Molson Coors Brewing Co. (TAP) reported its adjusted earnings of $1.23 per share in the second-quarter 2011, lagging the Zacks Consensus Estimate of $1.30 per share. The earnings also missed the prior-year quarter earnings of $1.25 per share.
The adjusted earnings in the reported quarter excludes a gain of 4 cents from net proportionate share of MillerCoors pretax special items, environmental litigation reserve, and tax effects related to special and other non-core items. Including one-time items, Molson Coors’ earnings exceeded the prior-year earnings of $1.25 by two cents.
Molson Coors’ earnings were driven by the impact of continuing weak economic conditions, commodity inflation and investments in the international business in the quarter. However, positive beer pricing, cost reductions in the core businesses and favorable foreign exchange offset the negative impact.
Revenues and Operating Profits
Net sales for the quarter climbed 5.7% to $933.6 million from $883.3 million in the year-ago period. However, it lagged the Zacks Consensus Revenue Estimate of $949 million.
The growth in net sales was driven by positive pricing, continued cost reductions and favorable foreign currency movements.
Molson Coors generated a gross profit of $409.7 million, 0.29% higher than the profit generated in first quarter 2011. Gross margin was 43.9% in the reported quarter, down 230 basis points from the prior-year quarter.
Total worldwide beer volume decreased 2.8% in the quarter to 13.07 million of hectoliters in the second quarter of 2011.
During the quarter, Molson Coors incurred special charges of $11.0 million pretax, which was driven by a $7.6 million reduction in fixed asset values and early retirement incentive expenses of $1.2 million in Canada, along with UK and Canada restructuring charges of $3.0 million, which were partly offset by a $2.0 million gain related to a reduction in the company’s guarantee of Ontario Beer Store debt.
Other non-core items generated a $0.1 million pretax gain, due to a reduction in environmental reserve.
Segment Details
Canada: Molson Coors’ Canada segment‘s net sales surged 4.2% to $564.7 million from the previous year. Sales volume was 2.4 million hectoliters in the quarter, down 3.9%. Net sales per hectoliter increased 2.2% in local currency equally due to continued positive pricing and the addition of contract brewing sales to North American Breweries.
Pre tax income decreased 4.5% in the quarter, driven by increased pricing, reduction in marketing, general and administrative expense and favorable foreign currency. However, they were more than offset by mid-single-digit volume declines and the resulting fixed-overhead deleverage. Moreover, these results reflect a $5 million benefit from a 6% year-over-year strengthening of the Canadian dollar versus the U.S. dollar.
Miller Coors’ net sales came down to $1699.1 million from $1700.9 million. Net income, excluding special items of the segment, increased 2.6% in the quarter to $399.8 million, driven by positive pricing, favorable brand mix, continued strong cost management.
United Kingdom: Molson Coors’ United Kingdom segment’s net sales inched up 6.6% to $341.7 million from the previous year. Net sales per hectoliter of owned brands increased 7% in local currency, driven by the impact of positive sales mix in the quarter, especially the addition of the Modelo brands.
Pre tax income for the segment increased by 6.1% to $34.7 million in the quarter, driven by a temporary reduction in marketing spending, a decrease in defined-benefit pension expense and favorable foreign currency movements, partially offset by lower volumes. The appreciation of the British Pound by 9% versus the U.S. Dollar improved pretax earnings by approximately $3 million.
International and Corporate: The segment’s net sales surged to $28.5 million from $21.0 million in the previous year. International business volume was 54% higher in the quarter, primarily due to the addition of the Si’hai brands in China and the Modelo brands in Japan, along with growth of Carling in Europe and Coors Light in Latin America and China.
The segment experienced an underlying pretax loss of $67.0 million in the quarter, up 16.1% from the previous year. The loss was primarily due to higher investments in international businesses and brands, along with a $2.0 million increase in corporate net interest expense.
Approximately one-fourth of the $10 million loss in the International businesses was driven by quarterly timing differences, as well as integration costs related to the new Cobra joint venture in India.
Other Financial Updates
The company exited the year with cash and cash equivalents of $1.18 billion as of June 25, 2011. Long-term debt was $1.95 billion.
During the quarter, Molson Coors’ Board approved, effective immediately, a new share repurchase program authorizing up to $1.2 billion of the company’s Class B common stock, with an expected program term of three years.
Further, in the second quarter 2011, Molson Coors delivered $12 million of Resources for Growth Two (RFG2) cost reductions. MillerCoors achieved $18 million of synergies in the quarter to complete its three-year synergy program. MillerCoors also delivered incremental cost savings of $9 million in the quarter. Molson Coors receives 42% of these synergies and incremental cost savings.
Molson Coors’ effective tax rate was 16% in the quarter on a reported basis and 17% on an underlying basis.
The company estimates its effective tax rate for fiscal 2011 to be in the range of 15% – 19% on an underlying basis, assuming no further changes in tax laws.
Recommendation
We remain encouraged by the restructuring initiatives taken by the company to reduce overhead costs and boost profitability. The initiatives include closure of underperforming breweries and efforts to improve efficiencies in finance, administration and human resource activities.
Further, the announcement of a new share repurchase program will strengthen the company’s balance sheet. Moreover, it signifies that Molson Coors has substantial cash generation capability.
However, seasonal nature of business of Molson Coors and increased competition from Anheuser-Busch InBev (BUD) are concerns.
Currently, Molson Coors has a Zacks #3 Rank, implying a short-term Hold recommendation. On a long-term basis, the company maintains a Neutral recommendation on the stock.
