Business Context and Reporting Period
Molson Coors Brewing Company (MCBC) is a leading global brewer operating primarily in Canada, the United States, and the United Kingdom. The reporting period covers the fiscal year ended December 30, 2007 (a 52-week period). The company operates three primary segments: Canada, United States, and Europe. A significant strategic development during the period was the signing of a definitive agreement on December 20, 2007, to form a joint venture with SABMiller plc ("MillerCoors") combining their U.S. and Puerto Rico operations, expected to close in mid-2008.
Key Financial Metrics
| Metric | 2007 | 2006 |
|---|---|---|
| Net Sales | $6,190.6 million | $5,845.0 million |
| Operating Income | $641.1 million | $581.1 million |
| Net Income | $497.2 million | $361.0 million |
| Diluted EPS (Continuing Ops) | $2.84 | $2.16 |
| Cash from Operations | $616.0 million | $833.2 million |
| Capital Expenditures | $428.3 million | $446.4 million |
| Long-Term Debt | $2,260.6 million | $2,129.8 million |
| Cash and Equivalents | $377.0 million | $182.2 million |
Note: Per share data has been adjusted for a 2-for-1 stock split effective October 3, 2007.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 5.9% to $6.19 billion, driven by brand strength, positive pricing, and favorable foreign currency impacts (specifically the strengthening of the Canadian dollar and British pound against the USD).
- Profitability: Income from continuing operations rose 37.8% to $514.9 million. This was aided by a significantly lower effective tax rate of approximately 1% in 2007 compared to 17% in 2006, due to foreign tax rate reductions and one-time benefits.
- Volume Trends: Total sales volume from continuing operations remained flat at 42.1 million barrels. The U.S. segment grew volume by 3.3%, while the Europe segment declined 7.1% due to weather and smoking bans in the U.K. The Canada segment volume decreased 1.6% on a reported basis, though comparable sales volume increased 1.5%.
- Special Items: The company incurred $112.2 million in special items in 2007, primarily related to the closure of the Edmonton brewery ($46.5 million), Foster's contract termination ($24.1 million), and costs associated with the proposed MillerCoors joint venture ($20.7 million).
Guidance, Outlook, and Risks
- MillerCoors Joint Venture: The company expects the joint venture to generate $500 million in annual cost synergies by the third year of combined operations. The U.S. segment will be de-consolidated and accounted for using the equity method upon closing.
- 2008 Outlook: Management anticipates continued inflationary pressure on commodities (fuel, aluminum, barley) and transportation costs. They expect to meet or exceed cost-reduction goals via the "Resources for Growth" program. The effective tax rate for 2008 is projected to be between 10% and 15%.
- Key Risks:
- Regulatory Approval: The MillerCoors transaction is subject to antitrust review and government approvals.
- Commodity Prices: Significant exposure to fluctuations in diesel fuel, aluminum, and agricultural raw materials.
- Foreign Exchange: Results are sensitive to fluctuations in the Canadian dollar and British pound.
- Discontinued Operations: Ongoing indemnity obligations related to the sale of the Kaiser Brazil business, with a carrying value of $155.0 million as of year-end.
Investor Verification Checklist
- Verify the status of regulatory approvals for the MillerCoors joint venture and the timeline for closing.
- Monitor the impact of the 2008 effective tax rate (projected 10-15%) compared to the anomalously low 1% rate in 2007.
- Track the execution of the $500 million synergy target from the MillerCoors venture and the associated one-time integration costs.
- Assess the exposure to rising commodity costs (fuel, aluminum) and the effectiveness of hedging strategies.
- Review the resolution of indemnity liabilities related to the former Kaiser Brazil operations.