Business Context and Reporting Period
Molson Coors Brewing Company reported unaudited results for the thirteen and twenty-six weeks ended June 29, 2013, compared with June 30, 2012. The company operates through Canada, the equity-method MillerCoors investment in the U.S., Europe, and Molson Coors International. Beginning in fiscal 2013, the U.K. and Ireland operations were combined with Central Europe into the Europe segment. Results are reported in U.S. dollars and are affected by seasonal beer demand and foreign exchange movements.
Key Financial Metrics
| Metric | Q2 2013 | Q2 2012 | H1 2013 | H1 2012 |
|---|---|---|---|---|
| Net sales | $1,178.0 million | $999.4 million | $2,006.5 million | $1,690.8 million |
| Gross profit | $493.9 million | $419.3 million | $775.3 million | $671.9 million |
| Operating income | $360.9 million | $278.9 million | $472.9 million | $400.7 million |
| Net income attributable to MCBC | $278.4 million | $105.1 million | $314.0 million | $184.6 million |
| Diluted EPS | $1.51 | $0.57 | $1.71 | $1.01 |
| Net cash from operating activities | Not separately provided | Not separately provided | $591.0 million | $397.4 million |
| Underlying free cash flow | Not separately provided | Not separately provided | $365.8 million | $336.3 million |
Q2 net sales increased 17.9% and first-half net sales increased 18.7%. Q2 gross margin was approximately 41.9%, compared with 42.0% in the prior year; first-half gross margin was approximately 38.6%, compared with 39.7%. Q2 operating margin was approximately 30.6%, compared with 27.9%; first-half operating margin was approximately 23.6%, compared with 23.7%.
- Worldwide beer volume increased 20.2% in Q2 and 20.3% in the first half, largely from inclusion of Central Europe. Consolidated owned volume increased 52.7% in Q2 and 56.3% in the first half.
- Underlying after-tax income increased 11.4% in Q2 to $278.6 million, or $1.51 per diluted share, but declined 0.7% in the first half to $333.2 million, or $1.82 per diluted share.
- Underlying EBITDA increased 12.5% in Q2 to $473.2 million and 9.6% in the first half to $690.4 million.
- Cash and cash equivalents were $801.6 million at June 29, 2013, compared with $624.0 million at year-end 2012 and $516.0 million at June 30, 2012.
- Total long-term debt, including the current portion, was $4,554.3 million; current debt and short-term borrowings totaled $1,272.4 million, and long-term debt was $3,295.7 million.
- The company had no borrowings under its commercial paper program or revolving credit facilities and reported compliance with debt covenants.
Material Changes Versus the Prior Comparable Period
- Reported growth was substantially driven by the StarBev acquisition, which was completed on June 15, 2012; the prior-year consolidated comparison includes only a limited post-acquisition period. On a pro forma basis, Europe Q2 pretax income increased 27.3% and underlying pretax income increased 14.4%.
- Q2 net income from continuing operations attributable to MCBC increased 165.3% to $276.7 million, primarily because the prior-year period included acquisition-related and financing costs, a $57.9 million foreign exchange loss on Euro cash holdings, a $39.2 million Treasury Lock loss, and other non-core items.
- Canada Q2 volume declined 2.6%, net sales declined 4.2%, and pretax income declined 1.9%, reflecting weak market conditions, unfavorable weather, negative mix, and higher unit costs, partly offset by lower marketing and administrative spending.
- MillerCoors equity income declined 7.0% in Q2 and 4.8% in the first half, reflecting lower U.S. beer volumes despite favorable pricing and mix.
- Europe reported Q2 pretax income of $81.6 million, up from $28.7 million on the reported basis; pro forma performance improved through positive pricing, cost savings, and lower prior-year special items, despite weak demand and flooding in the Czech Republic.
- MCI’s Q2 pretax loss improved to $3.3 million from $24.3 million, primarily due to the elimination of China joint-venture losses, lower overhead, and business transfers.
- Net cash from operating activities increased $193.6 million year over year, while capital expenditures increased to $149.7 million from $81.4 million. The company invested $615.3 million in MillerCoors and received a $515.2 million return of capital.
- Accumulated other comprehensive loss increased to $332.3 million from $72.3 million at year-end 2012, primarily because of foreign currency translation losses.
Guidance, Outlook, Risks, and Unusual Items
- Management expects weak consumer demand for the balance of 2013, with increased marketing and innovation spending in Canada, the U.S., Europe, and international markets.
- 2013 capital expenditures are expected to be approximately $330 million, excluding MillerCoors and other equity-method joint ventures.
- Management expects Corporate marketing and administrative expense of approximately $105 million, excluding foreign exchange movements; consolidated net interest expense of approximately $170 million; and an effective tax rate of 13% to 17% for 2013.
- Management expects a normalized long-term underlying effective tax rate of 20% to 24%, although it expects several years may be required to reach that range.
- The $575 million convertible notes matured and were repaid at face value on July 30, 2013. The euro-denominated $500 million zero-coupon convertible note matures December 31, 2013 and may require cash, operating cash flow, commercial paper, or revolving credit facilities for settlement.
- The company had $1,258.6 million of long-term debt maturing during 2013 at the reporting date. It also had cross-currency swaps with a net liability of $155.8 million scheduled to mature March 31, 2014.
- Pension contributions were $48.6 million in the first half. The company expects approximately $110 million of contributions to its defined benefit plans in 2013, excluding MillerCoors, and approximately $150 million including its share of MillerCoors contributions. A U.K. pension valuation as of June 30, 2013 could materially increase future funding obligations.
- Goodwill and indefinite-lived brands in Europe and Canada remain exposed to impairment risk because of weak economic conditions, competitive pressures, lower volumes, pension obligations, discount-rate changes, and failure to achieve cost savings. No triggering event requiring an impairment review was identified in Q2 2013.
- Flood-related inventory and packaging losses in the Czech Republic were fully offset by insurance proceeds. Potential business-interruption insurance proceeds had not yet been received.
- Miller Brewing sought to terminate the Canadian license agreement. Molson Coors obtained an injunction on June 20, 2013 pending a trial scheduled for December 2013. An adverse outcome could affect sales and the $61.9 million carrying value of the related definite-lived intangible asset.
- Former Brazilian subsidiary indemnities remain subject to tax, civil, and labor claims. The tax-credit claims had a maximum potential amount of $156.8 million at June 29, 2013, while other indemnity exposure is capped at the $68.0 million sale price of the 68% interest.
Investor Verification Checklist
- Separate acquisition-driven growth from organic performance, particularly in Europe and consolidated volume comparisons.
- Monitor MillerCoors volume trends, pricing, cost inflation, and the effect on equity income.
- Verify funding and settlement of the December 2013 euro-denominated convertible note and the effect of debt maturities on leverage and liquidity.
- Assess sensitivity of Europe and Canada goodwill and brand valuations to weaker volumes, discount rates, and cash-flow forecasts.
- Follow the Miller Canadian license litigation and potential impairment or loss of related sales.
- Review pension funding requirements, especially the U.K. statutory valuation and future contribution commitments.
- Distinguish GAAP results from underlying income, EBITDA, and free cash flow, and evaluate the recurring nature of reported tax benefits and foreign-exchange gains or losses.