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| TAP > SEC Filings for TAP > Form 10-Q on 4-Aug-2009 | All Recent SEC Filings |
4-Aug-2009
Quarterly Report
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements, the accompanying notes, and the MD&A included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2008, as well as our unaudited condensed consolidated financial statements and the accompanying notes included in this Form 10-Q. Due to the seasonality of our operating results, quarterly financial results are not an appropriate basis from which to project annual results.
Effective July 1, 2008, Molson Coors Brewing Company ("MCBC") and SABMiller plc ("SABMiller") combined the U.S. and Puerto Rico operations of their respective subsidiaries, Coors Brewing Company ("CBC") and Miller Brewing Company ("Miller"). In connection with the closing of the joint venture transaction, each of MCBC, CBC, SABMiller and Miller have entered into an Amended and Restated Operating Agreement (the "LLC Operating Agreement"). The LLC Operating Agreement is the primary operating document governing the joint venture, MillerCoors LLC ("MillerCoors").
Beginning in the third quarter of 2008, the results and financial position of U.S. operations, which has historically comprised substantially all of our U.S. reporting segment was, in all material respects, prospectively deconsolidated from MCBC. In the third quarter of 2008 and prospectively, our interest in the new combined operations have been accounted for under the equity method of accounting. Our equity investment in MillerCoors represents our U.S. reporting segment from July 1, 2008 forward.
BUSINESS OVERVIEW
Financial Highlights
The following second quarter highlights summarize components of our
condensed consolidated summary of operations for the thirteen and twenty-six
weeks ended June 28, 2009 and June 29, 2008. See "RESULTS OF OPERATIONS" below
for further analysis of our reportable segment results (In millions, except
percentages and per share data).
Thirteen weeks ended Twenty-six weeks ended
June 28, June 29, June 28, June 29,
2009 2008 % change 2009 2008 % change
Volume in hectoliters 5.005 13.679 (63.4 )% 8.901 24.388 (63.5 )%
Net sales $ 798.9 $ 1,757.4 (54.5 )% $ 1,357.9 $ 3,114.0 (56.4 )%
Income attributable
to MCBC from
continuing
operations, net of
tax $ 187.3 $ 91.8 104.0 % $ 266.9 $ 135.1 97.6 %
Diluted income
attributable to MCBC
per share from
continuing operations $ 1.01 $ 0.49 106.1 % $ 1.44 $ 0.73 97.3 %
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Consolidated Global Volumes including Proportionate Share of Equity Investments'
volume
Thirteen Weeks Ended Thirteen Weeks Ended
June 28, June 29, June 28, June 29,
2009 2008 % change 2009 2008 % change
(In millions, except percentages)
Actual Pro forma(1) Actual Reported
Volume in hectoliters:
Reported financial
volume 5.005 5.408 (7.5 )% 5.005 13.679 (63.4 )%
Royalty volume 0.077 0.067 14.9 % 0.077 0.067 14.9 %
Owned volume 5.082 5.475 (7.2 )% 5.082 13.746 (63.0 )%
Proportionate share
of equity investment
sales-to-retail(2) 8.451 8.509 (0.7 )% 8.451 0.099 N/M
Total MCBC worldwide
beer volume 13.533 13.984 (3.2 )% 13.533 13.845 (2.3 )%
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º N/M
º = Not meaningful
º (1)
º Reflects the elimination of the U.S. segment volume reported for the
thirteen weeks ended June 29, 2008.
º (2)
º Reflects the addition of MCBC proportionate share of equity method
subsidiaries sales-to-retail for the periods presented adjusted for
comparable trading days, if applicable.
