Molson Coors Beverage Company — Q1 2021 Form 10-Q Summary
Business context and reporting period
Molson Coors Beverage Company reported unaudited results for the three months ended March 31, 2021, in U.S. dollars under U.S. GAAP. The company operates through North America and Europe, with a portfolio centered on beer and expanding into hard seltzer, ready-to-drink beverages, coffee, energy drinks and other adjacent categories.
Results remained significantly affected by COVID-19 restrictions, particularly the closure of on-premise channels in the United Kingdom and restrictions in Canada and the United States. A March 2021 cybersecurity incident disrupted brewery operations, production and shipments, while a February 2021 Texas winter storm temporarily shut down the Fort Worth brewery.
Financial performance and key metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Financial volume | 16.217 million hectoliters | 18.428 million hectoliters | Down 12.0% |
| Worldwide brand volume | 16.248 million hectoliters | 17.865 million hectoliters | Down 9.1% |
| Net sales | $1,898.4 million | $2,102.8 million | Down 9.7% |
| Gross profit | $731.0 million | $623.8 million | Up 17.2% |
| Operating income (loss) | $177.2 million | $(92.5) million | Improved |
| Net income (loss) attributable to MCBC | $84.1 million | $(117.0) million | Improved |
| Diluted EPS | $0.39 | $(0.54) | Improved |
| Cash flow from operating activities | $(190.9) million | $(18.1) million | Use increased by $172.8 million |
Gross margin was approximately 38.5%, compared with approximately 29.7% in the prior-year quarter. Operating margin was approximately 9.3%, compared with negative 4.4% in Q1 2020. The improvement primarily reflected a $220.6 million favorable swing in unrealized commodity mark-to-market results, lower special items and lower marketing, general and administrative expense. These benefits more than offset lower volume, unfavorable channel and geographic mix, cost inflation and higher transportation costs.
- North America: Net sales were $1,692.0 million, down 5.5%; income before taxes was $144.2 million, up 89.2%. Financial volume declined 9.4%.
- Europe: Net sales were $206.9 million, down 34.9%; loss before taxes was $89.4 million versus a loss of $76.8 million. Financial volume declined 22.0%, primarily because of pandemic-related closures, especially in the United Kingdom.
- Cash and liquidity: Cash and cash equivalents were $532.7 million at March 31, 2021, down from $770.1 million at December 31, 2020. The company had full availability under its $1.5 billion revolving credit facility and no borrowings under that facility or its U.S. commercial paper program.
- Debt: Current and long-term debt totaled approximately $8.245 billion, including $1.064 billion classified as current debt and short-term borrowings. The company was in compliance with its debt covenants. A $1.0 billion tranche of 2.1% notes was due in July 2021.
- Capital expenditures: Cash additions to properties were $102.5 million, compared with $225.1 million in Q1 2020. Capital expenditures incurred but not yet paid were $116.2 million.
- Dividends: No dividends were paid in Q1 2021. The board had suspended regular quarterly dividends beginning in the second quarter of 2020 to preserve liquidity.
Material changes versus the prior comparable period
- Net sales declined despite favorable pricing and mix in North America, primarily because of lower volume, pandemic-related on-premise restrictions, the cybersecurity incident and the Texas winter storm.
- Profitability improved substantially because Q1 2020 included $31.5 million of keg sales-return reimbursements and $18.5 million of keg-related inventory and program costs, as well as materially higher special charges.
- Special items declined to $10.9 million from $86.6 million, including lower restructuring costs and the absence of most Irwindale brewery closure charges recorded in Q1 2020.
- Marketing, general and administrative expense declined to $542.9 million from $629.7 million, primarily from lower pandemic-affected marketing activity and revitalization-plan savings.
- Unallocated commodity hedge results shifted from a $99.1 million unrealized loss in Q1 2020 to a $121.5 million unrealized gain in Q1 2021, creating significant earnings volatility.
- Operating cash flow deteriorated to a $190.9 million use, primarily because of unfavorable working-capital timing, lower volumes, incentive payments and the comparison with prior-year tax-payment deferrals.
Guidance, outlook, risks and unusual items
- Management continued to expect 2021 to be a year of top-line growth and investment, but stated that on-premise sales would likely remain below pre-pandemic levels and that off-premise strength would not fully offset the decline.
- Expected 2021 net interest expense was approximately $270 million, plus or minus 5%.
- Expected 2021 effective tax rate was 20% to 23%. Potential cash tax outflows related to finalized U.S. hybrid regulations were estimated at up to approximately $100 million in 2021.
- Management intended to continue deleveraging and expected the board could be in a position to reinstate a dividend in the second half of 2021.
- The cybersecurity incident resulted in $2.0 million of incremental one-time costs in Q1, net of insurance recoveries, with additional costs expected in Q2. The incident shifted some production and shipments from Q1 into the balance of 2021.
- The revitalization plan was expected to continue through 2021, with total related charges estimated at approximately $100 million to $120 million. The remaining accrued restructuring balance was approximately $18.9 million at March 31, 2021.
- The company continued to monitor potential impairment of North America goodwill and certain European intangible assets. Management reported no Q1 triggering event, but adverse changes in pandemic duration, brand performance, cash-flow forecasts, discount rates or market multiples could lead to future impairment.
- Key risks included prolonged COVID-19 restrictions, additional cyberattacks, commodity and transportation cost inflation, foreign exchange volatility, customer collection risk, debt refinancing and covenant pressure, potential changes to Ontario’s beer distribution framework, litigation and indemnity obligations.
- Accrued contingent liabilities for litigation, other disputes and environmental matters were $33.3 million. Guarantees related to equity-method investments were $45.4 million, and accrued Kaiser-related indemnities were $10.1 million.
Important facts for investors to verify
- Whether the expected recovery in on-premise channels, particularly in the United Kingdom and Canada, offsets continuing volume weakness and unfavorable mix.
- The magnitude and timing of additional cybersecurity costs, operational recovery and any related litigation, regulatory or insurance effects.
- The July 2021 maturity of the $1.0 billion senior-note tranche and the company’s refinancing or repayment actions.
- Progress toward deleveraging, compliance with progressively tighter leverage requirements and the ability to reinstate dividends in the second half of 2021.
- Whether North America goodwill or European intangible assets require impairment if pandemic or market conditions worsen.
- The sustainability of earnings excluding the $121.5 million unrealized commodity-hedge gain and other favorable comparisons with Q1 2020 special and pandemic-related charges.
- The cash impact of approximately $130 million of deferred non-income-based taxes expected to be paid primarily in the second half of 2021 and potential additional tax outflows of up to approximately $100 million.