MOLSON COORS BEVERAGE CO annual report, FY2017

Molson Coors Beverage Company — FY2017 Form 10-K

Reporting period: Fiscal year ended December 31, 2017; filed February 14, 2018. The filing is an annual report, not a standalone Q4 filing, but it reports fourth-quarter results. Molson Coors operates through U.S., Canada, Europe and International segments and fully consolidated MillerCoors for the full year following the October 2016 acquisition.

Business context and reporting period

Molson Coors is a global brewer with brands including Coors Light, Coors Banquet, Miller Lite, Miller Genuine Draft, Blue Moon, Carling, Molson Canadian and Staropramen.
2017 results reflect the first full year of consolidated MillerCoors ownership and include the acquired Miller international brand portfolio.
Segment reporting changed in 2017: certain European markets moved from International to Europe, while Puerto Rico moved from U.S. to International.

Financial performance and key metrics

Metric	FY2017	FY2016
Net sales	$11.003 billion	$4.885 billion
Gross profit	$4.786 billion	$1.898 billion
Operating income	$1.725 billion	$3.331 billion
Net income attributable to MCBC	$1.414 billion	$1.993 billion
Net income from continuing operations attributable to MCBC	$1.413 billion	$1.996 billion
Diluted EPS from continuing operations	$6.52	$9.35
Operating cash flow	$1.866 billion	$1.127 billion
Capital expenditures incurred	$628.4 million	$339.9 million
Interest expense	$349.3 million	$271.6 million

Reported 2017 net sales increased substantially because MillerCoors was consolidated for a full year; reported comparisons with 2016 are not directly comparable. On a pro forma basis, 2017 net sales were $11.003 billion versus $10.983 billion in 2016, while financial volume declined 2.3%.
Gross margin was approximately 43.5% in 2017, compared with approximately 38.8% in reported 2016. Operating margin was approximately 15.7%, compared with approximately 68.2% in 2016; the prior-year margin benefited from a roughly $3.0 billion acquisition-related revaluation gain.
2017 effective tax rate was negative 3.9%, primarily because the U.S. Tax Cuts and Jobs Act generated an estimated $433.9 million deferred tax benefit. Management described the tax accounting as provisional.
Cash and cash equivalents were $418.6 million at year-end, down from $560.9 million. Approximately 82% of cash was held outside the United States.
Total debt, including current maturities and short-term borrowings, was approximately $11.0 billion at year-end; contractual principal debt maturities totaled $11.381 billion, including $715.2 million due in 2018 and $1.610 billion in 2019.
The company had approximately $1.1 billion available under its $1.5 billion revolving credit facility and was in compliance with debt covenants. Credit ratings were investment grade but at the lower end: S&P BBB-, Moody’s Baa3 and DBRS BBB(Low), all with stable outlooks.

Material changes versus comparable periods

Pro forma worldwide financial volume declined 2.3%, while positive pricing, mix, cost savings and lower marketing and administrative expenses supported earnings.
Cost savings exceeded $255 million in 2017. Management reported that the U.S. segment achieved higher pretax income on a pro forma basis despite lower shipments.
U.S. domestic STRs declined 2.9% and STWs declined 3.3%; domestic net sales per hectoliter increased 1.2% on a reported basis.
Canada net sales increased 2.3% to $1.458 billion, while financial volume declined 1.6%. Pretax income improved to $212.8 million from a $125.6 million loss, largely because 2016 included a $495.2 million Molson brand impairment.
Europe net sales increased 10.3% to $1.941 billion and pretax income increased to $281.0 million from $149.7 million. Results benefited from volume growth, portfolio premiumization, pension benefits and reversal of a $50 million indirect-tax provision.
International net sales increased 61.4% to $264.0 million and the pretax loss narrowed to $19.7 million from $39.7 million, helped by acquired Miller brands, Puerto Rico reclassification and Latin American growth. Japan lost the Modelo distribution contract and the Bihar, India brewery remained idled.
Net debt reduction was approximately $1.1 billion during 2017. The company issued approximately $1.5 billion of 2017 notes and fully repaid its $2.5 billion term loans by July 2017.

Guidance, outlook, commentary and unusual items

Management’s U.S. objective was flat volumes by 2018 and growth by 2019, while prioritizing profitable growth rather than volume growth at any cost.
Management targeted approximately $600 million of cumulative cost savings for 2017–2019, including approximately $210 million in 2018.
Expected 2018 capital expenditures were approximately $670 million, including construction of new British Columbia and Montreal breweries. Expected 2018 corporate net interest expense was approximately $330 million.
Management expected approximately $10 million of 2018 defined-benefit pension contributions and approximately $60 million of pension income.
Management expected a long-term consolidated effective tax rate of 20% to 24% after U.S. tax reform, subject to completion of the provisional tax accounting.
The quarterly dividend was maintained at $0.41 per share. The share repurchase program remained suspended while the company focused on deleveraging.
ABI paid $330 million in January 2018 under an acquisition purchase-price settlement, including a $328 million adjustment amount. The company expected to record the adjustment as a special-items gain in Q1 2018.
Special items were a net charge of $28.1 million in 2017, compared with a net benefit of $2.522 billion in 2016, primarily reflecting the prior-year MillerCoors revaluation gain.
Planned facility actions include closure of the Vancouver brewery in 2019, transition from the existing Montreal brewery with expected closure in 2021, and completion of the Burton South brewery closure in early 2018.

Principal risks and contingencies

High leverage following the MillerCoors acquisition could constrain dividends, capital allocation, acquisitions and operating flexibility; refinancing and credit-rating risk remain material.
Core U.S., Canadian and European markets are mature and exposed to volume declines, craft beer, cider, flavored malt beverages, wine, spirits, value brands and changing consumer preferences.
Foreign exchange exposure is significant, particularly to the Canadian dollar, British pound and European currencies.
Commodity, packaging, energy, agricultural input and aluminum costs could pressure margins if not offset by pricing, hedging or productivity gains.
U.K. Brexit uncertainty, Canadian regulatory and distribution changes, alcohol restrictions in emerging markets and the Bihar prohibition could affect operations.
Goodwill and intangible assets were approximately $8.4 billion and $14.3 billion, respectively. The 2017 impairment test found no impairment, but estimated fair-value cushions were sensitive to volumes, margins, discount rates and macroeconomic conditions.
Agrokor-related European receivables were approximately $8 million gross with a $6 million provision at year-end.
Recorded liabilities included $17.3 million of Kaiser indemnity reserves and $17.8 million of litigation, dispute and environmental reserves. The filing states that no other pending matters were expected to have a material effect, but outcomes remain uncertain.

Investor verification checklist

Reconcile reported versus pro forma comparisons, particularly revenue, volume, operating income and EPS, given the MillerCoors consolidation change.
Separate recurring operating performance from the $433.9 million tax benefit, the 2016 acquisition revaluation gain and other special items.
Verify debt maturities, interest costs, covenant headroom, available revolver capacity and progress toward deleveraging.
Assess whether the $600 million cost-savings target and 2018 capital-spending plan are being achieved without impairing brand investment.
Monitor U.S. and Canadian volume and market-share trends, especially Coors Light, Miller Lite and Molson Canadian.
Review the effect of the 2018 revenue-recognition adoption, including the expected $70 million to $90 million revenue presentation reduction and $26 million to $30 million opening-retained-earnings reduction.
Track future impairment-test cushions, pension funding assumptions, foreign exchange exposure and the resolution of remaining tax, environmental and Kaiser contingencies.