MOLSON COORS BEVERAGE CO annual report, FY2019

Molson Coors Beverage Company — FY2019 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2019. The filing is an annual Form 10-K, not a quarterly filing; fourth-quarter information is included in the annual results and quarterly supplemental table. Results are presented in U.S. dollars under U.S. GAAP.

Business Context

Molson Coors is a global brewer with major operations in the United States, Canada, Europe and International markets. Its portfolio includes Coors, Miller, Molson, Carling, Blue Moon, Staropramen and other owned, licensed and partner brands. In January 2020, the company changed its name from Molson Coors Brewing Company to Molson Coors Beverage Company and reorganized into North America and Europe business units.

The company operates in mature and highly competitive beer markets facing declining traditional beer volumes, consumer migration toward craft beer, imports, flavored malt beverages, hard seltzers, wine, spirits and non-alcoholic beverages.

Financial and Operating Metrics

Metric	2019	2018	Change
Financial volume	92.722 million hectoliters	96.627 million hectoliters	Down 4.0%
Net sales	$10,579.4 million	$10,769.6 million	Down 1.8%
Gross profit	$4,201.2 million	$4,184.8 million	Up 0.4%
Gross margin	39.7%	38.9%	Up approximately 80 basis points
Operating income	$764.4 million	$1,631.8 million	Down 53.2%
Operating margin	7.2%	15.2%	Down approximately 800 basis points
Net income attributable to MCBC	$241.7 million	$1,116.5 million	Down 78.4%
Diluted EPS	$1.11	$5.15	Down 78.4%
Operating cash flow	$1,897.3 million	$2,331.3 million	Down 18.6%
Capital expenditures	$593.8 million paid	$651.7 million paid	Down 8.9%

Gross profit increased modestly despite lower volume, reflecting favorable pricing, mix and cost savings. However, reported operating income and net income were significantly reduced by special items, particularly goodwill and intangible-asset impairments.

Segment Performance

United States: Net sales were $7,241.3 million, down 0.3%. Income before taxes was $1,301.8 million, down 1.4%. Volume declined, but pricing and cost savings partly offset inflation and volume deleverage.
Canada: Net sales were $1,307.4 million, down 6.1%. The segment recorded a $508.7 million loss before taxes versus $157.0 million of income in 2018, primarily because of a $668.3 million goodwill impairment and lower volume.
Europe: Net sales were $1,928.7 million, down 3.7%. Income before taxes was $160.1 million, down 14.1%, reflecting lower volume, increased brand investment, inflation, special charges and unfavorable currency movements.
International: Net sales were $225.3 million, down 9.9%. The segment recorded a $7.7 million loss before taxes, compared with a $2.7 million loss in 2018, including $12.2 million of India-related goodwill and intangible-asset impairments.

Cash Flow, Liquidity and Debt

Cash and cash equivalents declined to $523.4 million from $1,057.9 million at December 31, 2018. Approximately 90% of cash was held outside the United States, largely in foreign currencies.
Operating cash flow of $1.9 billion funded capital expenditures, dividends and debt reduction, but was lower than 2018 partly because 2018 included $328.0 million of settlement proceeds from ABI.
Net cash used in financing activities was approximately $2.0 billion, including $1.586 billion of debt repayments and $424.4 million of dividends paid.
Total long-term debt, including the current portion, was $9.031 billion at year-end; reported current debt and short-term borrowings were $928.2 million and long-term debt was $8.1095 billion.
The company repaid EUR 500 million of variable-rate notes, $500 million of 1.90% notes and $500 million of 1.45% notes during 2019.
The $1.5 billion revolving credit facility was fully available at year-end and matures in July 2024. The company reported compliance with debt covenants and payment obligations.
Credit ratings were BBB-/Stable from S&P, Baa3/Stable from Moody’s and BBB(Low)/Stable from DBRS.

