Molson Coors Beverage Company — Q2 2022 Form 10-Q Summary
Business context and reporting period
Molson Coors produces and distributes beer and adjacent beverages through its Americas and EMEA&APAC segments. This unaudited Form 10-Q covers the three and six months ended June 30, 2022, with comparisons to the same periods in 2021. Results are affected by seasonality and are not necessarily indicative of full-year performance.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Change |
|---|---|---|---|
| Net sales | $2,921.7 million | $2,939.4 million | (0.6%) |
| Gross profit | $820.0 million | $1,271.5 million | (35.5%) |
| Gross margin | 28.1% | 43.3% | Down 15.2 percentage points |
| Operating income | $114.5 million | $580.8 million | (80.3%) |
| Operating margin | 3.9% | 19.8% | Down 15.9 percentage points |
| Net income attributable to MCBC | $47.3 million | $388.6 million | (87.8%) |
| Diluted EPS | $0.22 | $1.79 | (87.7%) |
| Operating cash flow | Not separately provided for Q2 | Not separately provided for Q2 | Six-month comparison below |
| Six-month metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net sales | $5,136.3 million | $4,837.8 million | 6.2% |
| Operating income | $338.9 million | $758.0 million | (55.3%) |
| Net income attributable to MCBC | $198.8 million | $472.7 million | (57.9%) |
| Diluted EPS | $0.91 | $2.17 | (58.1%) |
| Operating cash flow | $666.8 million | $748.5 million | (10.9%) |
| Capital expenditures paid | $388.7 million | $211.9 million | Increase of $176.8 million |
Q2 financial volume declined 4.6% and worldwide brand volume declined 1.8%. For the first six months, financial volume declined 0.7% and worldwide brand volume declined 0.3%. Local-currency net sales per hectoliter increased 7.1% in Q2 and 8.3% year to date, reflecting pricing, mix and premiumization.
Cost of goods sold increased 26.0% in Q2 and 19.5% for the first six months. Management attributed the pressure primarily to commodity derivative mark-to-market movements, as well as inflation in materials, transportation and energy. Q2 commodity swap losses recognized in cost of goods sold were $163.4 million, compared with a $137.2 million gain in Q2 2021.
- Americas: Q2 net sales decreased 2.3% to $2,367.4 million and income before taxes decreased 18.7% to $348.0 million. Brand volume declined 2.2%, primarily due to softer U.S. industry performance and the Québec labor strike.
- EMEA&APAC: Q2 net sales increased 7.2% to $558.2 million, while income before taxes decreased 27.4% to $34.4 million because inflation and higher expenses offset pricing and volume benefits. Six-month net sales increased 29.1%.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $442.1 million at June 30, 2022, compared with $637.4 million at December 31, 2021 and $1,308.9 million at June 30, 2021.
- Total debt, including current and long-term portions, was approximately $6.8 billion at June 30, 2022, consisting of $247.0 million of current debt and short-term borrowings and $6,557.8 million 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 $229.8 million at June 30, 2022 and approximately $93 million as of August 2, 2022.
- Approximately $1.3 billion was available under the $1.5 billion revolving credit facility at June 30, 2022; availability increased to approximately $1.4 billion after subsequent commercial paper repayments.
- The maximum net debt-to-EBITDA covenant ratio was 4.00x. The company reported compliance with its debt covenants and payment obligations.
- Dividends declared during the first six months totaled $0.76 per share. The company repurchased 510,000 Class B shares for $26.2 million and had $173.8 million remaining under its $200 million repurchase authorization at June 30.
Material changes versus the prior comparable period
- Profitability deteriorated materially despite higher first-half sales, driven by cost inflation, unfavorable commodity derivative movements, lower volumes, higher marketing and general and administrative spending, and the Québec labor strike.
- Q2 gross margin fell to 28.1% from 43.3%; six-month gross margin fell to approximately 34.0% from 41.4%.
- First-half operating cash flow decreased $81.7 million, while capital expenditures paid increased $176.8 million.
- Six-month MG&A expense increased 13.0%, including a $56.0 million accrued liability related to Keystone trademark litigation and higher associated legal fees.
- First-quarter 2022 included a $28.6 million impairment charge related to the Truss joint venture asset group, of which $12.1 million was attributable to noncontrolling interests.
Outlook, management commentary, risks and unusual items
- Management expects significant cost inflation in materials, transportation and energy to continue to pressure results for the remainder of 2022 and potentially beyond. Pricing, premiumization, hedging and cost savings are intended to mitigate the effects.
- The Montréal/Longueuil, Québec brewery and distribution center strike ran from late March through mid-June. Management expects continuing effects in the second half as operations restart, inventories are rebuilt and retailer shelves are replenished.
- The Russia-Ukraine conflict halted the company’s Russian exports and production and sales under Ukrainian license arrangements. Direct exposure was limited, but the conflict contributed to broader inflation and supply-chain risks.
- The company recorded a $56.0 million liability for the Keystone litigation jury verdict. Post-trial motions, a potential permanent injunction and appeals could change the ultimate loss.
- Aggregate accrued contingent liabilities for litigation, disputes and environmental matters were $66.8 million at June 30, 2022, compared with $11.3 million at year-end 2021.
- The Ontario government has not proclaimed legislation that could terminate the province’s Master Framework Agreement governing beer distribution and retail systems. Potential effects remain uncertain and could adversely affect the Americas segment.
- The Americas reporting unit remains sensitive to unfavorable changes in forecast cash flows, cost inflation, market performance, terminal growth rates, market multiples and discount rates. No goodwill or intangible-asset triggering event was identified during the first half of 2022.
- Management stated that cash, operating cash flow and available borrowing capacity should be adequate for operating needs, debt service, dividends, capital expenditures and other obligations over the following twelve months, subject to the disclosed risks.
- Subsequent to quarter-end, the company declared a $0.38 per-share dividend and purchased an annuity contract expected to transfer approximately $340 million of U.S. qualified pension liabilities. A related pension settlement gain or loss was expected to be recorded in Q3 2022.
Important facts investors should verify
- Whether pricing and premiumization can offset persistent inflation, commodity volatility and volume declines without further margin erosion.
- The pace and cost of restarting Québec operations and replenishing inventories after the strike, including the status of the remaining Québec collective bargaining agreements.
- The final outcome and cash impact of the Keystone litigation, including post-trial rulings, any injunction and appeals.
- Progress in reducing commercial paper borrowings and maintaining sufficient revolver availability while funding capital expenditures, dividends and other obligations.
- Whether the Americas goodwill and indefinite-lived brand valuations remain supported as inflation, consumer demand and macroeconomic conditions evolve.
- The effects of foreign currency movements, Russia-Ukraine-related supply disruption, COVID-19 developments and potential Ontario regulatory changes.