USA & Canada: Molson Coors Brewing Company reported net income increased 25.5% in 3Q 2006

Molson Coors Brewing Company released October 31 its financial results for the third quarter ending September 24, 2006. Net sales, net income and earnings per share all increased in the quarter compared to the same period a year ago.

All of the Company's operating segments achieved pretax profit growth, with solid core brand volume performance during the quarter. Key results for the Company's third quarter 2006, compared to the same period a year ago, include the following (all $ amounts in US$):

- Net sales increased 3.3 percent to $1.58 billion.

- Sales volume of 11.2 million barrels, or 13.2 million hectoliters (hls), was unchanged.

- Cost of goods sold increased 2.8 percent to $907.3 million.

- Marketing, general and administrative expense rose 0.8 percent to $434.1 million.

- Net income increased 25.5 percent to $135.8 million, or $1.56 per diluted share.

- Excluding special items, income from continuing operations (after-tax) (1) was $139.5 million, or $1.61 per diluted share, down 8.4 percent from the third quarter 2005.

- Excluding a one-time tax benefit of $0.51 per share in the third quarter of 2005, third quarter 2006 after-tax income from continuing operations excluding special items increased 28.3 percent.

Leo Kiely, Molson Coors president and chief executive officer, said, "Our third quarter results demonstrate consistent progress strengthening the fundamentals of our company, even while we face tough competitive and cost pressures in all of our markets. All three of our businesses grew pretax earnings at double-digit rates. Our Canadian teams continue to achieve strong profit growth driven by solid strategic brand performance and cost reductions. In the U.S., volume gains, synergy achievements and improved industry pricing contributed to double-digit profit growth in the quarter. U.S. volume gains were driven by Coors Light, which grew for the sixth consecutive quarter. In the U.K., our teams are doing impressive work in a very competitive market, focusing on the factors they can control to minimize the impact of margin pressures and other challenging trends in the U.K. beer industry.

"On pricing - an area that is key to profitability in all of our businesses - we have strategies that are driven by our own business priorities, which include building brands and ensuring our brand equities remain strong. With that in mind, our teams on the frontline are making prudent tactical pricing decisions necessary to be competitive by market, channel and package."

During the quarter, Molson Coors achieved approximately $25 million in additional synergies and other cost savings during the quarter. These savings were more than offset, however, by commodity and energy-related cost inflation. Favorable foreign exchange rates increased total-company pretax income by approximately $8.5 million in the quarter.

The Company's effective tax rate during the third quarter 2006 was 31 percent including special items and 32 percent excluding special items, compared to 5 percent and 11 percent, respectively, a year ago. The low third quarter 2005 tax rates were attributable to a one-time $43.5 million benefit from releasing deferred tax liabilities related to the Company's U.K. business with the election of APB 23 tax treatment for that operation.

Canada Business

Canada operating income of $155.1 million in the third quarter 2006 increased 12.2 percent from the third quarter 2005 due to positive beer pricing, lower overall costs and an approximately 7 percent favorable movement in foreign exchange rates. Canada sales volume of 2.3 million barrels (2.7 million hls) was down 2.5 percent from the same period a year ago while net sales were up 6.1 percent from third quarter of 2005. Net revenue per barrel was up about 1 percent in local currency compared to the third quarter 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 decreased 1.7 percent during the quarter compared to third quarter 2005. Double-digit growth in Coors Light, Rickard's and the Company's partner import brands was offset by a decline in other premium, discount and unsupported brands stemming from intense competitive pricing pressure in key provinces, along with the impact of the discontinuation of Molson Kick and A Marca Bavaria in fall 2005.

Synergies and other cost reduction initiatives offset about one-third of the Canada business cost of goods inflation. Canada segment other income was up $12.9 million compared to the third quarter a year ago, driven by improved financial performance by the Montreal Canadiens Hockey Club and a $9.0 million benefit related to a reduction in the Company's financial guarantee obligations to the team in the third quarter.

United States Business

In the third quarter 2006, sales volume and net sales in the U.S. business increased 3.0 percent and 6.0 percent, respectively, from the third quarter a year ago. U.S. sales to retail increased 1.4 percent during the quarter compared to the same period in 2005, driven largely by a low-single-digit increase in Coors Light volume and a low double-digit increase in Keystone Light. Excluding the company's Caribbean business, U.S. 50-states sales to retail increased 1.8 percent from a year ago, well ahead of the domestic U.S. beer industry.

Including special charges, U.S. pretax income was $48.8 million. Excluding special charges, U.S. pretax income increased 10.7 percent to $74.3 million compared to the same period a year ago driven by sales volume growth, higher net pricing and the Company's cost saving initiatives and merger synergies.

Europe Business

Including special items, Europe business pretax income during the third quarter 2006 was $34.6 million. Excluding special items, pretax income for the Europe business was $36.9 million, a 27.6 percent increase from the third quarter of 2005, driven by cost savings initiatives in supply chain and overheads. In the third quarter 2006, Europe business owned-brand sales volume decreased by 4.4 percent compared to the same period a year ago. The Company's market-leading Carling brand continued to outperform the U.K. beer industry, though the brand's volume declined at a low-single-digit rate, primarily due to lower sales following the World Cup this year, the cycling of distribution gains in multiple pub chains a year ago and declines in the overall on-premise market.

Net sales per barrel decreased about 4.7 percent in local currency compared to the third quarter of 2005. About 3 percentage points of the decline was due to unfavorable owned-brand net pricing and sales mix, while the balance of the decline was largely attributable to declining factored brand volumes and a change in invoicing arrangements on certain factored brand sales. The invoicing change reduced both net sales and cost of goods sold by about $5.8 million with no impact on gross profits in the third quarter 2006. Cost of goods sold per barrel for the Company's owned brands decreased approximately 5 percent during the quarter, while marketing, general and administrative costs decreased by about 14 percent, both in local currency.

Corporate Expenses

The Company's Corporate general and administrative expenses totaled $27.2 million in the third quarter, up $4.1 million from a year ago. About half of the increase was due to the Company's stock-based long-term incentive plan, including the effect of expensing equity-based compensation. The balance of the increase was for severance payments and other labor-related costs.

Interest expense, excluding interest income from trade loans in the U.K., was $31.2 million in the third quarter, 9.4 percent lower than the interest expense a year ago due to debt repayments, including repaying $208 million of special dividend debt, during the past year and lower expense related to recording Ontario Beer Store interest rate swaps at market value.

Discontinued Operations

Net income from discontinued operations during the third quarter of 2006 was $13.4 million, which reflects a reduction in the fair value of indemnity guarantees related to the Brazil Kaiser business. These liabilities were reduced because Kaiser participated in federal and state amnesty programs in Brazil to settle a significant portion of the Company's previously recorded tax-related liabilities.

Special Charges

During the third quarter 2006 the company reported special charges totaling $28.5 million pretax, or $0.20 per diluted share after-tax, primarily related to the following:

- U.S. results included a $25.5 million pretax special charge related primarily to the closure of the Company's Memphis brewery, which was completed on September 6. These charges include accelerated depreciation of Memphis assets, severance and other plant closure costs.

- In Europe, a $2.3 million special charge was attributable to restructuring costs in the Company's U.K. supply chain and other areas.

- The Corporate special charge of $0.7 million was attributable to the cost of benefits for the Coors executives who left immediately following the merger last year under a change of control agreement.

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