USA & Canada: Molson Coors 2Q 2006 net sales increased 2.3%

Molson Coors Brewing Company released August 01 its financial results for the second quarter ending June 25, 2006. Net sales, income from continuing operations (after-tax) (1), net income and earnings per share increased in the quarter compared to the same period a year ago, PRNewswire released August 01.

Second quarter 2006 net sales of $1.58 billion increased 2.3 percent from the second quarter 2005. Sales volume grew 2.3 percent to 11.4 million barrels, or 13.4 million hectoliters (hls), compared to the second quarter a year ago. All $ amounts in U.S. dollars.

Cost of goods sold in the second quarter was $920.0 million, an increase of 2.7 percent over the same quarter last year. Marketing, general and administrative expense rose 0.4 percent to $448.3 million in the second quarter 2006.

During the quarter, Molson Coors continued to implement merger-related synergies and cost cutting programs across the Company. In total, Molson Coors achieved approximately $27 million in synergies and other cost savings during the quarter. These savings were more than offset, however, by commodity and energy-related cost inflation, which adversely affected each of the Company's businesses.

Net income during the second quarter 2006 increased to $156.2 million, or $1.81 per diluted share, from $38.5 million, or $0.45 per diluted share, a year ago. Excluding special items, income from continuing operations was$173.9 million, or $2.01 per diluted share, up 51.8 percent from the second quarter 2005.Higher income from continuing operations was driven primarily by Canadian income tax rate reductions, which significantly lowered the Company's effective tax rate, along with solid sales growth and progress on cost-reduction initiatives, both of which drove higher operating income in the quarter.

The Company's effective tax rate during the second quarter2006 was minus three percent including special items and positive three percent excluding special items, down from 27 percent and 33 percent, respectively, a year ago. The tax rate declined largely because of the benefit of a two-percentage-point reduction in the general corporate income tax rate in Canada, as well as minor changes in several provincial income tax rates. The non-recurring tax rate reduction increased earnings from continuing operations by approximately 60 cents per share in the second quarter.

Leo Kiely, Molson Coors president and chief executive officer, said," Overall, our second quarter results demonstrate that we are continuing to make solid, steady progress strengthening the fundamentals of Molson Coors Brewing Company. We grew sales volume in all three of our businesses, led by the strength of our strategic brands - the ones that receive the most investment - that are the future growth engines of our company. We combined this top-line growth with continued progress on our cost-reduction programs to achieve higher operating income and margins in the quarter. Our results also benefited from lower general tax rates enacted in Canada, which provide a one-time reduction in book tax rate this quarter and along-term reduction of about two percentage points in our book and cash tax rates when fully implemented in 2010. These positive results allowed us to more than overcome a significant rise in commodity and energy cost inflation that we and other brewers are facing globally.

"Our Canadian team grew profitability nearly 34 percent in the quarter on the strength of our strategic brands in this key market, in particular Coors Light, Rickard's and our partner import brands. This business faced heavy competitive and cost pressure and still achieved impressive results, including growing Coors Light and other strategic brands at double-digit rates in the quarter. Our U.S. business performed well on the top line, with solid volume growth and pricing, especially for Coors Light relative to its competitors.

“Cost-reduction initiatives in this business helped to offset very high cost inflation, which drove the U.S. profit decline in the second quarter. Importantly, we are on track with two major U.S. cost reduction initiatives - the closure of our Memphis brewery in early September and completion of our new brewery in Elkton, Virginia, in early 2007- as well as other productivity projects in the U.S. Due to these initiatives and our expectation that commodity cost increases will moderate in the second half of this year, we currently anticipate a full-year 2006 increase in U.S. cost of goods sold of three to five percent per barrel.

“In the U.K., despite an extremely difficult business and commodity inflation environment, our team achieved strong double-digit earnings growth by growing our market-leading Carling brand - which accounts for more than three-fourths of our annual Europe volume - and cutting costs significantly."

Kiely added, "We are making excellent progress toward one of our key goals for 2006 to generate more than $300 million of free cash flow available for debt pay down. In early July, we paid off the last of the debt related to the merger special dividend, so that substantially all of our debt is now of equal credit standing. We achieved our goal of paying down the special dividend debt more than seven months ahead of our original target. During the past 17 months, we have used free cash flow to repayUS$536 million of special dividend principal and related interest."

Canada Business

Pretax income in Canada during the second quarter 2006 increased 33.7 percent from the second quarter 2005 due to higher sales volume, lower costs and an approximately 10 percent favorable movement in foreign exchange rates. Canada sales volume of 2.3 million barrels (2.6 million hls) was up 1.6 percent from the same period a year ago.

Canada business net sales were up 13.2 percent from second quarter of 2005. Cost of goods sold and marketing, general and administrative costs declined in local currency compared to the same period a year ago. Sales to retail decreased0.4 percent during the quarter compared to second quarter 2005.

Strong double-digit growth in Coors Light and Rickard's, as well as strong single-digit growth by the Company's partner import brands, was offset by the discontinuation of Molson Kick and A Marca Bavaria and a decline in other premium and discount brands stemming from intense competitive pricing pressure in key provinces.

