Molson Coors Brewing Company — Form 10-Q Summary
Business context and reporting period
The filing covers the 13 weeks and 26 weeks ended June 26, 2010, compared with the periods ended June 28, 2009. Molson Coors operates primarily in Canada and the U.K. and accounts for its 42% economic interest in MillerCoors under the equity method. Results are seasonal and quarterly performance is not necessarily indicative of the full year.
Key financial metrics
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Net sales | $883.3 million | $798.9 million | $1,544.3 million | $1,357.9 million |
| Gross profit | $408.5 million | $366.3 million | $665.1 million | $579.2 million |
| Operating income | $295.1 million | $263.3 million | $402.6 million | $380.5 million |
| Income from continuing operations attributable to MCBC | $237.8 million | $187.3 million | $299.8 million | $266.9 million |
| Net income attributable to MCBC | $237.2 million | $187.3 million | $341.8 million | $263.0 million |
| Diluted EPS from continuing operations | $1.27 | $1.01 | $1.60 | $1.44 |
| Net cash from operating activities | Not separately provided for the quarter | Not separately provided for the quarter | $395.6 million | $352.5 million |
Q2 net sales increased 10.6%, operating income increased 12.1%, and continuing-operations income attributable to MCBC increased 27.0%. The gross margin was approximately 46.3% in Q2 2010 versus 45.9% in Q2 2009. The operating margin was approximately 33.4% versus 32.9%. First-half net sales increased 13.7%, while continuing-operations income attributable to MCBC increased 12.3%.
- Underlying after-tax income was $234.5 million, or $1.25 per diluted share, up 14.2% in Q2. First-half underlying after-tax income was $304.2 million, or $1.63 per diluted share, essentially unchanged from $304.1 million.
- Worldwide beer volume declined 0.7% in Q2 and 2.1% in the first half. Reported financial volume increased 2.2% in Q2 but declined 0.3% year to date.
- Equity income from MillerCoors increased to $163.6 million in Q2 from $134.1 million and to $254.6 million for the first half from $231.2 million.
- Cash and cash equivalents were $798.6 million at June 26, 2010, compared with $734.2 million at December 26, 2009 and $296.2 million at June 28, 2009. Net working capital was $655.7 million.
- Total debt, including current maturities, was $1,733.3 million; $300.0 million was due in September 2010. Long-term debt was $1,433.3 million.
- Free cash flow was $195.8 million for the first half, compared with $190.6 million in 2009. Underlying free cash flow was $323.0 million versus $229.2 million.
- Dividends paid were $96.7 million in the first half. The annualized dividend rate was increased 16.7% to $1.12 per share.
Material changes versus the prior comparable period
- Canada volume increased 2.6% in Q2 and 2.9% in the first half, but Canada earnings before taxes declined 3.3% in Q2 to $131.9 million. Underlying pretax income increased 6.7% to $146.5 million, helped by favorable Canadian-dollar translation.
- MillerCoors volume declined 2.9% in both Q2 and the first half, while net income attributable to MillerCoors increased 28.3% in Q2 and 17.4% year to date. Pricing, synergies and lower marketing expense more than offset volume weakness.
- U.K. Q2 volume increased 0.7%, but first-half volume declined 4.5%. Q2 reported pretax earnings increased 6.7%, while underlying pretax income declined 11.1%, primarily because of higher pension expense and foreign-exchange effects.
- Special items increased to $15.8 million in Q2 from $7.1 million, primarily due to a $12.4 million write-off of abandoned sales-support software and Canada pension and restructuring costs.
- Other income shifted to a $21.4 million gain from an $8.3 million expense, largely because of a $21.9 million non-cash gain on the Foster’s total-return swap.
- First-half discontinued-operations income was $42.0 million, compared with a $3.9 million loss, primarily reflecting a $42.6 million gain from settling part of the Kaiser indemnity obligations.
- The company acquired Granville Island Brewing Company and Mainland Beverage Distribution during Q2 2010 and continued consolidating the businesses within Canada.
Guidance, outlook, risks and unusual items
- Management maintained expectations for 2010 Canada cost of goods sold per hectoliter to decline at a low-single-digit rate in local currency.
- Management expects full-year MCI and corporate marketing, general and administrative expense of approximately $180 million, plus or minus 5%; corporate net interest expense of approximately $105 million; and capital expenditures of approximately $150 million, excluding MillerCoors.
- The expected 2010 effective tax rate was lowered to 14%–18%. The Q2 effective tax rate was approximately 18%, and the underlying rate was approximately 17%.
- Management expects to refinance the $300 million of senior notes due in September 2010. The company reported no borrowings under its $750 million committed credit facility and stated that it expects operating cash flow, MillerCoors distributions and financing access to be adequate for operating needs, debt service, dividends and capital expenditures.
- The company signed an agreement for a China joint venture with an expected total cash investment of approximately $40 million. It placed $34.2 million in escrow and expected closing during the second half of 2010.
- MillerCoors had delivered $390 million of its original $500 million synergy commitment program-to-date and had delivered $117 million of incremental synergies in the first half. Management expected approximately $50 million of 2010 MillerCoors restructuring, integration and synergy-related capital costs.
- Key risks include weak U.S. beer-industry demand, competitive pricing and mix, foreign-exchange movements, commodity and packaging costs, pension funding, interest-rate and derivative exposure, and reliance on MillerCoors distributions.
- Material contingencies include remaining Kaiser purchased-tax-credit claims with maximum potential claims of $248.7 million and recorded Kaiser indemnity reserves of $32.0 million, environmental obligations, guarantees of $100.7 million, a Brazilian distribution dispute, and a potential Canadian action seeking more than CAD $750 million against BRI. Management states that a material adverse result in the Brazilian dispute is not probable.
Important facts for investors to verify
- Verify the refinancing and repayment of the $300 million senior notes due in September 2010.
- Assess whether MillerCoors can sustain earnings growth and synergy delivery despite continuing volume declines.
- Separate recurring operating performance from the Foster’s swap gain, special charges and Kaiser settlement gain.
- Monitor Canada pricing, market-share gains and the effect of value-segment participation on revenue per hectoliter.
- Review the status and ultimate cost of Kaiser indemnities, environmental liabilities and pending litigation.
- Evaluate pension funding requirements, derivative liabilities and foreign-exchange sensitivity; derivative instruments had a net carrying liability of $419.1 million at quarter-end.
- Confirm completion, funding and expected financial contribution of the China joint venture.