Molson Coors Beverage Company — Q2 2019 Form 10-Q Summary
Business context and reporting period
Molson Coors is a global brewer operating through U.S., Canada, Europe and International segments. This unaudited Form 10-Q covers the three and six months ended June 30, 2019, with comparisons to the corresponding 2018 periods. Results are presented in U.S. dollars and are subject to beer-industry seasonality.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $2,948.3 million | $3,085.2 million | $5,251.6 million | $5,416.7 million |
| Net income attributable to MCBC | $329.4 million | $424.1 million | $480.8 million | $702.2 million |
| Diluted EPS | $1.52 | $1.96 | $2.22 | $3.24 |
| Gross profit | $1,188.5 million | $1,346.1 million | $2,078.8 million | $2,141.9 million |
| Operating income | $468.7 million | $590.9 million | $690.8 million | $1,020.4 million |
| Net cash from operating activities | Not separately provided for Q2 | Not separately provided for Q2 | $828.0 million | $1,297.8 million |
Q2 financial volume declined 7.0% to 25.811 million hectoliters; worldwide brand volume declined 5.6% to 24.295 million hectoliters. Q2 gross margin was approximately 40.3%, versus 43.6% in the prior-year quarter. Operating margin was approximately 15.9%, versus 19.1%, and net margin was approximately 11.2%, versus 13.7%. For the first half, gross margin was approximately 39.6%, operating margin 13.2% and net margin 9.2%.
At June 30, 2019, cash and cash equivalents were $490.2 million, compared with $1,057.9 million at December 31, 2018. Current assets were $2.6 billion and current liabilities were $4.1 billion. Total debt, including current and long-term debt, was approximately $9.5 billion, compared with $10.5 billion at year-end 2018. The company had $1.5 billion available under its revolving credit facility and no outstanding borrowings under that facility or commercial paper at quarter-end.
First-half capital expenditures paid were $310.5 million, dividends paid were $177.4 million, and debt repayments were $1.07 billion. Cash flow from investing activities was an outflow of $167.8 million, while financing activities used $1.236 billion. Free cash flow is not defined or presented in the filing text.
Material changes versus the prior comparable period
- Q2 net sales decreased 4.4%, and first-half net sales decreased 3.0%, primarily because of lower volume and unfavorable foreign-currency effects, partly offset by pricing and mix improvements.
- Q2 net income attributable to MCBC fell 22.3%; first-half net income fell 31.5%. The comparison was affected by the absence of a $328.0 million purchase-price-adjustment gain recorded in the first quarter of 2018.
- Operating income declined 20.7% in Q2 and 32.3% for the first half. Drivers included volume declines, cost inflation, higher marketing investment, lower general and administrative benefits, and unfavorable commodity-hedge mark-to-market results.
- U.S. pretax income declined 10.0% in Q2 to $401.0 million. Canada pretax income increased 31.2% to $80.4 million, primarily because of a $61.3 million gain on the Montreal brewery sale, partly offset by a $15.0 million unrealized loss on HEXO warrants. Europe pretax income declined 35.7% to $55.8 million, while International pretax income increased 92.3% to $2.5 million.
- Operating cash flow decreased $469.8 million year over year, largely because 2018 included $328.0 million of purchase-price-adjustment proceeds and 2019 had lower earnings and higher cash taxes.
- The company adopted ASC 842 lease accounting on January 1, 2019, recognizing approximately $154 million of operating lease right-of-use assets and approximately $164 million of lease liabilities at adoption.
Guidance, outlook, commentary and risks
- Management expects approximately $700 million of 2019 capital expenditures, including the Chilliwack and Longueuil brewery projects.
- 2019 consolidated net interest expense is expected to be approximately $300 million. The expected 2019 effective tax rate is 18% to 22%; the preliminary long-term rate is 20% to 24%.
- Management intends to continue deleveraging, maintain an investment-grade debt rating and keep share repurchases suspended while debt is reduced. The next quarterly dividend was declared at $0.57 per share.
- Management is emphasizing pricing, premiumization, innovation, brand investment, digital and e-commerce capabilities, and bolt-on acquisitions. The company expected a national launch of non-alcoholic cannabis-infused beverages through Truss in Canada following legalization later in 2019.
- The Vancouver brewery closure and production transition were expected in the third quarter of 2019. The Montreal brewery was sold and leased back while the Longueuil brewery is constructed, with operations expected to transition in 2021. Additional Montreal closure-related charges, including approximately CAD 36 million of estimated accelerated depreciation, were expected, although timing and amounts remain subject to change.
- Potential Ontario legislation could terminate the existing beer distribution and retail framework before 2025 and may negatively affect the Canada segment. The filing states that the impact is unknown.
- Other risks include beer-industry volume declines, weather and demand conditions, commodity prices, foreign-exchange volatility, Brexit-related uncertainty, potential goodwill impairment in Canada and Europe, litigation, regulatory changes, and the company’s ability to collect approximately $40 million of historically claimed duty and tax refunds.
- The company reported $12.5 million of accrued litigation, dispute and environmental liabilities at June 30, 2019. Securities class actions and shareholder derivative actions related to prior financial restatements remain pending, with potential losses not estimable.
Important facts for investors to verify
- Whether pricing and premiumization can offset continued volume declines across the major markets.
- The sustainability of cash generation after debt repayments, dividends and approximately $700 million of planned 2019 capital expenditures.
- Progress and final costs associated with the Chilliwack and Longueuil brewery projects and Vancouver and Montreal closures.
- The effect of Ontario distribution legislation, Brexit developments, foreign-exchange movements and commodity costs.
- Debt maturity funding, including the July 15, 2019 repayment of the $500 million 1.45% notes using cash and approximately $400 million of commercial paper proceeds.
- Potential impairment exposure for goodwill and indefinite-lived brands, particularly the Canada reporting unit, whose 2018 estimated fair value was only approximately 6% above carrying value.
- Outcomes and potential costs of pending litigation, tax-refund recoverability, guarantees and other contingencies.