Business Context and Reporting Period
Molson Coors Brewing Company’s unaudited Form 10-Q covers the thirteen and twenty-six weeks ended June 28, 2009, compared with periods ended June 29, 2008. The company operates primarily in Canada, the United Kingdom and global markets, and holds a 42% economic interest in MillerCoors. Following the July 1, 2008 formation of MillerCoors, the U.S. business is accounted for under the equity method rather than consolidated, significantly affecting year-over-year comparability.
Key Financial Metrics
| Metric | Q2 2009 | Q2 2008 | First half 2009 | First half 2008 |
|---|---|---|---|---|
| Net sales | $798.9 million | $1,757.4 million | $1,357.9 million | $3,114.0 million |
| Gross profit | $366.3 million | $723.8 million | $579.2 million | $1,245.4 million |
| Operating income | $263.3 million | $156.7 million | $380.5 million | $234.4 million |
| Net income attributable to MCBC | $187.3 million | $79.4 million | $263.0 million | $113.7 million |
| Diluted EPS from continuing operations | $1.01 | $0.49 | $1.44 | $0.73 |
| Net cash from operating activities | Not separately provided for the quarter | Not separately provided for the quarter | $352.5 million | $160.6 million |
- Q2 gross margin was approximately 45.9%; operating margin was approximately 33.0%; and net income attributable to MCBC margin was approximately 23.4%. First-half margins were approximately 42.7%, 28.0% and 19.4%, respectively.
- Worldwide beer volume, including the company’s proportionate share of equity-method investments, declined 3.2% in Q2 and 3.0% in the first half on a comparable basis.
- Cash and cash equivalents were $296.2 million at June 28, 2009, versus $216.2 million at December 28, 2008.
- Long-term debt was $1.629 billion at quarter-end, down from $1.752 billion at year-end 2008 and $1.991 billion at June 29, 2008. The company had no borrowings outstanding under its $750 million committed credit facility.
- Net working capital was $234.8 million at June 28, 2009, compared with $31.2 million at June 29, 2008.
- First-half investing cash outflows were $210.3 million, including a $212.1 million contribution to MillerCoors, partly offset by $343.1 million of MillerCoors distributions. Financing cash outflows were $62.0 million, including $81.4 million of dividends.
Material Changes Versus the Prior Comparable Period
- Reported revenue and volume fell sharply because the former U.S. business was deconsolidated and replaced by $134.1 million of Q2 and $231.2 million of first-half equity income from MillerCoors. The reported decline does not represent an equivalent decline in the company’s overall beer business.
- MillerCoors pro forma net sales increased 1.6% in Q2 and 2.6% in the first half, while net income attributable to MillerCoors increased 74.6% and 64.2%, respectively. Results benefited from pricing, cost synergies and lower marketing, general and administrative spending.
- Canada pretax income declined 11.4% in Q2 and 13.9% in the first half, reflecting lower volumes, currency effects and market-share pressure, partially offset by pricing and cost reductions.
- U.K. pretax income increased 63.0% in Q2 and 128.0% in the first half, despite significant volume declines, as pricing, mix and cost reductions more than offset lower volume.
- Special items declined to $7.1 million in Q2 and $17.3 million in the first half from $103.9 million and $111.2 million, respectively, in the prior-year periods. The prior year included MillerCoors formation costs, brand and fixed-asset impairments, and outsourcing costs.
- Interest expense declined to $19.9 million in Q2 and $39.8 million in the first half, compared with $27.0 million and $54.8 million, respectively, in the prior-year periods. The first half of 2008 also included $12.4 million of debt extinguishment costs.
- The company deconsolidated Brewers’ Retail, Inc. in the first quarter of 2009 and began equity-method accounting. It also acquired a 50.1% interest in Cobra Beer Partnership for $19.6 million and recorded $5.7 million of related Q2 special costs.
Guidance, Outlook, Risks and Unusual Items
- Management expects a 2009 effective tax rate of 10% to 14%, including approximately $45 million to $55 million of expected tax benefits from settlements of uncertain tax positions. A potential Canadian tax-law change could produce an additional one-time, non-cash tax benefit of approximately $101.5 million.
- Full-year 2009 global markets and corporate general and administrative expense is forecast at approximately $160 million, plus or minus 5%. Corporate net interest expense is expected to be approximately $85 million to $90 million, excluding U.K. trade-loan interest income.
- 2009 capital expenditures are expected to be approximately $140 million, excluding MillerCoors and consolidated joint ventures. Management expects incremental MCBC cash needs of approximately $85 million related to MillerCoors integration, restructuring and synergy-related capital spending.
- MillerCoors delivered $60 million of synergies in Q2 and $110 million in the first half. It expects approximately $260 million of cumulative synergies by year-end 2009, exceeding its initial $225 million target, while retaining a longer-term $500 million synergy goal.
- Management expects challenging conditions in Canada and the U.K., including weak economies, aggressive discounting, commodity inflation and lower industry volumes. Canada’s market share declined approximately 0.9 percentage point in Q2 and 0.8 percentage point in the first half.
- Key market risks include consumer trade-down, unfavorable foreign exchange, commodity and packaging-cost inflation, adverse weather, regulatory or excise-tax changes, climate-related supply disruption, and alcohol advertising or marketing restrictions.
- Derivative liabilities had a net fair value of approximately $289.0 million. The Foster’s total-return swap generated losses of $12.9 million in Q2 and $34.3 million in the first half. A below-investment-grade credit downgrade could increase borrowing costs and trigger collateral and early-termination requirements.
- Kaiser indemnity reserves related to the discontinued Brazil business totaled $144.6 million at quarter-end. Maximum potential claims for certain purchased tax credits were substantially higher, and settlement timing and amounts remain uncertain.
- The company recorded an $82.4 million fair-value guarantee related to Brewers’ Retail debt obligations after deconsolidation. Other contingencies include environmental matters and a potential claim against Brewers’ Retail seeking damages exceeding CAD $750 million; MCBC itself was not named as a defendant.
Most Important Facts to Verify
- Reconcile reported sales and volume declines with comparable MillerCoors pro forma results and the 42% ownership economics.
- Assess whether MillerCoors synergy delivery and distributions are sustainable and whether the projected $85 million of incremental MCBC cash needs is adequate.
- Review debt maturities, particularly the $300 million note due 2010 and $575 million convertible notes due 2013, together with credit-rating and derivative-collateral exposure.
- Evaluate Canada and U.K. market-share losses, volume declines and the effect of pricing and cost reductions on underlying margins.
- Validate the 10% to 14% tax-rate outlook, expected uncertain-tax-position settlements and any subsequent tax-law changes.
- Monitor Kaiser indemnity claims, Brewers’ Retail guarantees, environmental liabilities and other litigation for changes in reserves or cash-payment timing.