compensation and the cycling of reduced pandemic-period spending.
Operating cash flow declined $311.4 million year over year, primarily because 2020 benefited from more than $500 million of pandemic-related tax payment deferrals and favorable working-capital timing.
The company suspended regular dividends from the second quarter of 2020 through the second quarter of 2021. A quarterly dividend was reinstated in the third quarter of 2021.

Guidance, outlook, commentary and risks

Management expects to recover the production and shipment disruption caused by the March 2021 cybersecurity incident by the end of 2021. The incident generated $2.7 million of incremental net one-time costs through June 30.
Management expects on-premise trends to improve during the balance of 2021 as restrictions ease and prior-year comparisons normalize. It continues to invest in Coors Light, Miller Lite, hard seltzers, beyond-beer products and expanded distribution initiatives.
Management expects 2021 consolidated net interest expense of approximately $270 million, plus or minus 5%.
The company repaid its $1.0 billion, 2.1% notes at maturity on July 15, 2021 using cash on hand and commercial paper borrowings. Management remains committed to deleveraging and maintaining an investment-grade rating.
The revitalization plan is expected to generate aggregate restructuring costs of approximately $100 million to $120 million through 2021. The remaining accrued restructuring balance was approximately $16.2 million at June 30, 2021.
Key risks include COVID-19 variants and renewed restrictions, slower recovery of bars and restaurants, commodity and transportation inflation, foreign-exchange volatility, cybersecurity threats, potential goodwill or intangible-asset impairment, debt refinancing and covenant pressure, and customer credit risk.
The company had approximately $15.7 million of accrued litigation, dispute and environmental liabilities. The Stone Brewing trademark litigation has a trial reset for November 8, 2021, and the potential loss cannot currently be estimated.
The company reported $46.8 million of guarantee liabilities related to equity-method investments and $11.5 million of accrued Kaiser-related indemnities; the maximum potential Kaiser-related claims were $70.4 million.
Potential changes to Ontario’s beer distribution and retail framework could adversely affect North America, although the relevant legislation had not been proclaimed as law as of the filing date.

Important facts for investors to verify

Confirm the post-quarter-end repayment of the $1.0 billion notes and the resulting commercial-paper balance and liquidity.
Assess whether on-premise reopening, Europe recovery and cybersecurity-related shipment recovery continued through the second half of 2021.
Monitor gross-margin effects from aluminum, packaging, transportation and brewery-cost inflation.
Review leverage, covenant headroom and credit-rating outlook following the debt repayment and dividend reinstatement.
Evaluate impairment sensitivity for North America goodwill and Europe’s at-risk Staropramen indefinite-lived brand.
Track COVID-19 restrictions, Ontario regulatory developments, Stone Brewing litigation and other unestimable contingencies.