Synergies and other cost reduction initiatives offset about two-thirds of the Canada business cost of goods inflation, while additional reductions were achieved in marketing, general and administrative expenses.

United States Business

In the second quarter 2006, sales volume and net sales in the U.S. business increased 1.5 percent and 2.8 percent, respectively, from the second quarter a year ago. U.S. sales to retail increased 2.3 percent during the quarter compared to the same period in 2005, driven largely by a low single-digit increase in Coors Light volume, a high single-digit increase in Keystone Light and a strong double-digit increase in Blue Moon.

Excluding the company's Caribbean business, which suffered from a local government shut-down in Puerto Rico during the second quarter, U.S.50-states volume grew 3.0 percent from a year ago, about double the rate of growth for the total U.S. beer industry.

Including special charges, U.S. pretax income of $44.1 million decreased 44.0 percent compared to second quarter 2005. Excluding special charges, U.S. pretax income decreased 20.6 percent to $70.5 million compared to the same period a year ago driven by sales volume growth and higher net pricing, more than offset by higher packaging material, transportation, energy and labor costs. The Company's cost saving initiatives and merger synergies more than offset non-commodity cost inflation, but commodity, freight and energy inflation drove higher U.S.cost of goods per barrel and lower profit.

Europe Business

Including special items, Europe business pretax income during the second quarter 2006 increased 28.2 percent from second quarter 2005.Excluding special items, pretax income for the Europe business increased36.4 percent during the quarter, due to Carling volume growth, progress on cost initiatives and a $5.5 million gain on the sale of real estate, which represented about half of the increase, partially offset by continuing industry pricing pressures and unfavorable trends in sales mix.

In the second quarter 2006, Europe business sales volume increased by 5.1 percent compared to the same period a year ago, with Carling sales volume increasing at a high-single-digit percentage rate, due to the 2006 World Cup soccer tournament, the timing of the Easter holiday and account gains with retail pub chains.

Cost of goods sold per barrel for the Company's owned brands decreased approximately 10 percent during the quarter, while marketing, general and administrative costs decreased by about 12 percent, both in local currency.Net sales per barrel decreased 14.9 percent from the second quarter of2005. About half of the decline was due to a change in contractual arrangements on certain factored brand sales, which reduced both net sales and cost of goods sold by $21.2 million, with no impact on profits. The balance of the decline in Europe business net sales per barrel was primarily attributable to unfavorable owned-brand net pricing and sales mix.

Corporate Expenses

The Company's Corporate general and administrative expenses totaled$28.3 million in the second quarter, up $11.7 million from a year ago. About $4.7 million of the increase was due to the Company's stock-based long-term incentive plan, including the effect of the Company adoptingFAS123R accounting treatment for expensing equity-based compensation. Another $3.1 million of the increase was related to non-recurring expenses, such as severance costs and merger-related legal fees. The balance of the increase was related to establishing a corporate center and substantial investments in projects to drive future cost reductions throughout the enterprise.

Interest expense, excluding interest income from trade loans in the U.K., was $39.8 million in the second quarter, 28.0 percent higher than the interest expense a year ago due to expenses related to adjusting Ontario Beer Store (Brewers Retail Inc.) interest rate swaps to market value, the high percentage of long-term debt versus a short-term bridge loan that the Company had in place a year ago, and higher market interest rates in 2006,partially offset by the benefit of lower debt levels this year. Without the$4.6 million in Beer Store swaps - which now have been restructured and will not drive volatility on the Company's income statement – interest expense would have been $35.2 million in the second quarter 2006.

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 former Brazil business as discontinued operations. In the second quarter of 2006, the Brazil discontinued operations reported an after-tax loss of $1.4 million, which reflects the net impact of foreign exchange and other adjustments to the Company's Kaiser-sale-related indemnity guarantees. Under cost-method accounting for the Company's remaining interest in Kaiser, Brazil operating results are nolonger reported by Molson Coors. In the second quarter a year ago, the Brazil business reported an after-tax loss of $56.9 million.

Special Items

The Company reported special items totalling $25.8 million, or $0.19 per diluted share after-tax, during the second quarter 2006, primarily related to the following:

U.S. results included a $26.4 million pretax special charge related primarily to the scheduled closure of the Company's Memphis brewery in early September. These charges include accelerated depreciation of Memphis assets and limited restructuring and project expenses.

In Europe, the $1.9 million special credit is due primarily to a $5.3 million benefit related to a reduction in the liabilities recorded for the Company's U.K. pension plan. Recognition of this benefit in the second quarter was triggered by cost-reduction initiatives that have reduced the Company's staffing levels nearly 10 percent over the past year. This benefit was partially offset by additional restructuring costs in supply chain and other areas. This restructuring work is now substantially complete, with a payback period of approximately one year.

The Corporate special charge of $1.3 million is due to the quarterly adjustment to the cost of providing a floor price under the options for the Coors executives who left the Company under the change of control immediately following the merger last year.

For the second quarter of 2005, the Company reported pretax special charges totaling $41.0 million primarily related to post-merger severance payments and benefits and accelerated depreciation of the Memphis brewery.

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