Business Context and Reporting Period
Molson Coors Beverage Company filed this unaudited Form 10-Q for the quarter ended March 31, 2020. The company brews and markets beer and other beverages through its North America and Europe segments. Effective January 1, 2020, management reorganized its prior four-segment structure into North America and Europe and recast historical segment information.
The quarter was materially affected by the COVID-19 pandemic, including widespread closures of bars, restaurants and other on-premise venues. The company also continued its revitalization plan, including organizational consolidation, brewery closures and cost reductions.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $2,102.8 million | $2,303.3 million | Down 8.7% |
| Gross profit | $623.8 million | $890.3 million | Down 29.9% |
| Operating income (loss) | $(92.5) million | $222.1 million | Decline of $314.6 million |
| Net income (loss) attributable to MCBC | $(117.0) million | $151.4 million | Decline of $268.4 million |
| Diluted EPS | $(0.54) | $0.70 | Decline of $1.24 |
| Financial volume | 18.428 million hectoliters | 20.101 million hectoliters | Down 8.3% |
| Worldwide brand volume | 17.865 million hectoliters | 18.195 million hectoliters | Down 1.8% |
Calculated margins declined sharply: gross margin was approximately 29.7% versus 38.7% in the prior-year quarter; operating margin was approximately negative 4.4% versus 9.6%; and net margin attributable to MCBC was approximately negative 5.6% versus 6.6%.
- North America net sales were $1,789.7 million, down 7.4%; income before income taxes was $76.2 million, down 69.0%.
- Europe net sales were $317.6 million, down 15.5%; loss before income taxes increased to $76.8 million from $38.4 million.
- Special items were $86.6 million versus $13.0 million, including $58 million related primarily to the planned Irwindale brewery closure.
- Unrealized commodity hedge losses recorded in cost of goods sold were $99.1 million versus a $34.1 million gain in the prior-year quarter. Commodity and HEXO warrant mark-to-market changes together were an approximately $158 million unfavorable year-over-year driver, according to management.
- COVID-19-related keg programs and inventory costs reduced first-quarter results by approximately $50 million, including a $31.5 million reduction to net sales and $18.5 million in cost of goods sold.
Cash Flow, Debt and Liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Operating cash flow | $(18.1) million | $(98.5) million |
| Investing cash flow | $(220.0) million | $(194.6) million |
| Financing cash flow | $398.7 million | $(534.8) million |
| Capital expenditures paid | $225.1 million | $198.0 million |
| Cash and cash equivalents | $666.1 million | $523.4 million at December 31, 2019 |
Total long-term debt, including the current portion, was $8,422.4 million at March 31, 2020, compared with $9,030.8 million at December 31, 2019. Current debt and short-term borrowings increased to $1,445.0 million from $928.2 million, primarily because the company borrowed approximately $1.0 billion under its revolving credit facility and issued $25.5 million of commercial paper.
The company repaid its $500 million 2.25% notes at maturity in March 2020. At March 31, 2020, $474.5 million remained available under the $1.5 billion revolving credit facility. Subsequent to quarter-end, the company reported $600 million outstanding under the facility, no commercial paper outstanding and $900 million of remaining availability as of April 30, 2020. The company was in compliance with its debt covenants, including a maximum net debt-to-EBITDA ratio of 4.25x at March 31, 2020.
Material Changes Versus the Prior Comparable Period
- Net sales, financial volume and profitability declined substantially, with the company moving from net income to a net loss.
- Gross margin contracted because of lower volume, unfavorable mix, inflation, pandemic-related keg costs and unfavorable commodity hedge remeasurement.
- Operating results included significantly higher special items, primarily from the Irwindale brewery closure and revitalization-related restructuring.
- Operating cash use improved year over year, but capital expenditures increased and financing cash flow turned positive due mainly to precautionary borrowings.
- Accumulated other comprehensive loss attributable to MCBC increased to $1,661.3 million from $1,162.2 million at year-end 2019, primarily from foreign currency translation and derivative losses.
- Total assets declined to $28,461.1 million from $28,859.8 million, while total equity declined to $12,946.0 million from $13,673.1 million.
Guidance, Outlook, Risks and Unusual Items
The company withdrew its financial outlook for 2020 and beyond because market conditions were too unpredictable. Management expects a significant adverse effect on second-quarter and full-year 2020 sales and profit, with on-premise sales effectively eliminated in many markets. Approximately 23% of 2019 consolidated net sales came from on-premise consumption, including approximately 17% of North America net sales and 50% to 55% of Europe net sales.
- For the first four weeks of April 2020, estimated U.S. sales-to-retailers declined approximately 14%, while Europe brand volume declined approximately 40%. Off-premise strength was not expected to offset on-premise losses.
- Management reduced planned 2020 capital expenditures by approximately $200 million, substantially reduced discretionary spending and marketing, implemented furloughs and evaluated dividend suspension, reduction or elimination.
- The revitalization plan is expected to reduce employment by approximately 500 to 600 positions and incur aggregate restructuring charges of approximately $90 million to $120 million through fiscal 2021. Remaining accrued restructuring liabilities were approximately $55.2 million at March 31, 2020.
- Remaining special charges related to the Irwindale closure were estimated at approximately $75 million to $100 million, subject to uncertainty regarding asset disposition and the Pabst purchase option.
- The company preliminarily expected a second-quarter income tax expense of approximately $100 million to $200 million from retroactive U.S. Treasury hybrid regulations, subject to legal and technical analysis.
- Goodwill and indefinite-lived intangible assets were not impaired at quarter-end, but management stated that prolonged or severe pandemic effects could result in material future impairment charges.
- Material risks include prolonged pandemic effects, loss of on-premise demand, customer credit deterioration, foreign currency volatility, commodity prices, covenant compliance, potential credit-rating downgrades, litigation, and possible changes to Ontario’s beer distribution framework.
- The company reported an $18.1 million aggregate accrued contingent liability for litigation, other disputes and environmental matters. Certain litigation exposures, including the Stone trademark matter and shareholder actions, had no estimable loss range.
Investor Verification Priorities
- Verify the duration and severity of COVID-19 restrictions and the resulting recovery of on-premise volumes, particularly in Europe and the United Kingdom.
- Reconcile reported earnings with the approximately $50 million pandemic-related keg costs, $86.6 million of special items and $99.1 million of unrealized commodity hedge losses.
- Monitor liquidity, commercial paper and revolving-credit borrowings, debt maturities, covenant headroom and the company’s investment-grade credit ratings.
- Assess whether the dividend is maintained, reduced or suspended and how capital-expenditure reductions affect brewery projects and long-term growth.
- Track the potential $100 million to $200 million tax charge, future goodwill or intangible-asset impairments and additional Irwindale or Montreal brewery closure costs.
- Review the Pabst option for the Irwindale brewery, Ontario distribution legislation, pending litigation and guarantees or indemnities that could create additional cash requirements.