Twenty-six Weeks Ended Twenty-six Weeks Ended
June 28, June 29, June 28, June 29,
2009 2008 % change 2009 2008 % change
(In millions, except percentages)
Actual Pro forma(1) Actual Reported
Volume in
hectoliters:
Reported financial
volume 8.901 9.609 (7.4 )% 8.901 24.388 (63.5 )%
Royalty volume 0.128 0.120 6.7 % 0.128 0.120 6.7 %
Owned volume 9.029 9.729 (7.2 )% 9.029 24.508 (63.2 )%
Proportionate share
of equity
investment
sales-to-retail(2) 15.021 15.057 (0.2 )% 15.021 0.144 N/M
Total MCBC worldwide
beer volume 24.050 24.786 (3.0 )% 24.050 24.652 (2.4 )%
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º N/M
º = Not meaningful
º (1)
º Reflects the elimination of the U.S. segment volume reported for the
twenty-six weeks ended June 29, 2008.
º (2)
º Reflects the addition of MCBC proportionate share of equity method
subsidiaries sales-to-retail for the periods presented adjusted for
comparable trading days, if applicable.
During the first and second quarters of 2009, our results reflect the adoption of hectoliters as our standard global volume measure and as a result prior period information presented has been adjusted to reflect this change. Worldwide beer volume is composed of our financial volume, royalty volume and proportionate share of equity investment sales-to-retail. Financial volume represents owned beer brands sold to unrelated external customers within our geographical markets. Royalty beer volume consists of product produced and sold by third parties under various license and contract-brewing agreements. Equity investment sales-to-retail volume represents the company's ownership percentage share of volume in its subsidiaries accounted for under the equity method, including MillerCoors and Modelo Molson Imports, L.P.
Second quarter 2009 highlights
These improved results were driven by cost control initiatives and front-line price management, underpinned by well-executed strategic initiatives. Our ability to build long-term brand value, manage costs, and generate increased cash flows has delivered these favorable results. Meanwhile, tougher markets, poor weather and our strong pricing stance led to a 3.2% decline in our worldwide beer volume volumes, though within this Coors Light grew volumes by 3%. We also faced continuing cost inflation and unfavorable foreign currency movements. The U.K. beer industry continued to post poor volume figures, and there was increasing evidence in both the U.S. and Canadian markets of some consumers moving to "enhanced value propositions"-that is, looking for value in brands, package configurations and channels.
Regional highlights:
º •
º In our Canada business, net pricing grew as price increases in all
major markets were partially offset by higher promotional discounting
across Canada.
º •
º In the U.K. business, the pretax profit grew substantially through
price increases in all major channels and extensive cost reductions.
º •
º MillerCoors continued to achieve double-digit bottom-line growth in
the U.S., driven by cost synergy delivery, pricing increases, and
lower marketing general and administrative spending.
MCBC cost savings initiatives
We achieved approximately $32 million and $50 million of cost savings during the second quarter and first half of 2009, respectively, as part of our three-year, $250 million Resources for Growth ("RFG") cost savings program. These cost savings include our 42% of RFG cost savings initiatives that were achieved by MillerCoors, which equaled $3 million and $6 million in the second quarter and first half of 2009, respectively. Savings from the RFG program during the past two and a half years total $229 million.
MillerCoors integration and cost synergy initiatives
MillerCoors accelerated synergy delivery timing, realizing $60 million in the second quarter, bringing the total for the first half of 2009 to $110 million. By the end of calendar year 2009, MillerCoors expects to achieve a total of $260 million in synergies, surpassing its original forecast of $225 million. While the timing of synergy delivery has accelerated, MillerCoors' $500 million synergy goal is unchanged.
Income taxes
Our effective tax rate for the second quarter of 2009 was approximately 20%. We anticipate that our 2009 full-year effective tax rate will be in the range of 10% to 14%. Our anticipated full-year rate is lower than our previous guidance due to adjustments in our intercompany financing to reflect recent changes in the global interest-rate environment.
Discontinued operations
Discontinued operations are associated with the formerly-owned Kaiser business in Brazil. See Part I-Financial Statements, Item 1 Note 8 "DISCONTINUED OPERATIONS" and Note 17 "COMMITMENTS AND CONTINGENCIES" for discussions of the nature of amounts recognized in the Discontinued Operations section of the condensed consolidated statements of operations, which consists primarily of amounts associated with indemnity obligations to the owners of Kaiser related to purchased tax credits and other tax, civil and labor issues.