Material Changes Versus Prior Period

Worldwide brand volume declined 3.5%, while financial volume declined 4.0%; consolidated net sales declined 1.8%.
Net income fell primarily because 2019 included $691.9 million of aggregate goodwill and intangible-asset impairment losses, compared with a $328.0 million special-item gain in 2018 related to an ABI settlement.
Special items shifted from a net benefit of $249.7 million in 2018 to a net charge of $708.8 million in 2019.
Cost savings totaled approximately $230 million in 2019, bringing cumulative savings under the 2017–2019 program to approximately $725 million.
The regular quarterly dividend increased from $0.41 to $0.57 per share during the second half of 2019; total dividends per share were $1.96 for the year.
The company suspended share repurchases while prioritizing debt reduction.
The company sold its Montreal brewery for $96.2 million and recognized a $61.3 million gain, while leasing the facility back until the Longueuil brewery is expected to become operational in 2021.
The Vancouver brewery transition to the new Chilliwack facility was completed in 2019.
Internal control over financial reporting was assessed as effective at December 31, 2019, correcting the prior-year material weakness disclosure.

Guidance, Outlook and Management Commentary

The revitalization plan targets more consistent topline growth through investment in core brands, above-premium products, flavored beverages, hard seltzers, wine, non-alcoholic beverages and other adjacencies.
Management expects approximately $600 million of savings over the 2020–2022 program, including approximately $150 million of additional annual savings from organizational simplification.
Restructuring is expected to reduce global employment by approximately 500 to 600 employees. Total cash and non-cash restructuring charges are estimated at $120 million to $180 million, primarily through 2021; approximately $43 million was recognized in the fourth quarter of 2019.
For 2020, management expected capital expenditures of approximately $700 million, net interest expense of approximately $280 million and an effective tax rate of 20% to 24%.
Management intended to continue deleveraging, maintain an investment-grade rating and retain a dividend payout target of 20% to 25% of trailing annual EBITDA.
Production at the Irwindale, California brewery is expected to cease by September 2020. Total closure-related special charges are currently estimated at $150 million to $175 million, subject to uncertainty regarding asset disposition and Pabst’s purchase option.

Principal Risks, Contingencies and Unusual Items

Canada and Europe goodwill remain particularly sensitive to further volume declines, margin erosion, weaker economic conditions, unfavorable currency movements, higher discount rates and changes in projected cash flows. Canada had no reported goodwill valuation cushion after the 2019 impairment.
The Coors Light distribution-rights intangible asset in Canada had an estimated 11% fair-value cushion and was identified as at risk of future impairment.
Consumer shifts toward craft beer, imports, hard seltzers, flavored beverages, wine, spirits, cannabis and non-alcoholic products could pressure volumes and market share.
Commodity exposure includes aluminum, fuel, energy, barley, malt, hops, grains and packaging materials. Pricing volatility and the ability to pass through higher costs may affect margins.
Potential changes to Ontario’s beer distribution and retail system could adversely affect the Canada segment; the relevant bill had not been proclaimed into law at the filing date.
The company is involved in trademark litigation involving the Keystone brand, securities and shareholder derivative litigation related to prior financial reporting and internal controls, and environmental matters. Potential losses for certain lawsuits were not estimable.
The company had $60.9 million of outstanding letters of credit, $16.2 million of accrued litigation, dispute and environmental liabilities, and indemnity obligations associated with the former Kaiser business in Brazil.
Historically claimed U.S. federal duty, tax and fee refunds of approximately $40 million were subject to regulatory and litigation uncertainty as of the filing date.
Truss, the company’s 57.5%-owned Canadian cannabis-beverage joint venture with HEXO, planned a 2020 launch subject to licensing and regulatory clearances. The company also recorded $17.8 million of unrealized losses on HEXO warrants in 2019.

Investor Verification Checklist

Verify the sustainability of volume trends, pricing and mix, especially in the U.S. and Canada.
Assess whether the revitalization plan can deliver the targeted $600 million of savings while funding increased brand and innovation investment.
Monitor Canada and Europe for additional goodwill or intangible-asset impairments.
Reconcile debt maturities, refinancing needs and deleveraging progress, particularly the approximately $897 million due in 2020 and $1.005 billion due in 2021.
Evaluate cash conversion after capital expenditures, dividends, restructuring charges and pension or postretirement obligations.
Track the economic and regulatory effects of Ontario distribution reforms, Brexit-related developments, cannabis regulation and alcohol-tax changes.
Review the outcome of the Irwindale closure and Pabst purchase option, including the estimated $150 million to $175 million closure-charge range.
Follow the status and potential exposure from securities litigation, derivative actions, trademark litigation and the disputed $40 million refund receivable.