MOLSON COORS BEVERAGE CO quarterly report, Q3 FY2023

Molson Coors Beverage Company — Q3 2023 Form 10-Q Summary

Business context and reporting period

Molson Coors is a global beverage company primarily producing and distributing beer, with operations in the Americas and EMEA&APAC and expansion beyond beer. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods. Results are presented in U.S. dollars under U.S. GAAP.

Key financial metrics

Metric	Q3 2023	Q3 2022	Change	9M 2023	9M 2022	Change
Net sales	$3,298.4 million	$2,935.2 million	+12.4%	$8,911.3 million	$8,071.5 million	+10.4%
Gross profit	$1,346.2 million	$983.7 million	+36.9%	$3,335.8 million	$2,731.5 million	+22.1%
Operating income	$592.2 million	$330.1 million	+79.4%	$1,238.9 million	$669.0 million	+85.2%
Net income attributable to MCBC	$430.7 million	$216.4 million	+99.0%	$845.6 million	$415.2 million	+103.7%
Diluted EPS	$1.98	$0.99	+100.0%	$3.89	$1.91	+103.7%
Operating cash flow	Not separately provided	Not separately provided	—	$1,604.5 million	$1,117.5 million	+43.6%

Calculated margins improved materially: Q3 gross margin was approximately 40.8% versus 33.5% in the prior-year quarter, operating margin was approximately 18.0% versus 11.2%, and net margin attributable to MCBC was approximately 13.1% versus 7.4%. For the nine-month period, gross margin was approximately 37.4% versus 33.8%, operating margin was approximately 13.9% versus 8.3%, and net margin attributable to MCBC was approximately 9.5% versus 5.1%.

Consolidated financial volume increased 3.2% in Q3 and 2.1% for the nine months. Pricing and sales mix contributed 7.8% and 8.6%, respectively, to net sales growth.
Americas net sales increased 10.8% in Q3 and 9.3% year to date; volume increased 6.6% and 4.0%, respectively. Americas pretax income increased 28.2% in Q3 and 48.3% year to date.
EMEA&APAC net sales increased 19.2% in Q3 and 15.1% year to date despite volume declines of 5.5% and 3.1%, respectively. Pricing, mix and favorable currency were the principal drivers. EMEA&APAC pretax income increased 45.5% in Q3 and 118.7% year to date.
Cost of goods sold was essentially flat in Q3 and increased 4.4% year to date. Q3 results benefited from a $133.4 million favorable change in unrealized commodity derivative mark-to-market positions; the nine-month comparison included a $120.9 million favorable derivative impact.
MG&A increased 13.2% in Q3 and 2.6% year to date, reflecting higher marketing investment and incentive compensation. The year-to-date comparison benefited from cycling the $56.0 million Keystone litigation accrual recorded in 2022.

Cash flow, debt and liquidity

Cash and cash equivalents were $801.7 million at September 30, 2023, up from $600.0 million at December 31, 2022 and $525.2 million at September 30, 2022.
Nine-month operating cash flow was $1,604.5 million. Investing cash outflow was $668.5 million, including $494.1 million of property additions and $63.9 million for acquisitions. Financing cash outflow was $728.6 million, including $266.7 million of dividends, $60.9 million of treasury stock purchases and $402.9 million of debt repayments.
Total debt, including current maturities and short-term borrowings, was approximately $6.18 billion at September 30, 2023, compared with approximately $6.56 billion at December 31, 2022. The company repaid CAD 500 million of 2.84% notes at maturity in July 2023 using cash on hand.
Long-term debt was $5,301.1 million and current debt and short-term borrowings were $878.8 million. No borrowings were drawn under the $2.0 billion revolving credit facility, and no commercial paper borrowings were outstanding.
The revolving credit facility was extended to June 2028 and increased from $1.5 billion to $2.0 billion. The maximum net debt-to-EBITDA covenant is 4.00x; the company reported compliance with all debt covenants.
Capital expenditures incurred were $428.4 million during the first nine months, excluding equity-method joint ventures, down from $486.2 million in the prior-year period.

Material changes and unusual items

On August 7, 2023, the company acquired a 75% interest in Blue Run Spirits for a purchase price of $78 million, including $65 million of cash, to expand into premium spirits. A preliminary $88 million allocation was made to a 15-year definite-lived brand intangible asset.
The company sold its controlling interest in Truss LP on August 3, 2023 and recognized an $11.1 million loss. Truss was deconsolidated from the company’s results.
The Board authorized a new $2.0 billion Class B share repurchase program on September 29, 2023, replacing the prior $200 million program. The authorization does not require the company to repurchase shares and may be suspended or terminated.
Foreign currency translation reduced Q3 comprehensive income by $152.6 million, although total nine-month comprehensive income attributable to MCBC was $852.5 million versus $18.7 million in the prior-year period.
Derivative gains and losses created significant earnings volatility. Q3 commodity swaps not designated as hedges produced a $35.6 million gain in COGS, while the nine-month period included a $44.0 million loss.
The company’s Americas goodwill balance remains exposed to potential future impairment. Management reported no triggering event through September 30, 2023, but the October 1, 2023 annual impairment test was still in progress at the filing date.

Outlook, commentary and risks

Management expects continued moderation in cost inflation during the second half of 2023, but materials and manufacturing inflation remains a risk, particularly in EMEA&APAC.
Management is using pricing, premiumization, cost savings and hedging to offset inflation. These actions may reduce volumes or cause consumers to trade down if pricing exceeds their tolerance.
EMEA&APAC volumes remain pressured by industry softness and reduced discretionary spending in inflation-affected Central and Eastern European markets. The Russia-Ukraine conflict continues to negatively affect the segment.
Management believes cash, operating cash flow and available borrowing capacity are sufficient for operating needs, debt service, dividends, capital expenditures and other obligations for at least the twelve months following issuance of the report. Approximately 66% of cash was held outside the United States, creating potential repatriation, currency and tax constraints.
The company reported no material changes to the risk factors in its 2022 Form 10-K. Key risks include inflation, consumer demand and mix shifts, foreign exchange, commodity prices, interest rates, litigation, regulatory changes and impairment of goodwill or brands.
The Keystone trademark litigation remains subject to appeal. The company accrued $58.1 million as of September 30, 2023, including post-judgment interest, and stated that the estimate could change as the appeal progresses.
Aggregate accrued liabilities for litigation, other disputes and environmental matters were $70.4 million. The company also reported $11.3 million of accrued Kaiser indemnity liabilities and approximately $33.4 million of guarantee liabilities.

Investor verification points

Verify the sustainability of Q3 margin expansion, particularly the extent attributable to pricing, mix, cost savings and non-recurring derivative mark-to-market gains.
Review the October 1, 2023 goodwill and indefinite-lived brand impairment test results when available.
Monitor EMEA&APAC volume trends, consumer trade-down behavior and the effect of inflation on demand.
Assess the company’s upcoming EUR 800 million 1.25% notes maturity in July 2024 and the planned use of cash or refinancing capacity.
Follow the Keystone appeal and potential changes to the accrued liability.
Evaluate the pace and funding of the new $2.0 billion share repurchase authorization relative to leverage, dividends and capital expenditures.
Confirm the purchase accounting and performance implications of the Blue Run Spirits acquisition and the company’s broader expansion beyond beer.