TAP

Business Context and Reporting Period

Company: Molson Coors Brewing Company (MCBC)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 28, 2008 (13 weeks) and September 28, 2008 (39 weeks)
Key Event: Effective July 1, 2008, MCBC and SABMiller 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 structural change significantly impacts year-over-year comparability for the U.S. segment.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 45.3% in the quarter and 12.1% year-to-date. This is primarily due to the deconsolidation of U.S. sales following the MillerCoors formation. On a consolidated global volume basis (including equity share), worldwide beer volume increased 0.2% in the quarter and 4.9% year-to-date.
• Profitability Increase: Despite lower reported sales, Net Income increased 29% in the quarter ($173.2M vs $134.7M) and Operating Income increased 33% ($241.6M vs $181.7M). This is driven by the inclusion of equity income from MillerCoors ($106.5M) and cost savings initiatives.
• Special Items: Special items, net, were $24.8M in the quarter and $136.1M year-to-date. Significant charges included $50.6M for the impairment of Molson brands sold in the U.S. (prior to deconsolidation) and $27.3M for costs associated with the MillerCoors joint venture formation.
• Debt Reduction: Long-term debt decreased by approximately $266M year-over-year, largely due to the repurchase of $180.4M of Senior Notes in February 2008.

Guidance, Outlook, and Risks

• Outlook: Management anticipates full-year 2008 effective tax rates between 20% and 24%. Corporate general and administrative costs are expected to be $105M-$115M. Net interest expense is projected at $95M-$100M.
• Cost Savings: The company has achieved over 85% of its $77M "Resources for Growth" cost reduction goal for 2008. MillerCoors expects to accelerate its three-year synergy savings targets by six months.
• Segment Performance:
  • Canada: Sales-to-retail grew 3.7% on a comparable basis, though challenged by price discounting in Quebec and commodity inflation.
  • U.K.: Gained market share despite a difficult environment; volumes declined 3.1% but outperformed the industry decline of over 7%.
  • MillerCoors: In its first quarter, trading-day-adjusted sales-to-retail grew 0.7%, and revenue per barrel increased 3%.
• Risks and Contingencies:
  • Legal: Ongoing investigations by state Attorneys General regarding the "Sparks" caffeinated alcohol beverage. A lawsuit filed in September 2008 alleges the product is adulterated.
  • Indemnities: Significant indemnity obligations remain related to the 2006 sale of the Kaiser Brazil business, with a recorded liability of $175.2M as of September 28, 2008.
  • Pension Plans: Potential curtailment events in Canada and the U.K. could trigger significant pension expense increases in 2009 if global equity markets remain depressed.

Investor Verification Checklist

• MillerCoors Integration: Verify the realization of projected $500M annual cost synergies and the successful integration of sales and distribution networks.
• Commodity Inflation: Monitor the impact of rising costs for aluminum, barley, and fuel on gross margins, particularly in the Canada and U.K. segments.
• Sparks Litigation: Track the outcome of the D.C. Superior Court lawsuit and state AG investigations regarding the Sparks brand, which could result in product withdrawal or penalties.
• Kaiser Indemnity: Review updates on the Brazilian tax and labor contingencies, as fair value estimates are subject to significant volatility based on legal developments.
• Pension Funding: Assess the funded status of defined benefit plans in the U.K. and Canada, as market volatility could necessitate increased cash contributions in 2009.