The Canadian brewer Molson yesterday said that its Brazilian operations dragged it into the red for the second quarter of 2005.

The results in the quarter were principally affected by the Corporation recording a C$210m impairment charge related to operations in Brazil. However, sales in Canada and Brazil also fell and affected results.

Molson saw a consolidated operating loss of C$104.0m compared to operating profit (EBIT) of C$165.0m in the previous fiscal year.

The brewer reported a consolidated net loss of C$117.9m, down from net earnings of C$96.5m a year earlier.

Consolidated net sales revenue was also down though, 5.8% to C$674.4m, net sales and total Molson beer volumes fell 8.4%. Brazilian volumes were down 9.6% and volumes in Canada fell 6.8%.

"The second quarter performance was disappointing but not unexpected. It was heavily impacted by the impairment charge attributable to the Brazilian operations. In Canada, Molson faced an ongoing challenging competitive environment in Ontario and Alberta where the discount segment continued to expand supported by regional brewers and beer companies that benefit from preferential tax rates," explained Daniel J. O'Neill, president and CEO of Molson.

Second quarter operating profit in Canada totalled C$153.2m, excluding the merger related costs and Canada-specific provisions for rationalization of C$18.2m.

A 4.9% decline in EBIT was attributed to cooler and wetter summer weather, combined with market share erosion due to the strengthening value segment in certain regional markets.

Net sales revenue amounted to $579.0 million in the quarter, compared to C$599.5m the year before, reflecting lower volumes and partially offset by higher consumer prices.

Brazil's EBIT in the quarter was negatively impacted by higher expenditures in both marketing and sales centre costs, as well as lower volumes.

Due to declining sales volumes and the loss of market share, the
Corporation revised its long-term forecast of net cash flows of the operations in Brazil and recorded an impairment charge of $210.0m.

Total sales volume for the quarter fell 9.6%, reaching 2.13m hectolitres compared to 2.36m hectolitres last year.

"Sales and market share growth as well as profitability are the biggest challenges facing the brewer. In addition, the Corporation has reviewed the overall corporate debt structure as it relates to Brazilian operations, with the goal of reducing net interest expense and minimizing overall risk. Given recent operating losses, the Corporation is planning to refinance a portion of its Brazilian debt through a $45.0 million capital injection from Canada," a statement said.

As part of the strategic review of the Brazilian operations and volume declines, Molson said it had decided to close a brewing facility in the Rio de Janeiro region and implement changes to the sales centre network. A charge of approximately C$50m will be taken against earnings in the coming quarters to account for the plant closing and organizational right- sizing: of that amount $35.0 million will be a fixed-asset write down. Production volume from the Quiemados plant will be transferred to the Jacarei facility in the Sao Paulo region.