Business Context and Reporting Period
Company: Molson Coors Brewing Company (MCBC)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 28, 2008 (52-week period)
Key Structural Change: Effective July 1, 2008, MCBC and SABMiller plc formed the MillerCoors joint venture, combining their U.S. and Puerto Rico operations. Consequently, MCBC deconsolidated its U.S. operations and now accounts for its 42% economic interest in MillerCoors using the equity method. This change significantly alters the comparability of U.S. segment results between 2008 and prior years.
Key Financial Metrics
| Metric (in millions, except per share) | 2008 | 2007 | % Change |
|---|---|---|---|
| Net Sales | $4,774.3 | $6,190.6 | (22.9)% |
| Income from Continuing Operations | $400.1 | $514.9 | (22.3)% |
| Diluted EPS (Continuing Ops) | $2.16 | $2.84 | (23.9)% |
| Net Income | $388.0 | $497.2 | (21.9)% |
| Operating Cash Flow | $411.5 | $616.0 | (33.2)% |
| Total Assets | $10,416.6 | $13,451.6 | (22.6)% |
| Long-Term Debt | $1,831.7 | $2,260.6 | (18.9)% |
| Cash and Cash Equivalents | $216.2 | $377.0 | (42.6)% |
Note: The decline in Net Sales and Total Assets is primarily driven by the deconsolidation of U.S. assets and sales upon the formation of MillerCoors.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 22.9% to $4.77 billion. This is largely due to the exclusion of U.S. sales from July 1, 2008, onwards, which are now reported as equity income. Excluding the U.S. deconsolidation, underlying performance was impacted by commodity inflation and unfavorable foreign exchange rates (CAD and GBP weakened against the USD).
- Profitability: Income from continuing operations fell 22.3% to $400.1 million. Despite the structural change, the company reported $155.6 million in equity income from MillerCoors for the six-month period it was active.
- Segment Performance:
- Canada: Net sales decreased 2.6% to $1.86 billion. Volume declined 4.4% due to the exclusion of Modelo volumes (now a joint venture), though comparable volume was flat. Operating income increased 11.3% to $451.4 million due to cost savings and pricing.
- United States: Reported net sales dropped 45.4% to $1.5 billion as the segment only includes the first half of the year prior to the joint venture. Operating income decreased 8.3% to $262.7 million, including $155.6 million of equity income from MillerCoors.
- United Kingdom: Net sales decreased 7.8% to $1.34 billion due to volume declines (weather, smoking bans) and currency translation. Operating income remained relatively flat at $78.9 million.
- Special Items: Total special items expense was $133.9 million in 2008, compared to $112.2 million in 2007. Significant items included $50.6 million for the impairment of Molson brands sold in the U.S. and $37.9 million for MillerCoors joint venture costs.
Guidance, Outlook, and Risks
- 2009 Outlook: Management expects a challenging trading environment, particularly in the U.K. due to the weak local economy. Commodity inflation remains a challenge, though some relief is anticipated in fuel and certain commodities.
- Cost Synergies: MillerCoors expects to accelerate synergy delivery, targeting $128 million by June 30, 2009, and $238 million by year-end 2009, surpassing the original forecast. The long-term goal remains $500 million in annual cost synergies.
- Foreign Exchange Risk: Significant exposure to CAD and GBP. If rates remain consistent with year-end 2008, currency translation could negatively impact Canada pretax earnings by 15-20% and U.K. pretax earnings by 25-30% in the first three quarters of 2009.
- Pension Obligations: The global financial crisis caused significant declines in pension plan asset values. The consolidated unfunded pension position increased to approximately $319 million. Management anticipates pension contributions of approximately $69.4 million in 2009 (excluding MillerCoors).
- Legal and Contingencies:
- Kaiser Indemnities: MCBC retains indemnity obligations related to the 2006 sale of its Brazilian business (Kaiser). The carrying value of these liabilities was $133.2 million at year-end.
- Environmental: MCBC is a potentially responsible party (PRP) at the Lowry Superfund site in Denver. While a settlement exists, future costs in excess of the threshold could require additional accruals.
Investor Verification Checklist
- MillerCoors Integration: Verify the progress of the $500 million synergy target and the actual equity income received from the joint venture in subsequent quarters.
- Foreign Exchange Sensitivity: Monitor the USD/CAD and USD/GBP exchange rates, as they significantly impact reported earnings and asset values for the Canada and U.K. segments.
- Pension Funding Requirements: Track the funded status of defined benefit plans, particularly in the U.K. and Canada, given the volatility in asset values and potential for increased cash contributions.
- Commodity Hedging: Review the effectiveness of hedging programs for aluminum, barley, and fuel, which are major cost drivers.
- Debt Covenants and Ratings: Monitor credit ratings (S&P placed MCBC on credit watch negative in Feb 2009) and ensure compliance with debt covenants, especially regarding leverage ratios.
- Discontinued Operations: Assess the resolution of indemnity liabilities related to the Kaiser sale in Brazil, which could result in future cash outflows.