08/07/2012 02:58 EDT | Updated 10/07/2012 05:12 EDT

Molson Coors foray in Central Europe on track despite early challenges, says CEO

MONTREAL - Molson Coors Brewing Co. says its foray into Central Europe's beer market is on track to pay dividends over the next few years despite experiencing weather-related and currency challenges in the first weeks of its ownership.

"We're very satisfied with what we purchased. We think we've got a very reasonable deal and it's going to drive shareholder value to the very early end of expectations," president and CEO Peter Swinburn said in an interview Tuesday.

However, during the second quarter, Central European beer company StarBev's pro forma underlying pretax income fell 36.6 per cent to $46.2 million. Higher volume and pricing were more than offset by unfavourable foreign currency changes, geographic mix, and increased costs.

Pro forma sales volume increased 1.4 per cent while overall market share was up slightly.

"The business did decline in the first half," he added, noting "atrocious" weather in February disrupted deliveries.

StarBev's previous management advanced marketing expenditures that should help sales and profits for the remainder of the year, Swinburn said.

"Certainly at the moment their action seems justified because the last four weeks we've seen high single-digit volume growth from the business and that goes on the back of market share gains we saw in the first half of the year."

In fact, Molson Coors will reduce its marketing spending support. But it is conducting consumer research about introducing Carling to some markets early next year.

Overall, the company reported Tuesday that its net earnings fell more than 53 per cent to US$104.3 million in the second quarter on costs linked to the North American beer maker's expansion in Central Europe.

The Denver and Montreal-based brewer, which reports in U.S. dollars, said it earned 57 cents per share for the period ended June 30. That compares with $1.19 or $224.3 million a year earlier.

Excluding one-time costs, Molson Coors earned $250.1 million or $1.38 per share, compared to $231.6 million or $1.23 per share in the prior period. That was well ahead of analyst forecasts for $1.19 per share in adjusted earnings.

Net sales increased seven per cent to $999.4 million driven by the performance of its U.S. business and included two weeks of operation of the StarBev acquisition in Central Europe.

Worldwide beer volume was up 6.4 per cent to 13.9 million hectolitres.

The acquisition of StarBev was completed June 15 at a final purchase price was 2.7 billion euros or US$3.4 billion, including the assumption of debt.

In Canada, underlying pretax income decreased 0.6 per cent to $139 million due to foreign exchange. Income increased four per cent in Canadian dollars driven by higher volume, higher net pricing, cost reductions, and income from the addition of North American Breweries (NAB) contract brewing.

Sales-to-retail and sales volume increased 1.8 per cent due to the addition of Canada Day in this year's second quarter from the third quarter in 2011.

Molson Coors' (TSX:TPX.B) market share in Canada decreased about one-half share point from a year ago on estimated industry growth of three per cent.

Net sales per hectolitre increased six per cent in local currency, with more than half of the increase driven by continued higher pricing, and the remainder due to NAB contract sales.

The Coors Light trademark enjoyed double-digit growth with the help of sales of Coors Light Iced T and a six per cent growth in Coors Light itself. Molson Canadian and other brands also did well, with the exception of "value" beers that continued to face fierce competition from smaller brewers.

Promotion pricing was particularly strong in Western Canada, Molson Coors Canada president Dave Perkins told analysts during a conference call.

"What we did see in the quarter was better trends on our core brands so Canadian and Coors Light but we saw worsening trends in the value segment."

Mark Swartzberg of Stifel Nicolaus said the results beat expectations "on an out-of-favour" stock.

"We are not negative on the shares, however, due to multiples, continued price discipline in Canada and the U.S., and corresponding annual cash flow," he wrote in a report.

Molson Coors underlying U.S. segment pretax income increased 7.2 per cent to $184.6 million.

In Britain, underlying pretax income decreased 19.3 per cent to $28.0 million due to lower volume, higher pension expense and higher marketing costs.

Total net debt at the end of the second quarter was $4.4 billion, including $2.9 billion related to the European acquisition.

During the quarter, Molson Coors recorded $21.2 million in pretax charges, including a $10.4 million writedown of goodwill and assets related to its China business and a $1.4 million costs for retirement incentives in Vancouver and Newfoundland, partially offset by a $2.3 million gain related to Toronto flood insurance reimbursement.

Molson Coors employs 19,000 people at 30 breweries and operations in more than 50 countries.

It has a portfolio of more than 65 strategic and partner brands, including Coors, Coors Light, Molson Canadian, Carling, Blue Moon, Keystone and Richard's.

The Molson Coors Brewing Co. was formed in 2005 following the merger between North American family-run breweries Molson Inc. and the Adolph Coors Company.

On the Toronto Stock Exchange, Molson Coors shares gained $1.24, or 2.99 per cent, at C$42.75 in afternoon trading.