More than a year after Molson and Coors merged, the company has reduced debt, increased sales of its flagship product and is on track to reap savings that executives promised investors.
But Molson Coors Brewing Co.’s earnings have disappointed Wall Street, and the company’s stock price is languishing short of its April 2005 high of $79.99.
Inflation, a fiercely competitive environment and the drift of some consumers away from beer to hard liquor and wine have dulled the merger’s luster.
In a presentation at the Prudential Equity Group’s Consumer Conference last week, Molson Coors chief executive Leo Kiely told investors he was encouraged by the company’s progress.
But one fund manager questioned whether its executives are painting too rosy a picture.
“The stock doesn’t have too many friends today,” Mary Jane Matts, portfolio manager with Fifth Third Asset Management, said in a telephone interview. “The basic impression has been that there is a laxity in the internal controls and that when the quarter is reported, they are as surprised as the rest of us.”
Kiely said later in a phone interview that Molson Coors, the world’s seventh-largest brewer, has cut costs, increased sales, particularly of flagship product Coors Light, and is paving the way toward a stronger and more competitive future.
“The merger has transformed our company and made us fundamentally a more competitive beer company. It set us up beautifully to grow … in the future. Analysts clearly would like us to be more predictable. We are a company that doesn’t give guidance, and we are also a company that experiences more volatility than others,” Kiely said.
Right now, he said, the company is working to free up capital that can be used for acquisitions or to take other steps to grow.
Though it’s among the world’s largest brewers, Molson Coors doesn’t have the global reach of supersized competitors such as InBev, makers of Becks, and Anheuser-Busch, maker of Budweiser.
The market for beer is growing in Asia, Eastern Europe and South America. Molson Coors has made small inroads in China and Mexico but has little presence in developing markets, a disadvantage for any company that hopes to compete with top-tier beermakers, Matts said.
Kiely admits that his company so far hasn’t benefited from growth in developing countries.
“We need to strengthen our financial base in our core markets – the U.S., (United Kingdom) and Canada – (before plunging into more immature markets),” he said.
InBev, SABMiller, Anheuser-Busch and Heineken, the top four beermakers, produce more than 100 million barrels each per year. Molson Coors ranks in a second tier of international brewers, with 45.9 million barrels in 2005, according to Beer Marketer’s Insights, a trade publication.
After the merger Feb. 9, 2005, Molson Coors cut $59 million in annual costs, and it expects to trim more than $60 million this year. Molson Coors says it expects to make good on its promise to cut a total of $175 million in the first three years of the merger.
Analyst Karim Salamatian of BMO Nesbitt Burns acknowledges the company’s success in cutting costs but remains concerned about the future.
“An abundance of increases to the company’s expenses has more than offset much of the cost savings and improvements. We, along with the rest of the street, have had to revise our forecasts down on several occasions,” Salamatian said in a research report.
The company faces increased costs for fuel to run its trucks and power its plants and higher prices for aluminum for cans.
Last summer, the major brewers fought a price war that hurt profits.
“There were factors in our business that we were going to face, merger or not, that have impacted performance in the short to medium term,” Kiely said.
Coors Light is Molson Coors’ No. 1 brand across Canada, with significant growth since the merger. Coors Light is also doing well in Great Britain and Ireland.
Molson Coors has consolidated operations in Great Britain and sold its least-efficient brewery in Memphis, Tenn.
Closing the Memphis brewery and moving production to a facility in Virginia will cut transportation costs by locating manufacturing closer to the company’s biggest markets, Molson Coors chief financial officer Tim Wolf told attendees at the Prudential conference.
The brewer increased free cash flow by selling its controlling interest in the money-losing Brazilian brewer Cervejarias Kaiser for $68 million to Fomento Economico Mexicano SA, the Mexican maker of Tecate and Dos Equis.
Molson Coors also sold its preferred shares in the Montreal Canadiens hockey team for $36.1 million to majority owner George Gillett.
By the end of August, Molson Coors generated $270 million in free cash flow available for debt repayment and is on track to achieve its 2006 goal of more than $300 million, Wolf said.
The free cash flow has made it possible for the company to pay back debt on a $527 million special dividend it gave Molson investors to sweeten the merger.
Despite the difficulties of the merger, former Coors chairman Bill Coors said it has been a success. The stock is trading around $70 a share, and the brand is on the move in places he would never have expected.
“How you could possibly sell Coors Light against Guinness in Ireland, I will never know,” he said.
Independent of each other, the Molson and Coors families faced a competitive environment that required both to grow or be swallowed by a larger company, Coors said.
“When an industry starts to consolidate, you either consolidate or get consolidated. If you do consolidate, it is beneficial to the stockholders,” Coors said.
But if the combined company doesn’t show Wall Street that it can boost earnings, it may find itself a takeover target, Matts said.
“Nature abhors a vacuum, and we have seen what happens when shareholder activists get involved with underperforming companies,” she said. “There is a fairly big insider ownership at Molson Coors, so it would be tougher to come in and make a run at the board, but all the conditions are there.”
Molson Coors stock closed Friday at $69.86.
Staff writer Tom McGhee can be reached at 303-954-1671 or tmcghee@denverpost.com.
