USA: Molson Coors reports 2006 first quarter results

Molson Coors Brewing Company reported a small net loss from continuing operations in the first quarter 2006 and lower consolidated net sales from continuing operations on higher sales volume compared to pro forma first quarter 2005, The Washington Post released on April 28.

For the 13-week first quarter ended March 26, 2006, the company reported net sales of $1.2 billion, down 0.1 percent from the pro forma net sales in the first quarter 2005. Sales volume of 8.6 million barrels, or 10.1 million hectoliters (hl), from continuing operations (Canada, U.S. and Europe), was up 2.0 percent from the pro forma first quarter a year ago. The first quarter 2006 consolidated net loss from continuing operations was $18.6 million, or a loss of $0.22 per share. Excluding special items, the after-tax loss from continuing operations was $0.4 million, or a loss of $0.01 per share, down from after-tax income of $14.7 million or $0.17 per share in pro forma first quarter 2005. The 2006 results include the impact of stock option expense and other long-term incentives, the combination of which reduced first quarter pretax income by $4.3 million, or $0.03 per share after tax.

Leo Kiely, Molson Coors president and chief executive officer, said, "Overall, our results during the first quarter of the year reflected positive sales volume and brand strength in all three of our businesses, while our earnings were negatively affected by a very difficult operating environment in the U.K., temporarily high corporate overhead expenses, and higher commodity and energy inflation costs across our system, which had a disproportionate impact because the first quarter is seasonally our smallest profit quarter. Despite these challenges, we are encouraged by the positive momentum of our core brands as we head into our key summer selling season, including the strong global performance of Coors Light, encouraging trends for Molson Canadian in Canada, and the continued strength of our leading brand in the U.K., Carling.

"During the first quarter, Coors Light sales to retail in the U.S. were positive for the fourth consecutive quarter, and the brand achieved a mid-single-digit growth rate in global sales volume, driven by growth in all of our major markets. In addition to our strong volume performance during the first quarter, we continued to make substantial progress on reducing our cost structure through the capture of additional merger-related synergies, as well as through baseline cost-savings initiatives that are contributing to greater productivity across all of our business units and helping us offset inflationary and other cost pressures."

The company's effective tax rate for the first quarter 2006 was 33 percent, or 31 percent for income from continuing operations, excluding special items. All $ amounts are stated in U.S. dollars.

Canada Segment

Canada segment comparable 2006 first quarter sales to retail increased 3.9 percent from the prior year. Double-digit percentage growth by Coors Light and significant growth of super-premium brands drove the volume improvement. In addition, Molson Canadian volume trends improved significantly during the first quarter, with a mid-single-digit increase in sales to retail compared to the prior year. The company's sales to retail grew approximately in line with the industry, resulting in unchanged market share from a year earlier.

Canada segment sales volume was up 1.6 percent on a pro forma basis versus prior year. Canada segment net sales increased 11.0 percent on a pro forma basis from the first quarter of 2005, driven by favorable volume, foreign exchange rate movements, pricing and brand mix. Favorable foreign exchange rates benefited Canada segment net sales by approximately 6 percent. Pretax income in Canada during the first quarter 2006 increased 9.4 percent on a pro forma basis versus prior year due to favorable foreign exchange rates, volume growth, positive beer pricing, and lower overhead costs, partially offset by higher distribution and production costs.

United States Segment

In the first quarter 2006, U.S. sales to retail increased 1.9 percent on a pro forma basis during the quarter, driven by low-single-digit growth for Coors Light, strong-double-digit growth of Blue Moon and mid-single-digit growth of Keystone Light. Comparable U.S. segment sales volume increased 2.4 percent. On a pro forma basis, the company reported a 3.9 percent increase in U.S. segment net sales compared to the first quarter a year ago.

