TAP

Business Context and Reporting Period

Company: Molson Coors Brewing Company (MCBC)
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 29, 2009 (Thirteen weeks)
Key Structural Change: Effective July 1, 2008, MCBC's U.S. operations were combined with SABMiller's to form MillerCoors LLC. MCBC now accounts for its 42% interest in MillerCoors using the equity method, resulting in the deconsolidation of U.S. operating revenues and expenses from the consolidated statements.

Key Financial Metrics

Note: The significant decrease in reported Net Sales is primarily due to the deconsolidation of U.S. sales, which are now reflected as equity income rather than top-line revenue.

Material Changes vs. Prior Period

• Revenue Presentation: Consolidated Net Sales decreased 58.8% to $559.0 million. This is a non-cash accounting change; the U.S. segment (MillerCoors) generated $1.7 billion in sales, but MCBC only reports its 42% share as "Equity income in MillerCoors" ($97.1 million).
• Profitability: Net income attributable to MCBC increased 120.7% to $75.7 million, driven by strong performance at MillerCoors (which reported a 50% increase in net income pro forma) and cost savings initiatives.
• Segment Performance:
  • Canada: Net sales declined 15.4% to $324.7 million due to foreign currency translation (CAD depreciation) and volume declines in non-strategic brands, though strategic brands like Coors Light grew.
  • U.K.: Net sales declined 29.3% to $219.4 million due to a 13.8% volume drop in a weak economy, though pricing increased 11.6% in local currency.
  • Global/Corporate: Operating loss narrowed to $27.2 million from $43.5 million, aided by reduced special items and interest costs.
• Debt Reduction: Long-term debt decreased by approximately $463 million compared to the prior year, reflecting debt extinguishment activities in 2008 and the deconsolidation of Brewers' Retail, Inc. (BRI) debt.

Guidance, Outlook, and Risks

• 2009 Outlook: Management expects full-year 2009 effective tax rates between 16% and 20%. Corporate net interest expense is forecast at $85–$90 million. Global Markets and Corporate G&A is expected to be approximately $150 million (+/- 5%).
• MillerCoors Synergies: MillerCoors has realized $78 million in synergy savings since inception and expects to reach $128 million by June 30, 2009. The joint venture aims for $500 million in total synergies over three years.
• Capital Expenditures: MCBC's 2009 capex plan is approximately $140 million (excluding MillerCoors and consolidated joint ventures).
• Risks and Contingencies:
  • Credit Rating: Standard & Poor's placed MCBC on credit watch with negative implications in February 2009. A downgrade to BBB- would trigger collateral requirements on derivatives.
  • Derivatives: A $21.4 million loss was recognized on a total return swap related to Foster's Group. A 10% adverse change in equity prices could impact fair value by $30.0 million.
  • Legal/Indemnities: Significant indemnity obligations remain related to the sale of the Kaiser business in Brazil ($135.0 million total reserves). A new legal action involving Brewers' Retail, Inc. (BRI) seeks damages exceeding CAD $750 million regarding pregnancy warnings.
  • Climate Change: Identified as a risk factor affecting agricultural commodity costs and water availability.

Investor Verification Checklist

• Equity Method Accounting: Verify understanding that U.S. sales volumes and revenues are no longer consolidated; review MillerCoors' standalone pro forma results for true U.S. performance.
• Foreign Currency Impact: Assess the impact of CAD and GBP depreciation on reported earnings versus local currency performance.
• Debt Covenants: Monitor credit rating status (S&P credit watch) and potential triggers for derivative collateral posting.
• Special Items: Review the $10.2 million in special items, including pension curtailments in Canada and restructuring costs, to determine recurring vs. one-time nature.
• Indemnity Reserves: Monitor the $135.0 million reserve for Kaiser indemnities and the potential exposure from the BRI legal action.