Molson Coors Brewing Company — Q3 2018 Form 10-Q Summary
Business context and reporting period
Molson Coors is a global brewer operating through its U.S., Canada, Europe and International segments. This unaudited Form 10-Q covers the three and nine months ended September 30, 2018, with comparisons to the comparable 2017 periods. Results are reported in U.S. dollars and are affected by seasonality and foreign-currency movements.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net sales | $2,934.2 million | $2,883.2 million | $8,350.9 million | $8,423.2 million |
| Operating income | $469.7 million | $506.2 million | $1,490.1 million | $1,407.5 million |
| Net income attributable to MCBC | $338.3 million | $287.0 million | $1,040.5 million | $825.4 million |
| Diluted EPS | $1.56 | $1.33 | $4.80 | $3.81 |
| Net cash from operating activities | Not separately provided for the quarter | Not separately provided for the quarter | $1,791.4 million | $1,145.4 million |
- Q3 net sales increased 1.8%; nine-month net sales declined 0.9%.
- Approximate gross margin was 41.6% in Q3 and 40.3% for the nine months, compared with 44.9% and 44.0%, respectively, in 2017.
- Approximate operating margin was 16.0% in Q3 and 17.8% for the nine months, compared with 17.6% and 16.7%, respectively, in 2017.
- Approximate net margin attributable to MCBC was 11.5% in Q3 and 12.5% for the nine months, compared with 10.0% and 9.8%, respectively, in 2017.
- Financial volume increased 0.8% in Q3 but declined 1.9% year to date. Worldwide brand volume declined 1.0% in Q3 and 2.1% year to date.
- Capital expenditures paid were $491.0 million for the nine months; management expected approximately $670 million for full-year 2018.
- Cash and cash equivalents were $750.1 million at September 30, 2018, versus $418.6 million at December 31, 2017.
- Total debt, including the current portion, was $10,559.7 million; long-term debt was $8,970.3 million. The company had no borrowings under its $1.5 billion revolving credit facility.
- Dividends paid were $265.6 million for the nine months, or $0.41 per share per quarter.
Material changes versus the prior comparable period
- Q3 attributable net income increased 17.9% and diluted EPS increased 17.3%, despite lower operating income. The improvement reflected lower income-tax expense, lower marketing and general administrative expense, higher pricing and a U.S. vendor-dispute benefit.
- Nine-month attributable net income increased 26.1%, substantially aided by a $328.0 million special gain from the settlement of the Miller International Business acquisition purchase-price adjustment. Excluding this unusual item, the year-over-year improvement would be materially smaller.
- Operating income declined in Q3 primarily because of higher cost of goods sold, higher special charges and unfavorable commodity mark-to-market effects. Nine-month operating income increased due largely to the acquisition settlement gain.
- U.S. Q3 income before taxes increased 1.9%, while nine-month income before taxes declined 7.6%, reflecting volume pressure, input-cost inflation and special charges.
- Canada Q3 income before taxes was broadly stable, but nine-month income before taxes declined 11.9% because of lower volume, unfavorable mix and inflation.
- Europe Q3 income before taxes increased 1.2%, while nine-month income before taxes declined 20.3%, partly because 2017 included a roughly $50 million indirect-tax provision release.
- International improved from a $6.0 million Q3 loss to a $1.0 million loss and generated $4.0 million of nine-month pretax income versus a $12.2 million loss in 2017.
- The company adopted new revenue-recognition guidance in 2018. The adoption reduced nine-month net sales by $53.5 million and reduced operating income by $8.0 million versus historical accounting, with no impact on cash flows and no expected material full-year net-income impact.
- The company repaid CAD 400 million of 2.25% notes maturing in September 2018 and reduced borrowings under commercial paper and other facilities.
Guidance, outlook, commentary and risks
- Management expected 2018 corporate net interest expense of approximately $300 million to $310 million and defined-benefit pension contributions of approximately $10 million.
- Management expected a long-term consolidated effective tax rate of 20% to 24%, benefiting from the 2017 U.S. Tax Act. The reported effective tax rate was 16% in Q3 and 18% for the nine months, versus 33% and 29% in 2017.
- The company planned to maintain its quarterly dividend at $0.41 per share until achieving approximately 3.75x debt to EBITDA, expected near the second half of 2019. Share repurchases remained suspended while debt is reduced.
- Management initiated U.S. restructuring expected to reduce employment by approximately 350 employees in Q4 2018. Q3 special charges included $28.7 million of restructuring costs; additional charges may arise.
- The Colfax, California cidery was expected to close in December 2018, with total related special charges estimated at approximately $6 million. Vancouver and Montreal brewery closures were expected in 2019 and 2021, respectively.
- Commodity costs, particularly aluminum, freight and fuel, remained significant risks. Q3 and nine-month unrealized commodity hedge losses were $23.2 million and $62.8 million, respectively, versus gains of $45.3 million and $85.0 million in the comparable 2017 periods.
- The company is exposed to foreign-exchange volatility, European receivable-collection risk, changing tax laws, input-cost inflation, competitive pressure and changing consumer preferences. Approximately 65% of cash was held outside the U.S. at quarter-end.
- The company formally exited its China business and recorded related special charges. It also completed the formation of a 57.5%-owned Canadian joint venture with HEXO to pursue non-alcoholic cannabis-infused beverages, subject to substantial regulatory, market-acceptance and reputational risks.
- Stone Brewing filed a trademark infringement lawsuit concerning the Keystone brand. A potential loss range was not estimable at the filing date.
- Management stated that operating cash flow, financing access and existing liquidity should be adequate for operating needs, debt service, dividends and capital expenditures for the following twelve months.
Most important facts an investor should verify
- Reconcile underlying operating performance excluding the $328.0 million acquisition-related settlement gain and other special items.
- Track U.S. and Canada brand volumes, distributor inventory effects and whether pricing offsets continued volume and mix pressure.
- Verify progress toward the approximately 3.75x leverage target, debt maturities, refinancing needs and the timing of any dividend-policy change.
- Assess the sustainability of lower tax rates after discrete benefits and implementation of the 2017 Tax Act.
- Monitor aluminum, freight, fuel and foreign-exchange costs, including the potential earnings volatility from commodity hedges.
- Evaluate restructuring costs, brewery closures, capital spending of approximately $670 million and expected efficiency benefits.
- Review the impact of the revenue-recognition adoption on reported sales comparisons and segment trends.
- Follow the Stone Brewing litigation, Agrokor receivable exposure, Kaiser indemnities and the regulatory and commercial risks of the HEXO cannabis joint venture.