MOLSON COORS BEVERAGE CO annual report, FY2013

Full document

Business Context and Reporting Period

Molson Coors Brewing Company is a global brewer with operations in Canada, the United States through its 42% economic interest in MillerCoors, Europe, and Molson Coors International. The filing is a Form 10-K for the fiscal year ended December 31, 2013. Fiscal 2013 covered December 30, 2012 through December 31, 2013 and included three additional days; management stated the impact was immaterial. The company changed from a 52/53-week fiscal year to a calendar-year basis.

Beginning in 2013, the former U.K. and Central Europe operations were combined into the Europe segment, and prior European results were recast on a pro forma basis for selected comparisons.

Financial Performance and Key Metrics

  • Net sales: $4.206 billion, up 7.4% from $3.917 billion in 2012, primarily reflecting a full year of Central Europe operations and positive European pricing, partly offset by lower Canada and U.S. volumes and unfavorable foreign exchange.
  • Net income attributable to MCBC from continuing operations: $565.3 million, or $3.07 diluted EPS, up 28.0% from $441.5 million and $2.43 diluted EPS in 2012.
  • Underlying net income: $727.1 million, or $3.95 per diluted share, up 2.3% and 1.0%, respectively. Underlying EBITDA was $1.469 billion, up 5.1%.
  • Gross profit: $1.661 billion versus $1.564 billion in 2012. Reported gross margin was approximately 39.5%, compared with approximately 39.9% in 2012.
  • Operating income: $805.7 million versus $867.4 million, reflecting substantially higher special items, including intangible impairment charges.
  • Income from continuing operations before taxes: $654.5 million versus $592.1 million. The effective tax rate was approximately 13%, compared with 26% in 2012.
  • Worldwide beer volume: 59.738 million hectoliters, up 8.5%, primarily due to the full-year inclusion of Central Europe and higher U.K. volume. Canada and U.S. volumes declined.
  • Operating cash flow: $1.168 billion, up 18.8% from $983.7 million. Underlying free cash flow was $892.0 million, up 3.2%.
  • Capital expenditures: $293.9 million, up 32% from 2012, with approximately 70% directed to Europe. Management expected approximately $330 million of 2014 capital expenditures, excluding MillerCoors and other equity-method investments.
  • Cash and liquidity: Cash and cash equivalents were $442.3 million at year-end, down from $624.0 million. Debt-free net working capital declined to negative $17.5 million from positive $394.9 million, largely due to debt repayments and working-capital management.
  • Debt: Long-term debt was $3.213 billion and current debt and short-term borrowings were $586.9 million. Total borrowings decreased $868.2 million during the year. Commercial paper outstanding was $379.8 million and Euro revolving-facility borrowings were $137.4 million.
  • Pension and postretirement obligations: The consolidated net underfunded position improved by approximately $405 million to $382.8 million, primarily due to higher discount rates, employer contributions, and plan-asset performance.
  • Dividends: The company paid $1.28 per common share during 2013 and declared a quarterly dividend increase to $0.37 per share in February 2014 from $0.32.

Segment Results and Material Changes

  • Canada: Net sales declined 4.6% to $1.944 billion; volume declined 2.0% to 8.332 million hectoliters; pretax income declined 14.1% to $363.3 million. Results were pressured by weak industry conditions, competitor discounting, unfavorable weather, Quebec excise taxes, higher input and pension costs, and foreign exchange.
  • United States/MillerCoors: MCBC’s equity income increased 5.5% to $539.0 million, while underlying equity income increased 4.4% to $547.3 million. MillerCoors volume declined 2.7%, but pricing, mix, cost reductions, and lower marketing and pension expenses supported earnings.
  • Europe: On a pro forma basis, volume declined 0.3%, while net sales increased 2.6% to $2.128 billion and underlying pretax income increased 15.3% to $213.3 million. Reported pretax income fell 78.6% to $34.3 million due primarily to a $150.9 million non-cash impairment of Jelen and Ostravar brand intangibles.
  • Molson Coors International: Net sales declined 6.4% to $137.6 million and underlying pretax loss improved 44.9% to $16.2 million. The company sold its interest in the MC Si’hai China joint venture and recognized a $6.0 million gain before related legal costs.
  • Special items: Total special items increased to $200.0 million from $81.4 million, including the $150.9 million European brand impairment, a $17.9 million impairment of the Canadian Miller license asset, restructuring charges, and a $13.2 million Tradeteam-related loss.
  • Debt reduction: The company repaid $575 million of convertible notes, settled most of the €500 million convertible note, and fully repaid the €120 million term loan. The remaining $61.8 million related to the convertible note was withheld pending resolution of acquisition-related claims; $46.3 million was paid in January 2014 to settle one claim.

