Molson Coors Beverage Company — Q3 2019 Form 10-Q Summary
Business context and reporting period
Molson Coors Brewing Company reported unaudited consolidated results for the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. The company operates through U.S., Canada, Europe and International segments and sells owned and partner beer brands, including Coors, Miller, Molson, Carling, Blue Moon and Staropramen.
Financial performance and key metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $2,841.6 million | $2,934.2 million | $8,093.2 million | $8,350.9 million |
| Net income attributable to MCBC | $(402.8) million | $338.3 million | $78.0 million | $1,040.5 million |
| Diluted EPS | $(1.86) | $1.56 | $0.36 | $4.80 |
| Gross profit | $1,156.2 million | $1,220.2 million | $3,235.0 million | $3,362.1 million |
| Operating income | $(237.3) million | $469.7 million | $453.5 million | $1,490.1 million |
| Net cash from operating activities | Not separately provided | Not separately provided | $1,288.2 million | $1,791.4 million |
- Financial volume declined 5.5% in both the quarter and nine-month period. Worldwide brand volume declined 2.4% in Q3 and 4.2% year to date.
- Q3 gross margin was approximately 40.7%, compared with 41.6% in the prior-year quarter. Nine-month gross margin was approximately 40.0%, compared with 40.3% in 2018.
- The Q3 loss primarily reflected $703.3 million of net special items, including a $668.3 million Canada goodwill impairment. Nine-month special items were $666.4 million, compared with a $267.7 million benefit in 2018.
- Cash and cash equivalents were $410.2 million at September 30, 2019, down from $1,057.9 million at December 31, 2018 and $750.1 million at September 30, 2018.
- Capital expenditures paid were $457.3 million in the first nine months; management expected approximately $700 million of full-year 2019 capital expenditures.
- Total debt, including the current portion, was $8,980.2 million, with $8,058.5 million classified as long-term debt and $1,193.8 million of current debt and short-term borrowings.
- The company had $1.2 billion available under its $1.5 billion revolving credit facility and $264.9 million of commercial paper outstanding. It stated that it was in compliance with debt covenants and payment obligations.
Material changes versus the prior comparable period
- Net sales decreased 3.2% in Q3 and 3.1% for the first nine months, primarily due to lower volume, partly offset by favorable pricing and product mix.
- Q3 net income attributable to MCBC declined by $741.1 million, and nine-month net income declined 92.5%, largely because 2018 included a $328.0 million purchase-price-adjustment gain while 2019 included substantial impairment charges.
- U.S. income before taxes declined 6.9% in Q3 and 5.8% year to date, reflecting lower volume, inflation and volume deleverage, partly offset by pricing and cost savings.
- Canada reported a Q3 loss before taxes of $615.5 million versus income of $77.5 million, driven primarily by the $668.3 million goodwill impairment, lower volume and higher cost per hectoliter.
- Europe income before taxes declined 19.3% in Q3 and 30.8% year to date, affected by weaker demand, inflation, foreign exchange and $12.4 million of charges related primarily to the termination of the Grolsch arrangements.
- International reported a Q3 loss before taxes of $7.7 million versus a $1.0 million loss in 2018, primarily because of a $12.2 million India goodwill and intangible-asset impairment.
- Operating cash flow declined $503.2 million year to date, principally because 2018 included the $328.0 million purchase-price-adjustment proceeds and 2019 had lower adjusted earnings and higher cash taxes.
- Financing cash outflows increased to $1.6 billion from $923.4 million, mainly because of higher debt repayments and dividends. The company repaid $500 million notes due in March 2019 and $500 million notes due in July 2019.
Guidance, outlook, commentary and risks
- On October 28, 2019, management announced a revitalization plan to increase investment behind core, premium and beyond-beer products, strengthen innovation and simplify the operating structure into North America and Europe business units.
- Management targeted approximately $150 million of additional savings, increasing the 2020–2022 cost-savings program from $450 million to $600 million.
- The plan is expected to reduce employment by approximately 400–500 positions and generate approximately $120 million to $180 million of restructuring charges, primarily through fiscal 2021. Charges were expected to begin in Q4 2019.
- Management expected 2019 net interest expense of approximately $275 million and a 2019 effective tax rate of 18% to 22%; the preliminary long-term tax-rate range was 20% to 24%.
- The company remained committed to investment-grade debt ratings and further deleveraging, and suspended share repurchases while prioritizing debt reduction. The quarterly dividend was $0.57 per share.
- Key operating risks include continued volume declines, Canadian beer-market weakness, cost inflation, commodity and foreign-exchange volatility, U.K. Brexit uncertainty, potential changes to Ontario’s beer distribution framework, and further impairment of Canadian goodwill or intangible assets.
- The company identified a potential further impairment risk for the Coors Light distribution agreement in Canada and continued to regard Europe as at risk of future goodwill impairment if assumptions deteriorate.
- Cash contingencies included $16.7 million of accrued litigation, dispute and environmental liabilities, $59.7 million of guarantee liabilities, and approximately $84.2 million of maximum potential claims related to Kaiser indemnities. Certain shareholder litigation claims had no estimable loss range.
- The company expected Truss, its Canadian cannabis joint venture, to launch cannabis-infused products in the first half of 2020, subject to required licenses and regulatory clearances.
Most important facts for an investor to verify
- Whether Canadian operating performance stabilizes and whether additional goodwill or intangible-asset impairments are required.
- Actual cash restructuring costs, employee reductions and realized savings under the revitalization plan.
- Progress and final cost of the Chilliwack, Longueuil and Golden brewery projects relative to the approximately $700 million 2019 capital-spending expectation.
- Debt maturities, commercial-paper reliance, covenant headroom and progress toward further deleveraging.
- Resolution and financial impact of proposed Ontario distribution-system changes, shareholder litigation and other contingencies.
- Whether volume trends, pricing, mix and cost inflation support management’s outlook and dividend policy.