RESULTS OF OPERATIONS
Canada Segment Results of Operations
Our Canada segment consists primarily of Molson's beer business, including the production and sale of the Molson brands, Coors Light, and other licensed brands in Canada. Effective, January 1, 2008, Molson and Grupo Modelo, S.A.B. de C.V. established a joint venture, Modelo Molson Imports, L.P. ("MMI"), to import, distribute, and market the Modelo beer brand portfolio across all Canadian provinces and territories. MMI is accounted for using the equity method. The Canada segment also includes our arrangements related to the distribution of beer in Ontario and in Western Canada, Brewers' Retail, Inc. ("BRI") and Brewers' Distributor Ltd. ("BDL"), respectively. BRI was a consolidated joint venture through February 28, 2009. As of March 1, 2009, we deconsolidated BRI, and prospectively began accounting for BRI results under the equity method as a result of the reduction in our BRI ownership interest following Labatt's acquisition of Lakeport Brewing in Ontario and the resulting increase in their relative ownership interest in BRI. Also included in the Canada results is BDL, a joint venture accounted for under the equity method.
Thirteen Weeks Ended Twenty-Six Weeks Ended
June 28, June 29, June 28, June 29,
2009 2008 % change 2009 2008 % change
(In millions, except percentages)
Volume in
hectoliters 2.402 2.475 (2.9 )% 4.165 4.242 (1.8 )%
Net sales $ 471.0 $ 532.6 (11.6 )% $ 795.7 $ 916.2 (13.2 )%
Cost of goods sold (231.1 ) (258.5 ) (10.6 )% (418.5 ) (474.7 ) (11.8 )%
Gross profit 239.9 274.1 (12.5 )% 377.2 441.5 (14.6 )%
Marketing, general
and administrative
expenses (103.8 ) (117.1 ) (11.4 )% (187.3 ) (223.7 ) (16.3 )%
Special items, net (0.9 ) (0.5 ) N/M (9.0 ) (1.9 ) N/M
Operating
income 135.2 156.5 (13.6 )% 180.9 215.9 (16.2 )%
Other income
(expense), net 1.2 (2.6 ) N/M 5.5 0.7 N/M
Earnings
before income
taxes $ 136.4 $ 153.9 (11.4 )% $ 186.4 $ 216.6 (13.9 )%
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Foreign currency impact on results
The Canadian dollar ("CAD") depreciated versus the U.S. dollar ("USD") resulting in an approximate $18 million decrease to USD earnings before income taxes on a quarter over quarter basis during the second quarter. During the comparable twenty-six week periods for 2009 and 2008, the CAD also declined versus the USD, resulting in a $28 million decrease to USD earnings before income taxes.
Volume and net sales
With the formation of MillerCoors, the revenues and production costs of MCBC products sold by Molson in Canada for U.S. distribution, which were previously treated as inter-company sales and eliminated upon consolidation, are now included in Canada segment results. However, the sales volume continues to be eliminated from our Canada results, as this volume is now reported by MillerCoors. These changes will impact the first and second quarters as we cycle prior year results that do not reflect this treatment. To provide more comparable results, we will provide year-over-year changes that exclude the reporting effects in Canada of deconsolidating BRI in March 2009 and setting up MillerCoors in 2008.
Our Canada segment sales volume was 2.4 million hectoliters in the second quarter of 2009, down 2.9% from a year ago while our Canada sales to retail ("STR"), for the calendar quarter ended
June 30, 2009 decreased 0.5% versus the prior year. The variance between STR and sales volume was driven by differences in reporting periods (calendar versus fiscal, primarily driven by the July 1st Canada Day holiday within our fiscal calendar), along with a decrease in retail inventories of import beer. STRs of Molson's strategic brands, which represent more than 85% of our Canada volume, increased almost 2%, while sales of our other brands declined at a double-digit rate. Strategic brand changes were led by high-single-digit growth of Coors Light and growth of Rickard's. Molson Canadian volumes declined at a mid-single-digit rate versus the prior comparable period.
Comparable net sales per hectoliter increased 2.6% in local currency in the second quarter, driven by favorable net pricing, led by price increases across all major markets and improved sales mix, partially offset by continued discounting activity.