Outlook, Risks, Contingencies and Unusual Items

  • Management’s 2014 priorities were cash generation, improved returns on capital, debt reduction, core-brand investment, innovation, and above-premium growth.
  • Management expected 2014 Canada cost of goods sold per hectoliter to increase at a low-single-digit rate in local currency, U.S. cost of goods sold per hectoliter to increase at a low-single-digit rate, Europe cost of goods sold per hectoliter to decrease at a low-single-digit rate, and MCI cost of goods sold per hectoliter to increase at a mid-single-digit rate.
  • Management expected 2014 consolidated net interest expense of approximately $145 million, an underlying effective tax rate of 16% to 20%, and Corporate marketing, general and administrative expense of approximately $110 million.
  • The Modelo Molson Imports joint venture in Canada was scheduled to terminate February 28, 2014. The company expected to receive CAD 70 million from ABI, while losing most of the joint venture’s earnings after two months of 2014. The company expected to record the termination payment, net of the related asset carrying value, as a special item.
  • Heineken agreed to pay GBP 13.0 million through April 30, 2015 to terminate a U.K. contract-brewing arrangement early.
  • The Miller Canada license dispute remained unresolved. An injunction prevented termination pending litigation or settlement. The license generated $92.3 million of 2013 net sales; the related intangible asset had a $38.6 million carrying value and an estimated three-year remaining life after the impairment.
  • Europe and Canada goodwill reporting units remained near impairment thresholds. Certain European brands had aggregate fair value only approximately 1% above carrying value, and the Molson core brand was approximately 10% above carrying value. Further impairment charges are possible if volumes, cash flows, economic recovery, or discount-rate assumptions deteriorate.
  • Other key risks include mature and declining beer markets, competition from global brewers, craft beer and spirits substitution, commodity and packaging costs, foreign exchange, pension funding, labor disruptions, regulatory and excise-tax changes, distributor and licensing arrangements, joint-venture governance, and reliance on MillerCoors distributions.
  • Total contractual obligations were $9.231 billion, including $3.805 billion of debt obligations, $1.870 billion of interest payments, $2.209 billion of supply and distribution commitments, and $270.2 million of advertising and promotion commitments.
  • Management stated that disclosure controls and internal control over financial reporting were effective as of December 31, 2013, and the independent auditor issued an unqualified opinion.

Investor Verification Points

  • Verify the sustainability of earnings excluding the $200.0 million of special items and the gap between reported net income of $565.3 million and underlying net income of $727.1 million.
  • Assess whether Canada volume declines and the loss of Modelo-related earnings can be offset by pricing, cost savings, Coors Banquet, craft brands, and the CAD 70 million termination payment.
  • Monitor the Miller Canada litigation and any additional impairment or loss of the associated $92.3 million revenue stream.
  • Reassess Europe’s near-term profitability and the risk of additional impairment to the Jelen, Ozujsko, Branik, Molson, or other intangible assets.
  • Review debt maturities, commercial paper refinancing, available revolver capacity, and the effect of reduced cash balances and negative debt-free working capital.
  • Evaluate pension funding requirements, particularly the pending U.K. statutory valuation and its potential effect on future cash contributions.
  • Reconcile reported segment performance with the 42% equity-method interest in MillerCoors and confirm the level and timing of MillerCoors cash distributions.
  • Track the company’s 2014 tax rate assumptions, unrecognized tax benefits, and expected Canadian tax settlements.