Molson Coors Beverage Company: Q1 2016 Form 10-Q Summary
Business context and reporting period
Molson Coors Brewing Company is a global brewer operating through Canada, MillerCoors in the U.S., Europe and Molson Coors International. This unaudited Form 10-Q covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015. Results are seasonal and the company cautions that first-quarter performance is not necessarily indicative of the full year.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Sales | $950.8 million | $1,003.2 million | -5.2% |
| Net sales | $657.2 million | $700.0 million | -6.1% |
| Gross profit | $243.2 million | $245.2 million | -0.8% |
| Gross margin | 37.0% | 35.0% | +2.0 percentage points |
| Operating income | $243.3 million | $125.3 million | +94.2% |
| Net income attributable to MCBC | $158.8 million | $81.1 million | +95.8% |
| Continuing-operations diluted EPS | $0.78 | $0.42 | +85.7% |
| Underlying net income | $110.3 million | $86.1 million | +28.1% |
| Underlying diluted EPS | $0.54 | $0.46 | +17.4% |
| Underlying EBITDA | $263.4 million | $228.6 million | +15.2% |
| Worldwide beer volume | 11.636 million hectoliters | 11.501 million hectoliters | +1.2% |
Reported earnings included a $110.4 million gain on the sale of the Vancouver brewery. The company also recorded $53.7 million of acquisition, integration and financing-related costs in its underlying-income reconciliation. MillerCoors equity income increased 10.1% to $142.4 million, while underlying equity income increased 22.1% to $157.9 million.
Net cash used in operating activities improved to $93.4 million from $202.6 million, primarily because Q1 2015 included a $227.1 million discretionary U.K. pension contribution. Investing cash outflow was $205.5 million, including a $413.7 million investment in MillerCoors and $71.1 million of property additions, partly offset by a $283.4 million return of capital from MillerCoors. Financing cash flow was $2.464 billion, principally from the $2.526 billion net proceeds of a 29.9 million-share Class B equity offering.
Cash and cash equivalents were $2.603 billion at March 31, 2016, versus $430.9 million at December 31, 2015. Total long-term debt, including current portions, was $2.973 billion, and short-term borrowings were $63.5 million. The company had $750 million available under its revolving credit facility and had not drawn on its $6.8 billion bridge facility or $3.0 billion term-loan commitments for the pending acquisition. Debt-free net working capital increased to $2.604 billion from $70.3 million at year-end.
Material changes versus the prior comparable period
- Net sales declined mainly because foreign-currency movements reduced sales by $43.5 million and Canada experienced lower volume and the loss of the Miller license agreement.
- Worldwide volume increased 1.2%; Europe and the U.S. grew, while Canada declined. Canada net sales fell 14.5%, Europe increased 0.2% and MCI increased 6.5%.
- Gross margin improved because of lower cost of goods sold, including supply-chain savings and lower commodity and fuel costs, although marketing and general and administrative expenses increased.
- Canada pretax income increased to $146.6 million from $30.9 million, principally because of the Vancouver brewery gain. Underlying Canada pretax income increased 20.7% to $37.3 million.
- MillerCoors benefited from pricing, favorable mix, shipment timing and cost savings. Its domestic trading-day-adjusted retail sales declined 1.3%, while sales to wholesalers increased 1.3%.
- Europe’s reported pretax loss narrowed to $1.2 million from $4.1 million, but underlying pretax results declined to a $0.5 million loss from $4.5 million of income because of higher brand investment, amortization and lower pension benefits.
- The company issued equity, suspended its share-repurchase program because of the pending acquisition and maintained a quarterly dividend of $0.41 per share.
Guidance, outlook, commentary and unusual items
- The company expects the ABI/SABMiller transaction and its acquisition of SABMiller’s MillerCoors interest and specified Miller brand assets to close in the second half of 2016, subject to shareholder and regulatory approvals. The purchase price is $12.0 billion in cash, subject to contractual adjustments.
- Management expects to fund the acquisition with cash, equity proceeds and new debt. It expects to replace the bridge commitment with approximately $6.7 billion of permanent long-term financing and anticipates substantial U.S. cash-tax benefits over the first 15 years if the transaction is treated as an asset acquisition.
- For 2016, management expects consolidated net interest expense of approximately $110 million excluding acquisition-related interest. Excluding acquisition effects, underlying effective tax rate guidance is 18% to 22%.
- Expected 2016 capital expenditures are approximately $300 million, excluding MillerCoors and potential acquisition effects. Corporate marketing, general and administrative expense is expected to be approximately $120 million excluding acquisition costs.
- Management expects Canada and Europe cost of goods sold per hectoliter to rise at a low-single-digit rate in local currency, MillerCoors to be approximately flat, and MCI to increase at a high-single-digit rate. Canada expects additional brewery-related special charges, including approximately CAD 18 million of accelerated depreciation through the anticipated Vancouver closure at the end of 2018.
- MillerCoors expects total Eden brewery closure charges of approximately $150 million to $200 million; $104.6 million had been incurred through March 31, 2016. Additional charges are expected through the planned September 2016 closure.
- Reported results were affected by acquisition financing costs, including $18.4 million of bridge-loan commitment-fee amortization, $21.1 million of swaption mark-to-market losses and $1.8 million of term-loan financing costs.
- India’s Bihar state imposed a complete prohibition on alcohol beginning in April 2016. The duration and ultimate impact are unclear; assets potentially exposed include $22.5 million of India goodwill, $13.9 million of properties, $9.1 million of current assets and $1.1 million of intangible assets.
- European indirect-tax assessments total approximately $114 million. Management is contesting them and estimates a possible loss ranging from zero to approximately $121 million; no provision has been recorded.
- The company faces a Canadian proposed class action seeking CAD 1.4 billion related to alleged price fixing and market allocation involving The Beer Store. Management considers the claim without merit and intends to defend it.
- Goodwill and indefinite-lived intangible assets remain sensitive to unfavorable changes in volumes, consumer demand, competition, foreign exchange, macroeconomic conditions, cost savings, discount rates and regulation. The Molson core brand had only approximately 3% excess fair value over carrying value at the October 2015 impairment test.
Most important facts for investors to verify
- Whether the ABI/SABMiller transaction closes on schedule, receives all required approvals and remains within the stated purchase-price and financing assumptions.
- The amount, timing and terms of permanent debt issued to fund the acquisition, and the resulting leverage, interest expense and credit ratings.
- Underlying operating performance excluding the Vancouver gain, acquisition-related costs, MillerCoors special charges and derivative mark-to-market effects.
- Whether MillerCoors retail-sales trends improve and whether projected Eden closure costs remain within the $150 million–$200 million range.
- Progress on Canada’s brewery transition, required capital spending and additional Vancouver-related charges.
- The outcome of the European indirect-tax assessments and the Ontario class-action litigation.
- The duration and financial effect of the Bihar alcohol prohibition, including any impairment charges.
- Foreign-currency exposure, particularly to the Canadian dollar and European currencies, and its effect on reported sales, earnings and cash flows.