Molson Coors reviewing costs and efficiency of its Canadian operations

MONTREAL – Molson Coors Brewing Co. is reviewing its Canadian operations to see if cost adjustments are required to make the company more efficient as it continues to lose market share amid intensifying competition and waning demand for some of its core brands.

The Denver- and Montreal-based company is “benchmarking” its operations against other brewers and top companies outside the industry in an exercise it followed in Britain and the United States.

“There will be areas where we can take costs out of the business, there are areas where we have to put costs into the business as well, so it’s a complete review of operationally how we go to market,” president and CEO Peter Swinburn said in an interview Wednesday after the company released its third-quarter results, including “disappointing” numbers for its Canadian operations.

Overall net income dropped to US$121.8 million in the third quarter on one-time charges, but its adjusted profit increased 7.7 per cent to US$268.1 million, beating analyst expectations.

Molson Coors, which reports in U.S. dollars, earned 66 cents per diluted share for the period ended Sept. 28, down from $1.09 per share or $198.4 million in the prior year. It recorded $163.1 million of special and non-core expenses mainly related to writedowns on two brands in Europe.

Excluding these one-time charges, Molson Coors’ earned $268.4 million or $1.45 per share, compared with $248.9 million or $1.37 per share in the 2012 quarter. It benefited from a lower than expected effective tax rate of 15 per cent.

Total sales decreased two per cent to US$1.17 billion on a 0.9 per cent dip in worldwide beer volume to 17 million hectolitres.

The company was expected to earn $1.39 per share on $1.21 billion of revenues, according to analysts polled by Thomson Reuters.

Molson Coors’ (TSX:TPX.B, NYSE:TAP) Canadian operations struggled as adjusted pre-tax profit slipped 13 per cent to $130.6 million despite lower costs because of a decrease in volume and the value of the Canadian dollar.

Net sales decreased 9.2 per cent to $526.7 million on a 5.2 per cent drop in volume. Sales to retailers decreased 3.3 per cent, primarily due to higher beer excise taxes in Quebec, weak economic conditions and increased promotional activity by competitors.

Molson Coors continued to lose market share in the quarter, falling by about one per cent as the Canadian beer market decreased the same amount.

Since 2008, the company’s market share is down about three points to 39 per cent from 42 per cent, although the company noted that its major competitor, Labatt’s owner Anheuser-Busch InBev, is in the same boat, having fallen to 40 per cent from 43 per cent.

Swinburn said the benchmarking exercise could take four to five months. The company has already committed to between $40 million and $60 million in annual costs savings over five years across its global network. It didn’t specify how much of the savings will be generated in Canada.

“This is not a big bang theory. These are things that you do step by step,” he said, adding he doesn’t know how extensive the changes might be.

Earlier, the company told analysts during a conference call that the company was confident about addressing its cost base, but said any changes to production capacity must be examined province by province instead of for the overall country.

“We do have some excess capacity and that is forming part of our plan to understand how to reduce our overall costs,” added Stewart Glendinning, president for Molson Coors Canada.

Market share gains in cheaper “value” brands and more expensive “above premium” beers such as Coors Banquet were more than offset by weakness in its core brands including Coors Light which accounts for 45 per cent of its business. Molson Canadian, however, gained share, especially in Quebec.

Although play has resumed in the National League Hockey after last year’s lockout, beer volumes haven’t fully returned to previous levels, meaning Canadian volumes and profits will continue to face challenges in the fourth quarter when the company won’t benefit from substantial expense reductions from lower NHL sponsorship and promotion costs.

Molson Coors will receive $70 million in compensation for lost profits after agreeing to terminate its joint venture in March with AB InBev over Modelo brands such as Corona in Canada, nearly four years ahead of schedule. Agreements to represent the Modelo brands in the U.K. are unchanged through the end of 2014.

On the Toronto Stock Exchange, Molson Coors shares gained $2.03, or 3.61 per cent, to C$58.21 in Wednesday afternoon trading. In New York, shares gained $1.08 to US$55.09.