Our Canada segment sales volume was 4.2 million hectoliters in the first half of 2009, down 1.8% from a year ago. Our Canada STRs, for the first half ended June 30, 2009 decreased, 1.5% versus a year ago. STRs of Molson's strategic brands increased almost 1%, while sales of our non-supported brands declined. Strategic brand changes were led by high-single digit growth of Coors Light and growth of Carling. Partner import brands and Molson Canadian volumes declined versus the prior comparable period.
Comparable net sales per hectoliter increased 2.3% in local currency in the first half, driven by favorable net pricing, led by price increases across all major markets and improved sales mix, partially offset by continued discounting activity.
Total Canadian beer industry STRs increased an estimated 1.8% and 0.5% in the calendar second quarter and first half of 2009, respectively. Our estimated Canada market share decreased about 0.9 of a share point in the second quarter of 2009 and about 0.8 of a share point in the first half versus a year ago.
Cost of goods sold
Cost of goods sold per hectoliter increased 1.7% for the second quarter of 2009 and 2.1% for the first half of 2009 on a comparable basis in local currency. The second quarter and first half increases were due to the net effect of three factors:
º •
º Commodity, packaging material, distribution and other cost of goods
sold input costs which increased approximately 2.5%, for the second
quarter and the first half,
º •
º These inflationary increases were partially offset by savings from our
RFG initiatives.
º •
º An increase of approximately 2% and 1.8%, for the second quarter and
first half, respectively, was due to ongoing product mix shifts,
Marketing, general and administrative expenses
Comparable marketing, selling, general and administrative expense decreased 1% in the second quarter of 2009 and 3.3% in the first half of 2009 in local currency driven by lower overhead costs. Also, during the first half of 2009 we incurred less long-term incentive compensation expense versus a year earlier.
Special items, net
The Canada segment recognized $0.9 million of special items in the second quarter of 2009 and $9.0 million in the first half of 2009 related to costs associated with the Montreal brewery employee pension curtailment and severance, and the ongoing Edmonton brewery closure and restructuring expenses. See Part I-Financial Statements, Item 1 Note 6 "UNUSUAL OR INFREQUENT ITEMS" to the condensed consolidated financial statements for further discussion.
United States Segment Results of Operations
During the first two quarters of 2008, the United States ("U.S.") segment produced, marketed and sold the Coors portfolio of brands in the United States and Puerto Rico and included the results of the Rocky Mountain Metal Corporation and Rocky Mountain Bottle Corporation, which were consolidated joint ventures. The U.S. segment also included sales of Molson products in the United States. As of July 1, 2008, MillerCoors began operations. The results and financial position of our U.S. segment operations were prospectively deconsolidated upon contribution to the joint venture, and our interest in MillerCoors is being accounted for and reported by us under the equity method of accounting. This means that 42% of the net income reported by MillerCoors is reported on the MCBC income statement as "Equity income in MillerCoors" (after being adjusted for basis difference amortization, accounting policy differences, and share based compensation). MillerCoors' revenue and expense do not directly appear on our income statement. Similarly, 42% of MillerCoors' cash distributions appear on our statement of cash flows as "Distributions from MillerCoors" and the individual components of MillerCoors' cash flow do not appear on our statement of cash flows. Thus, while our equity investment in MillerCoors represents our U.S. operating segment from and after July 1, 2008, our discussion of its results of operations are not addressed and do not reflect MillerCoors' financial statements and results of operations. See Part I-Financial Statements, Item 1 Note 1 "BASIS OF PRESENTATION," regarding the MillerCoors joint venture.
