Molson Coors Beverage Company — Q1 2018 Form 10-Q Summary
Business context and reporting period
Molson Coors Brewing Company is a global brewer operating through U.S., Canada, Europe and International segments. The filing covers the three months ended March 31, 2018, with comparisons to March 31, 2017. Results are unaudited, presented in U.S. dollars under U.S. GAAP, and are affected by seasonality.
Financial performance and key metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Sales | $2,868.0 million | $2,913.8 million | (1.6%) |
| Net sales | $2,331.5 million | $2,448.7 million | (4.8%) |
| Gross profit | $795.8 million | $1,076.4 million | (26.1%) |
| Gross margin | 34.1% | 44.0% | Down 9.9 points |
| Operating income | $429.5 million | $364.4 million | +17.9% |
| Operating margin | 18.4% | 14.9% | Up 3.5 points |
| Net income attributable to MCBC | $278.1 million | $208.5 million | +33.4% |
| Diluted EPS | $1.28 | $0.96 | +33.3% |
| Operating cash flow | $315.2 million | $(118.3) million | +$433.5 million |
| Capital expenditures paid | $208.3 million | $180.0 million | +$28.3 million |
Worldwide brand volume declined 3.1% to 19.101 million hectoliters; financial volume declined 4.9% to 20.813 million hectoliters. Net income benefited materially from a $328.0 million gain related to the settlement of the Miller International Business purchase-price adjustment with Anheuser-Busch InBev.
The effective tax rate was 21%, compared with 23% in the prior-year quarter, primarily reflecting the reduction in the U.S. federal corporate tax rate under the 2017 Tax Act. Dividends were $0.41 per share.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $197.9 million at March 31, 2018, down from $418.6 million at December 31, 2017.
- Total debt, including current maturities and short-term borrowings, was $12.6 billion; long-term debt was $9.5 billion and current debt and short-term borrowings were $1.6 billion.
- Approximately $1.4 billion remained available under the $1.5 billion revolving multi-currency credit facility; no borrowings were drawn on that facility.
- The company was in compliance with its debt covenants and had met all debt payment obligations. Long-term credit ratings were BBB-/Stable, Baa3/Stable and BBB(Low)/Stable from S&P, Moody’s and DBRS, respectively.
- Net cash used in financing activities was $289.9 million, primarily reflecting repayment of commercial paper borrowings and dividends.
Material changes versus the prior comparable period
- Net sales fell 4.8% because of lower volumes, unfavorable mix and other effects, partly offset by pricing and foreign currency translation.
- Gross profit declined 26.1%, with cost of goods sold increasing to 65.9% of net sales from 56.0%. Management cited volume deleverage, aluminum and other input-cost inflation, freight and fuel costs, and unfavorable mix.
- Operating income increased despite weaker underlying operations because Q1 2018 included the $328.0 million purchase-price settlement gain; Q1 2017 included $50 million of favorable indirect-tax contingency releases and an $8.1 million Montreal Canadiens-related gain.
- U.S. income before tax decreased 17.3% to $261.7 million, primarily due to lower shipments, negative mix, volume deleverage, cost inflation and higher depreciation.
- Canada income before tax decreased 56.5% to $9.1 million, driven by volume declines, higher accelerated depreciation and the absence of the prior-year gain.
- Europe shifted to a $29.9 million loss before tax from $27.0 million of income, primarily due to the absence of the prior-year indirect-tax benefit, revised excise-tax calculations and increased strategic investment.
- International income before tax increased to $3.7 million from $1.5 million, helped by lower marketing expenses and $2.0 million of Colombia-related settlement proceeds.
Guidance, outlook, risks and unusual items
- Management expects approximately $670 million of 2018 capital expenditures, including construction of new British Columbia and Montreal breweries.
- Management expects approximately $10 million of 2018 defined-benefit pension contributions and approximately $330 million of 2018 corporate net interest expense.
- Management expects a long-term consolidated effective tax rate of 20% to 24%, while continuing to evaluate the 2017 Tax Act and GILTI accounting.
- The quarterly dividend was expected to remain $0.41 per share. Share repurchases remained suspended while the company focuses on debt reduction.
- Management expects U.S. distributor inventories to rebuild in the second half of 2018 and is targeting premium share gains, above-premium volume growth and continued cost savings.
- The company acquired Aspall Cyder Limited in the U.K. during the quarter. It also announced the planned closure of the Colfax, California cidery, with approximately $6 million of expected special charges through completion.
- Canada’s Vancouver and Montreal brewery closures are expected in 2019 and 2021, respectively. Europe’s Burton South brewery closed during Q1 2018.
- Commodity derivative mark-to-market losses were $84.7 million in Q1 2018, compared with a $63.1 million gain in Q1 2017, creating significant period-to-period earnings volatility.
- Operating cash flow benefited from the $328.0 million settlement proceeds and therefore is not representative of recurring cash generation. Approximately 80% of cash was held outside the U.S., largely in foreign currencies.
- Receivables are concentrated in Europe, and the company continued to have exposure to financially distressed Croatian customer Agrokor. Litigation, environmental and other contingencies accrued were $17.3 million; guarantee liabilities totaled $56.8 million.
- The company adopted new revenue-recognition and pension-cost presentation standards. Revenue recognition reduced Q1 2018 reported net sales by $16.1 million versus historical guidance, with no material expected full-year net-income effect; opening retained earnings was reduced by $27.8 million.
Important facts for investors to verify
- Separate recurring operating performance from the $328.0 million one-time ABI settlement gain and other prior-year tax-related benefits.
- Verify volume recovery, distributor inventory normalization and pricing progress, particularly in the U.S. and Canada.
- Monitor gross-margin pressure from aluminum, freight, fuel, labor and other input costs.
- Track debt maturities, commercial-paper usage, deleveraging progress and covenant headroom.
- Assess execution and funding requirements for the British Columbia and Montreal brewery projects and other planned closures.
- Review exposure to foreign exchange, European customer collectibility, commodity derivatives, pension obligations and unresolved tax-law interpretations.