Molson Coors Brewing Company — Q1 2017 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2017, compared with March 31, 2016. Molson Coors operates through U.S., Canada, Europe and Molson Coors International segments. Comparability is significantly affected by the October 11, 2016 acquisition of SABMiller’s interests in MillerCoors and the Miller international brand portfolio. MillerCoors was fully consolidated beginning October 11, 2016; it was previously accounted for under the equity method.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change/comment |
|---|---|---|---|
| Sales | $2,913.8 million | $950.8 million | Increase primarily from consolidation of MillerCoors |
| Net sales | $2,448.7 million | $657.2 million | Reported increase of 272.6% |
| Gross profit | $1,075.8 million | $243.2 million | Gross margin approximately 43.9% versus 37.0% |
| Operating income | $369.2 million | $243.3 million | Operating margin approximately 15.1% versus 37.0% |
| Net income attributable to MCBC | $201.3 million | $162.7 million | Increase of $38.6 million |
| Diluted EPS | $0.93 | $0.80 | Increase of $0.13 |
| Net cash used in operating activities | $118.3 million | $88.3 million | Higher interest and pension cash payments |
| Capital additions | $180.0 million paid | $71.1 million paid | Increase primarily related to the acquisition and capital projects |
| Cash and equivalents | $395.0 million | $560.9 million at Dec. 31, 2016 | Decline driven primarily by interest payments |
| Total debt | Approximately $12.3 billion | Approximately $12.1 billion at Dec. 31, 2016 | Includes current and long-term borrowings |
On a pro forma basis, as if the acquisition and related financing had occurred on January 1, 2016, Q1 2017 net sales declined 0.5%, worldwide brand volume declined 2.8%, and diluted EPS from continuing operations declined 21.8% to $0.93 from $1.19. Pro forma results exclude expected synergies and are illustrative rather than historical results.
Material changes versus the prior comparable period
- Reported net sales and earnings increased substantially because the company consolidated 100% of MillerCoors rather than reporting only its 42% economic share as equity income.
- Pro forma performance was pressured by lower U.S. volume, unfavorable product mix, higher cost of goods sold per hectoliter and higher marketing and administrative expenses.
- U.S. pro forma net sales declined 3.3% and income before taxes increased 3.4%, helped by lower brewery-closure charges, lower administrative expenses and pricing, partially offset by volume declines and higher unit costs.
- Canada income before taxes fell 84.2% to $23.1 million, primarily because Q1 2016 included a $110.4 million gain on the Vancouver brewery sale.
- Europe income before taxes improved to $30.6 million from a $1.2 million loss, primarily reflecting release of an approximately $50 million indirect-tax provision, partly offset by an approximately $11 million provision for potentially uncollectible Agrokor receivables.
- Net interest expense increased to $96.6 million from $47.3 million due to acquisition-related debt and financing costs. The company also recorded $55.2 million of intangible-asset amortization versus $9.6 million, primarily from acquisition-related assets.
- Special items were a $3.8 million net charge in Q1 2017 versus a $108.6 million net benefit in Q1 2016, which included the Vancouver brewery sale gain.
Liquidity, debt and capital allocation
- Cash flow was seasonally negative: operating cash flow was negative $118.3 million and investing cash flow was negative $132.1 million. Financing cash flow was positive $80.3 million.
- On March 15, 2017, the company issued approximately $1.5 billion of senior notes: $500 million due 2019 at 1.90%, $500 million due 2020 at 2.25%, and EUR500 million of floating-rate notes due 2019.
- Proceeds were used to repay the remaining $800 million of the 2019 term loan and repay $700 million of the 2021 term loan. After quarter-end, the company repaid $300 million of 2.0% notes and $50 million of the 2021 term loan.
- At March 31, 2017, $620 million was available under the $750 million revolving credit facility after considering commercial paper borrowings. The company was in compliance with its debt covenants.
- Management expected 2017 capital expenditures of approximately $750 million, pension contributions of approximately $100 million to $120 million, and consolidated net interest expense of approximately $370 million.
- The quarterly dividend remained $0.41 per share. Share repurchases were suspended while the company focuses on deleveraging.
Guidance, outlook, risks and unusual items
- Management continued to target flat U.S. volume in 2018 and growth in 2019, while investing in flagship, craft, above-premium, flavored malt beverage and cider brands.
- Management expects continued integration and brand-building investment following the MillerCoors acquisition. MCI expects near- to medium-term profit pressure from upfront investments and the planned termination of the Modelo contract in Japan at the end of June 2017.
- The company’s Europe indirect-tax dispute remains material. A favorable local court ruling supported release of the approximately $50 million provision, but the ruling may be appealed. The company disclosed assessments of approximately $136 million and an estimated potential loss of up to approximately $142 million, excluding interest and penalties.
- Agrokor-related exposure was approximately EUR18 million, with an approximately $11 million allowance recorded for potentially uncollectible receivables.
- The company faces ongoing integration, restructuring and brewery-closure costs. Eden closure costs were expected to reach approximately $180 million, of which $166.6 million had been incurred through March 31, 2017. Burton South closure costs and Vancouver brewery replacement spending remain ongoing.
- Europe goodwill was considered at risk of future impairment if projected cash flows, market conditions, exchange rates, cost savings or other valuation assumptions deteriorate. No new impairment-triggering event was identified in Q1 2017.
- Other risks include foreign-exchange volatility, commodity prices, interest rates, pension funding, customer credit exposure, alcohol regulation, litigation and environmental obligations. A Canadian class-action lawsuit seeks approximately CAD1.4 billion in damages; management considers the claim without merit and intends to defend it.
Most important facts for investors to verify
- Assess performance using the pro forma comparison, not reported year-over-year growth, because MillerCoors was consolidated only after October 11, 2016.
- Verify progress toward acquisition synergies, integration costs and deleveraging targets, including the effect of refinancing and post-quarter debt repayments.
- Monitor the Europe indirect-tax appeal and potential exposure of up to approximately $142 million, excluding interest and penalties.
- Evaluate whether lower U.S. volumes, higher unit costs and mix pressure are temporary or indicate sustained market-share and margin challenges.
- Reconcile cash generation with approximately $750 million of expected 2017 capital expenditures, pension contributions, dividends and debt service.
- Review the final acquisition purchase-price allocation, goodwill and intangible-asset impairment sensitivity, and the eventual impact of new lease and revenue-recognition standards.