Molson Coors Beverage Company — 2020 Q2 Form 10-Q Summary
Business context and reporting period
Molson Coors is a global brewer with operations primarily in North America and Europe and brands including Coors, Miller, Molson Canadian, Carling, Blue Moon and Staropramen. The filing covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods. Effective January 1, 2020, the Company reorganized its reporting structure into North America and Europe segments.
Results were materially affected by the COVID-19 pandemic, including widespread closures or restrictions affecting bars, restaurants, sporting events and other on-premise venues. Nearly all consolidated second-quarter sales were estimated to come from off-premise channels, compared with approximately 23% of 2019 consolidated net sales from on-premise consumption.
Financial performance and key metrics
| Metric | Q2 2020 | Q2 2019 | Change |
|---|---|---|---|
| Net sales | $2,503.4 million | $2,948.3 million | Down 15.1% |
| Gross profit | $1,046.8 million | $1,188.5 million | Down 11.9% |
| Gross margin | 41.8% | 40.3% | Up approximately 150 bps |
| Operating income | $458.0 million | $468.7 million | Down 2.3% |
| Operating margin | 18.3% | 15.9% | Up approximately 340 bps |
| Net income attributable to MCBC | $195.0 million | $329.4 million | Down 40.8% |
| Diluted EPS | $0.90 | $1.52 | Down 40.8% |
| Six-month metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $4,606.2 million | $5,251.6 million | Down 12.3% |
| Operating income | $365.5 million | $690.8 million | Down 47.1% |
| Net income attributable to MCBC | $78.0 million | $480.8 million | Down 83.8% |
| Diluted EPS | $0.36 | $2.22 | Down 83.8% |
| Effective tax rate | 66% | 18% | Increase driven primarily by discrete tax expense |
- Q2 financial volume declined 12.5%; worldwide brand volume declined 11.6%. For the six months, financial volume declined 10.7% and worldwide brand volume declined 7.4%.
- North America Q2 net sales declined 8.3% to $2,200.2 million, and income before taxes declined 8.2% to $411.5 million.
- Europe Q2 net sales declined 44.6% to $307.1 million, and income before taxes declined to a loss of $11.0 million from income of $43.4 million.
- Six-month operating cash flow was $1,059.9 million, up from $828.0 million in 2019, primarily due to favorable working-capital timing, lower taxes paid and more than $500 million of temporary government-related tax payment deferrals.
- Capital expenditures paid were $345.1 million in the first six months, compared with $310.5 million in 2019. The Company reduced planned 2020 capital expenditures by approximately $200 million.
- Cash and cash equivalents were $780.8 million at June 30, 2020, versus $523.4 million at December 31, 2019.
- Total debt, including the current portion, was $8,477.1 million; current debt and short-term borrowings were $613.0 million. The Company had approximately $1.3 billion available under its $1.5 billion revolving credit facility at June 30, 2020.
Material changes versus the prior comparable period
- Revenue and volumes declined primarily because of on-premise closures, unfavorable channel and geographic mix, and supply constraints involving aluminum cans and other packaging.
- Marketing, general and administrative expense declined 31.9% in Q2 and 19.0% in the first half, reflecting spending reductions, delayed marketing activity and revitalization-plan savings.
- Q2 special items were a $64.3 million expense versus a $49.9 million benefit in 2019. First-half special items were a $150.9 million expense versus a $36.9 million benefit.
- Special items included restructuring, Denver office impairment, and accelerated depreciation and other costs related to the planned closure and sale of the Irwindale brewery. The Company expects approximately $10 million to $15 million of additional net Irwindale-related charges before the expected fourth-quarter 2020 sale.
- The first half included $48.6 million of COVID-related keg relief, returns and obsolete inventory costs, including a $31.8 million reduction to net sales and $16.8 million of cost of goods sold charges.
- The effective tax rate increased substantially because of approximately $135 million of discrete tax expense from final U.S. Treasury hybrid regulations. The Company stated that related cash tax outflows could reach this amount in 2021.
- The Board suspended regular quarterly dividends on the Class A, Class B and exchangeable shares for the remainder of fiscal 2020.
- The Company repaid its $500 million 2.25% notes at maturity in March 2020 and used commercial paper borrowings partly to fund the repayment and preserve liquidity.
Guidance, outlook, risks and unusual items
The Company withdrew its detailed 2020 and beyond financial outlook and did not provide an updated detailed forecast because of continuing pandemic uncertainty. Management expects significant adverse effects on net sales and profit in the third quarter, full-year 2020 and potentially beyond.
- On-premise demand remained below pre-pandemic levels, particularly in Europe and the U.K.; management did not expect off-premise volume growth to fully offset on-premise losses.
- Supply-chain constraints, especially for aluminum cans and packaging, were expected to remain a challenge during the third quarter.
- Temporary tax-payment deferrals that benefited first-half operating cash flow by more than $500 million were expected to reverse substantially in the second half of 2020 and thereafter.
- The Company amended its revolving credit facility. The maximum permitted net debt-to-EBITDA ratio was 4.75x at June 30, 2020, increasing to 5.25x for the quarters ending September 30, 2020 through March 31, 2021, before stepping down over time. The Company was in compliance at June 30, 2020.
- Management cited risks involving renewed venue closures, recessionary conditions, customer credit losses, foreign currency volatility, commodity prices, packaging availability, liquidity, credit ratings and potential covenant pressure.
- Goodwill and indefinite-lived intangible assets were not impaired as of June 30, 2020, but prolonged or worsening pandemic effects could result in material future impairment charges.
- Material contingencies include litigation with Stone Brewing, securities and derivative shareholder actions, potential changes to Ontario’s beer distribution framework, Kaiser-related indemnities, and uncertainty over recovery of approximately $20 million of previously claimed beer duty and tax refunds.
- The Company had $20.6 million accrued for litigation, disputes and environmental matters at June 30, 2020. Certain legal matters have no estimable range of potential loss.
Most important facts for an investor to verify
- Whether on-premise sales recover without renewed closures and whether off-premise demand can offset lost higher-margin volume.
- The timing and magnitude of reversal of more than $500 million in deferred tax payments and the potential 2021 cash tax outflow of up to approximately $135 million.
- Compliance with amended leverage covenants as EBITDA and cash flow respond to pandemic-related declines.
- Commercial paper balances, the September 2020 CAD 500 million note maturity, and remaining revolving-credit availability.
- Future COVID-related keg returns, inventory obsolescence, restructuring, brewery closure and impairment charges.
- Potential goodwill and indefinite-lived intangible-asset impairments if pandemic conditions persist or market valuations weaken.
- Progress and final economics of the Irwindale brewery sale and the Longueuil, Quebec brewery project.
- Developments in Stone Brewing litigation, shareholder litigation, Ontario regulatory proposals and beer duty refund appeals.