U.S. pretax income was $15.0 million including special items. Excluding special items, U.S. pretax income was $36.7 million, up 62.4 percent on a pro forma basis, driven by volume growth, higher frontline pricing and additional progress on operations cost saving initiatives, partially offset by higher packaging materials and energy costs and competitive price discounting in some key markets.

Europe Segment

In the first quarter 2006, Europe segment sales volume increased 1.4 percent compared to a year ago, driven by mid-single-digit growth of the Carling brand. Net sales per barrel decreased 17.8 percent from the first quarter of 2005. Net sales and other results were affected by a roughly seven percent depreciation in the British pound versus the U.S. dollar. Approximately two-thirds of the decrease in net sales per barrel in local currency was the result of a change in invoicing arrangements with a major customer for the sale of non-owned brands, which did not impact Europe segment profits. In addition, net sales per barrel in the U.K. were negatively impacted by unfavorable owned-brand net pricing and sales mix.

U.K. beer industry volume decreased an estimated one percent in the first quarter, indicating a market share gain by the company's U.K. business of about one-half percentage point. In the first quarter, the Europe segment reported a pretax loss of $21.2 million including special items.

Excluding special items, the Europe segment pretax loss of $13.4 million was approximately double the loss during the same period a year ago, primarily due to continued unfavorable industry conditions including ongoing pricing pressures across all channels and industry volume declines in the on-premise channel. The profit declines were partially offset by the company's volume performance and cost-reduction programs.

Corporate Expenses

In the company's Corporate segment, general and administrative expense in the quarter was $29.7 million, up $17.5 million from the pro forma first quarter 2005. About $4.4 million of the increase was related to non-recurring expenses, such as severance costs and additional merger-related legal fees. About $2.5 million of the increase was related to the corporate portion of the company's stock-based long-term incentive plan, including the effect of adopting FAS123R accounting treatment for expensing of equity-based compensation. Approximately $3 million of the increase was driven by investments in projects and initiatives designed to achieve further cost-reductions by 2008. The balance of the increase was related to establishing a corporate center, including the transfer of nearly $3 million of global costs from operating segments and investments to support the global enterprise.

Corporate interest expense was $34.8 million in the first quarter, 19.3 percent higher than the pro forma expense a year ago due to the high percentage of long-term debt versus a short-term bridge loan that the company had in place a year ago, as well as higher market interest rates this year.

Discontinued Operations

Following the company's sale of a 68 percent equity interest in its Brazilian unit, Cervejarias Kaiser ("Kaiser") in January 2006, the company now reports results for its Brazil business as discontinued operations, including the company's 2006 first quarter results and 2005 first quarter results.

In the first quarter of 2006, the Brazil discontinued operations reported an after-tax loss of $11.7 million, which includes the company's portion of the operating loss sustained by Kaiser for the period of the fiscal first quarter prior to the sale of the company's controlling interest, along with recognition of contingent liabilities for sale-related indemnity provisions, adjusted for foreign currency and non-cash accretion.

In the first quarter a year ago, the Brazil segment reported a pro forma after-tax loss of $37.6 million.

Special Items

The company reported special items totalling $26.8 million, or $0.21per share after-tax, during the first quarter 2006. These special charges were primarily related to accelerated initiatives to improve the company's future performance and were as follows:- A U.S. segment net special charge of $21.7 million, driven by expenses related to closing the Memphis brewery in the next six months, primarily accelerated asset depreciation and limited restructuring expenses.- In Europe, a $7.8 million special charge largely attributable to restructuring expenses for supply chain cost-reduction initiatives, as well as costs related to the closure of the company's sales operation in Russia.- A corporate segment special credit of $2.7 million was attributable to stock option income resulting from the quarterly adjustment to the cost of providing a floor price under options for Coors executives who left under a change-of-control provision following the merger of Molson and Coors.

In the first quarter a year ago, the company reported pretax pro forma special charges totaling $64.6 million related to the closing of the company's Memphis brewery, the write-off of obsolete brewery assets in the Europe segment and merger-related corporate expenses.

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