Thirteen Weeks Ended Twenty-Six Weeks Ended
June 29,
June 28, 2009 2008 % change June 28, 2009 June 29, 2008 % change
(In millions, except percentages)
Volume in
hectoliters - 8.271 N/M - 14.779 N/M
Net sales $ - $ 841.8 N/M $ - $ 1,491.8 N/M
Cost of goods sold - (514.4 ) N/M - (907.3 ) N/M
Gross profit - 327.4 N/M - 584.5 N/M
Marketing, general
and administrative
expenses - (214.6 ) N/M - (412.2 ) N/M
Special items, net - (77.3 ) N/M - (69.3 ) N/M
Equity income in
MillerCoors 134.1 - N/M 231.2 - N/M
Operating
income 134.1 35.5 277.7% 231.2 103.0 124.5%
Other income, net - (0.1 ) N/M - 2.3 N/M
Earnings
before income
taxes $ 134.1 $ 35.4 278.8% $ 231.2 $ 105.3 119.6%
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The results of operations for MillerCoors for the three and six months ended June 30, 2009, and pro forma results of operations for the three and six month periods ended June 30, 2008 are as follows:
For the three months ended For the six months ended
June 30, 2009 June 30, 2008 % change June 30, 2009 June 30, 2008 % change
Actual Pro Forma Actual Pro Forma
(In millions, except percentages)
Volumes in
hectoliters 22.938 23.326 (1.7 )% 41.360 42.117 (1.8 )%
Sales $ 2,499.4 $ 2,469.7 1.2 % $ 4,505.1 $ 4,416.8 2.0 %
Excise taxes (362.7 ) (365.7 ) (0.8 )% (652.5 ) (660.4 ) (1.2 )%
Net sales 2,136.7 2,104.0 1.6 % 3,852.6 3,756.4 2.6 %
Cost of goods sold (1,302.3 ) (1,259.8 ) 3.4 % (2,352.2 ) (2,276.8 ) 3.3 %
Gross profit 834.4 844.2 (1.2 )% 1,500.4 1,479.6 1.4 %
Marketing, general
and administrative
expenses (500.6 ) (561.2 ) (10.8 )% (942.4 ) (1,047.1 ) (10.0 )%
Special items, net (20.4 ) (104.8 ) N/M (30.8 ) (116.1 ) N/M
Operating
income 313.4 178.2 75.9 % 527.2 316.4 66.6 %
Other (expense)
income, net (0.2 ) 2.2 N/M (0.7 ) 4.8 N/M
Income before
income taxes 313.2 180.4 73.6 % 526.5 321.2 63.9 %
Income tax expense (2.5 ) - N/M (4.6 ) - N/M
Net income 310.7 180.4 72.2 % 521.9 321.2 62.5 %
Less: Net income
attributable to
noncontrolling
interests (5.8 ) (5.8 ) 0.0 % (11.0 ) (10.0 ) 10.0 %
Net Income
attributable
to MillerCoors $ 304.9 $ 174.6 74.6 % $ 510.9 $ 311.2 64.2 %
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The unaudited pro forma combined financial information has been derived from the historical financial results of the respective U.S. businesses of MCBC and Miller, giving effect to the MillerCoors transaction and other related adjustments, described below. These pro forma results are not necessarily indicative of the results of operations that would have been achieved had the MillerCoors transaction taken place at the beginning of the pro forma period, and do not purport to be indicative of future operating results.
MILLERCOORS, LLC
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
For the Three Months Ended June 30, 2008
MCBC's U.S. Miller's U.S.
Business Business MillerCoors
Contributed to Contributed to Pro Forma Pro Forma
MillerCoors MillerCoors Adjustments Results
(In millions)
Net sales $ 841.8 $ 1,261.5 $ 0.7 C $ 2,104.0
Cost of goods sold (514.4 ) (757.3 ) 11.1 C
0.8 D (1,259.8 )
Gross profit 327.4 504.2 12.6 844.2
Marketing, general and
administrative (214.6 ) (308.2 ) 3.7 C
(14.9 ) A
(27.3 ) D
0.1 B (561.2 )
Special items (77.3 ) (27.5 ) - (104.8 )
Operating income 35.5 168.5 (25.8 ) 178.2
Interest, net - 0.2 0.2
Other, net (0.1 ) 17.4 (15.3 ) C 2.0
Pretax income 35.4 186.1 (41.1 ) 180.4
Income tax expense - - - -
Net income 35.4 186.1 (41.1 ) 180.4
Less: Net income
. . .
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