Molson Coors Beverage Company — Q3 2022 Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2022. The unaudited results cover the Americas and EMEA&APAC segments and are presented in U.S. dollars under U.S. GAAP.
Business Context
Molson Coors produces and markets beer and adjacent beverages, including Coors Light, Miller Lite, Molson Canadian, Carling, Staropramen, Blue Moon, Vizzy, Coors Seltzer and Simply Spiked. Management continued its premiumization, innovation and cost-savings initiatives while addressing significant inflation, supply-chain constraints, foreign-exchange pressure, the Quebec labor strike and the Russia-Ukraine conflict.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 | Change |
|---|---|---|---|
| Net sales | $2,935.2 million | $2,822.7 million | 4.0% increase |
| Gross profit | $983.7 million | $1,193.6 million | 17.6% decrease |
| Operating income | $330.1 million | $531.4 million | 37.9% decrease |
| Net income attributable to MCBC | $216.4 million | $453.0 million | 52.2% decrease |
| Diluted EPS | $0.99 | $2.08 | 52.4% decrease |
| Financial volume | 22.809 million hectoliters | 22.851 million hectoliters | 0.2% decrease |
| Worldwide brand volume | 22.090 million hectoliters | 22.541 million hectoliters | 2.0% decrease |
Q3 gross margin was approximately 33.5%, compared with 42.3% in the prior-year quarter. Operating margin was approximately 11.2%, compared with 18.8%, and net margin attributable to MCBC was approximately 7.4%, compared with 16.1%.
| Metric | Nine months 2022 | Nine months 2021 | Change |
|---|---|---|---|
| Net sales | $8,071.5 million | $7,660.5 million | 5.4% increase |
| Operating income | $669.0 million | $1,289.4 million | 48.1% decrease |
| Net income attributable to MCBC | $415.2 million | $925.7 million | 55.1% decrease |
| Diluted EPS | $1.91 | $4.26 | 55.2% decrease |
| Net cash provided by operating activities | $1,117.5 million | $1,267.7 million | $150.2 million decrease |
| Capital expenditures paid | $530.7 million | $363.4 million | $167.3 million increase |
Nine-month gross margin was approximately 33.8%, compared with 41.7% in the prior-year period. Operating margin was approximately 8.3%, compared with 16.8%, and net margin attributable to MCBC was approximately 5.1%, compared with 12.1%.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $525.2 million at September 30, 2022, down from $637.4 million at December 31, 2021.
- Total debt, including current debt and short-term borrowings, was approximately $6.6 billion, consisting of $505.0 million of current debt and borrowings and $6.1 billion of long-term debt.
- The company repaid its $500 million, 3.5% notes at maturity on May 1, 2022 using cash and commercial paper.
- Commercial paper outstanding was $125.0 million at September 30, 2022. The company reported approximately $1.4 billion available under its $1.5 billion revolving credit facility; subsequent repayments reduced commercial paper outstanding to approximately $30 million as of November 1, 2022.
- The company was in compliance with all debt covenants, including a maximum net-debt-to-EBITDA ratio of 4.00x.
- Nine-month dividends paid were $247.1 million. The board declared a quarterly dividend of $0.38 per share, and the company repurchased 740,000 Class B shares for $38.8 million under its $200 million authorization.
Material Changes Versus the Prior Comparable Period
- Pricing and sales mix increased Q3 net sales by 8.1%, more than offsetting slightly lower volume and a 3.9% unfavorable currency impact.
- Cost of goods sold increased 19.8% in Q3 and 19.6% for the first nine months, driven by materials, transportation and energy inflation, portfolio mix and commodity derivative effects.
- Q3 income before taxes declined 43.2%, while nine-month income before taxes declined 55.6%.
- Americas Q3 net sales increased 6.8%, but brand volume declined 1.5%. Nine-month Americas net sales increased 3.8%, while income before taxes declined 11.5%.
- EMEA&APAC Q3 net sales declined 6.4% after currency translation, and income before taxes declined 49.4%. For the first nine months, net sales increased 13.1% and income before taxes declined 2.2%.
- Unallocated results deteriorated substantially because of commodity derivative mark-to-market effects. Unallocated income before taxes was a loss of $150.4 million in Q3 versus income of $43.2 million in the prior-year quarter.
- Foreign-currency movements reduced reported Q3 net sales by $109.2 million and income before taxes by $21.0 million. The nine-month impacts were $208.9 million and $24.3 million, respectively.
- Operating cash flow declined, while capital expenditures increased substantially because of investment in Americas breweries.
Outlook, Commentary, Risks and Unusual Items
- Management expects significant cost inflation to continue negatively affecting results through the remainder of 2022 and beyond. Mitigation efforts include pricing, hedging, premiumization and cost-savings programs.
- The Quebec strike involving approximately 400 employees lasted from late March through June 2022 and continued to affect Q3 production, inventory rebuilding and shipments. The company stated that all four expired Quebec collective bargaining agreements had been renegotiated by the third quarter.
- The Russia-Ukraine conflict led the company to suspend exports to Russia and terminate its Russian production license. Russia and Ukraine represented less than 0.2% of 2021 annual net sales, but the conflict increased inflationary and supply-chain pressures.
- The company recorded a $56.0 million liability for the Keystone trademark litigation following a jury award to Stone Brewing. Post-trial motions and potential appeals could alter or nullify the judgment, and the loss estimate could change.
- A $28.6 million impairment loss related to the Truss joint venture asset group was recorded in the first quarter, with $12.1 million attributable to noncontrolling interests.
- Goodwill and indefinite-lived brand assets remain exposed to future impairment if inflation, economic conditions, brand performance or revitalization results fall short of assumptions. The 2022 annual impairment test was in progress at the filing date.
- A $5.3 million pension settlement gain was recorded in Q3 following the purchase of an annuity contract covering approximately $340 million of U.S. qualified pension liabilities.
- The effective tax rate was 20% for both Q3 and the first nine months, compared with 6% and 18%, respectively, in the prior-year periods. The prior year benefited from a significant discrete tax benefit related to the settlement of tax positions.
- Management stated that available cash, operating cash flow and borrowing capacity should be adequate for operating needs, debt service, dividends, capital expenditures and other obligations for the following twelve months.
Facts Investors Should Verify
- Whether pricing and premiumization can offset persistent input-cost inflation without causing additional volume declines or consumer trade-down.
- The outcome and ultimate financial exposure from the Keystone litigation, including post-trial motions and appeals.
- The results of the 2022 annual goodwill and indefinite-lived intangible asset impairment testing.
- Progress in rebuilding Quebec inventory and restoring shipment levels after the labor strike.
- Net leverage, commercial paper repayment and continued compliance with the 4.00x covenant as interest rates and operating costs change.
- The sustainability of operating cash flow after elevated brewery capital expenditures and higher dividend payments.
- Currency, commodity and geopolitical effects, including the Russia-Ukraine conflict and broader economic impacts.