Business Context and Reporting Period
Molson Coors Beverage Company filed an unaudited Form 10-Q for the three and nine months ended September 30, 2021. The company produces and markets beer and adjacent beverages through its North America and Europe segments, including Coors Light, Miller Lite, Molson Canadian, Carling, Blue Moon, Vizzy and other brands.
Financial Performance and Position
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $2,822.7 million | $2,753.5 million | $7,660.5 million | $7,359.7 million |
| Operating income | $531.4 million | $508.3 million | $1,289.4 million | $873.8 million |
| Net income attributable to MCBC | $453.0 million | $342.8 million | $925.7 million | $420.8 million |
| Diluted EPS | $2.08 | $1.58 | $4.26 | $1.94 |
| Operating cash flow | Not separately provided | Not separately provided | $1,267.7 million | $1,493.2 million |
| Capital expenditures paid | Not separately provided | Not separately provided | $363.4 million | $456.4 million |
- Q3 net sales increased 2.5%, while nine-month net sales increased 4.1%.
- Q3 financial volume declined 3.9% and worldwide brand volume declined 3.6%. Nine-month financial volume declined 3.0% and worldwide brand volume declined 2.9%.
- Approximate Q3 gross, operating and net margins were 42.3%, 18.8% and 16.1%, respectively, compared with 43.7%, 18.5% and 12.4% in the prior-year quarter.
- Approximate nine-month gross, operating and net margins were 41.7%, 16.8% and 12.1%, respectively, compared with 39.0%, 11.9% and 5.7% in the prior-year period.
- Operating cash flow declined primarily because of unfavorable working-capital timing, higher taxes paid and the repayment of pandemic-related tax deferrals.
- Cash and cash equivalents were $616.3 million at September 30, 2021, compared with $770.1 million at December 31, 2020.
- Total debt, including current debt and short-term borrowings, was approximately $7.7 billion at September 30, 2021, compared with approximately $9.2 billion at December 31, 2020. Long-term debt, including the current portion, was $7.169 billion.
- The company repaid $1.0 billion of 2.1% notes at maturity in July 2021. It reported $45.0 million of commercial paper outstanding and $1.5 billion available under its revolving credit facility.
- The company reinstated a quarterly dividend of $0.34 per share, paid September 17, 2021.
Material Changes Versus the Prior Comparable Period
- Net income attributable to MCBC increased 32.1% in Q3 and 120.0% for the first nine months. The increase was driven by stronger pricing and mix, lower special-item charges, favorable commodity-derivative mark-to-market movements and significantly lower tax expense.
- The effective tax rate decreased to 6% in Q3 from 23% and to 18% for nine months from 38%. Results benefited from a $68 million tax benefit, including a $49 million discrete benefit, from the settlement of a tax audit.
- North America Q3 net sales declined 1.2% and income before taxes declined 13.7%, reflecting lower volumes, shipment timing, inflation and higher marketing spending.
- Europe Q3 net sales increased 19.2% and income before taxes increased 124.2%, aided by reopening of on-premise venues, pricing and favorable mix. Nine-month Europe income before taxes improved to $49.7 million from a $46.9 million loss.
- Special items improved materially, from a $59.7 million charge in Q3 2020 to a $2.6 million benefit in Q3 2021; nine-month charges declined to $17.3 million from $210.6 million.
- The company recorded $412.8 million of nine-month gains from commodity swaps not designated as hedges, compared with a $48.6 million loss in the prior-year period. These gains are largely driven by commodity-price changes and may reverse as exposures are realized.
Guidance, Outlook, Risks and Unusual Items
- Management expects 2021 consolidated net interest expense of approximately $270 million, plus or minus 5%.
- Management intends to continue deleveraging, maintain an investment-grade debt rating and continue investing in core brands, above-premium products, hard seltzers and expansion beyond the beer aisle.
- Management expects to pay approximately $125 million of cash tax and associated interest in the fourth quarter of 2021 following the tax-audit settlement.
- The March 2021 cybersecurity incident disrupted brewery operations, production and shipments; the company incurred $2.4 million of related net one-time costs and expects full operational recovery by year-end 2021.
- The company continues to face COVID-19 risks, including renewed restrictions, variant outbreaks, on-premise weakness, supply-chain disruption, customer credit risk and possible asset impairments.
- Cost inflation, including transportation, aluminum and other input costs, is pressuring margins. The February 2021 Texas winter storm also temporarily shut down the Fort Worth brewery.
- The revitalization plan is expected to generate aggregate restructuring charges of approximately $100 million to $120 million through 2021. The remaining accrued restructuring balance was approximately $13.5 million at September 30, 2021.
- North America goodwill and certain European intangible assets remain sensitive to unfavorable changes in projected cash flows, discount rates, market multiples and pandemic-related operating conditions.
- Contingencies include litigation with Stone Brewing, Ontario legislative uncertainty affecting beer distribution and retail systems, Kaiser-related indemnities with a remaining maximum potential claims amount of $64.3 million, and potential recovery or repayment issues related to approximately $9 million of previously claimed beer-duty refunds.
Investor Verification Checklist
- Verify the sustainability of earnings excluding the tax-audit benefit and the substantial commodity-derivative gains.
- Monitor volume trends, particularly U.S. economy brands, and determine whether pricing and premiumization can offset volume declines and inflation.
- Reconcile reported debt reduction with remaining maturities, commercial paper usage, interest-rate hedges and the revolving-credit leverage covenant.
- Assess the timing and cash impact of the expected $125 million tax payment, remaining restructuring obligations and Montreal brewery completion.
- Evaluate recovery of on-premise sales and exposure to renewed COVID-19 restrictions, supply-chain pressures and input-cost inflation.
- Review goodwill and indefinite-lived intangible asset sensitivity, cybersecurity remediation, litigation exposure and Ontario regulatory developments.