Molson Coors Brewing Company
2014 2nd Quarter Earnings Conference Call
August 6, 2014

1) Peter Swinburn, President and Chief Executive Officer
2) Gavin Hattersley, Chief Financial Officer

            Welcome to the Molson Coors Brewing Company 2nd quarter 2014 Earnings Conference Call.  Before we begin, I will paraphrase the company’s Safe Harbor language.  Some of the discussion today may include "forward-looking statements."  Actual results could differ materially from what the company projects today, so please refer to its most recent 10-K and 10-Q filings for a more complete description of factors that could affect these projections.  The company does not undertake to publicly update forward-looking statements, whether as a result of new information, future events, or otherwise.  You should not place undue reliance on forward-looking statements, which speak only as of the date they are made.
            Regarding any non-U.S. GAAP measures that may be discussed during the call and from time to time by the Company’s executives in discussing the company’s performance, please visit the company’s website – – and click on the financial reporting tab of the investor relations page for a reconciliation of these measures to the nearest U.S. GAAP results. Also, unless otherwise indicated, all financial results the company discusses are versus the comparable prior-year period and in U.S. Dollars.  Now, I would like to turn the call over to Peter Swinburn, President and CEO of Molson Coors.

[Peter Swinburn:]
Thank you, Chrissy. Hello and welcome everybody to the Molson Coors earnings call....
Thanks for joining us today.

With me on the call this morning are:
•    Gavin Hattersley, Molson Coors CFO
•    Tom Long, CEO of MillerCoors
•    Stewart Glendinning, CEO of Molson Coors Canada
•    Mark Hunter, CEO of Molson Coors Europe
•    Kandy Anand, CEO of Molson Coors International
•    Sam Walker, Molson Coors Chief Legal and People Officer
•    Brian Tabolt, Molson Coors Controller, and…
•    Dave Dunnewald, Molson Coors VP of Investor Relations

One quick note before we discuss the quarter:  You will all be aware of my intention to retire from Molson Coors at the end of this year.  I am delighted that Mark Hunter has been named as my successor. I have worked with Mark for over 20 years, and I cannot think of anyone better qualified to take the business on to continued success.  Mark has played a key role in developing and implementing our company strategy over the past seven years as a member of our executive leadership team, and he and the team here plan to continue to execute the strategy that we have set for the company.  Also, Mark will join Gavin and me at the Barclays Back to School Conference in Boston in a few weeks.  Our time today is focused on earnings, so for the balance of the call today, Gavin and I will take you through highlights of our 2nd quarter 2014 results for Molson Coors Brewing Company, along with some perspective on the 2nd half of 2014.

In the 2nd quarter, Molson Coors increased underlying after-tax income nearly 8%, grew underlying EBITDA 4%, and expanded gross, operating and after-tax margins.  Underlying earnings per share increased nearly 7%, and U.S. GAAP after-tax earnings increased 9.5% versus a year ago. 
We continued to build a bigger and stronger brand portfolio that is delivering value-added innovation; continued investment in our core brands; and increased our share in above premium.  As a result, we achieved positive pricing and mix, resulting in higher net sales in the quarter.  We also continued to improve our operations by reducing costs, implementing common processes, and focusing on Profit After Capital Charge as the key driver for our cash and capital allocation strategy.  

In the 2nd quarter, Coors Light global volume (including our proportional percentage of MillerCoors volumes) increased nearly 5% versus a year ago. Coors Light grew more than 30% in the United Kingdom and even faster in Mexico and Latin America, underscoring the increasingly important role of MCI in the company.  Coors Light underperformed in the U.S. and in Canada, and we continue to implement plans to reverse this trend.  Molson Canadian volume in Canada was even with prior year, while Coors Banquet grew volume and share in both the U.S. and Canada. 

Carling, the number-one brand in the United Kingdom and the largest brand in our Europe business, continued to grow volume, and our Europe above premium portfolio continued to grow strongly, led by Coors Light, Cobra and Doom Bar.  Staropramen volume decreased overall versus the second quarter of 2013 as a result of lower volumes in Russia and Ukraine related to political and economic turmoil.  Despite the severe flooding in Central Europe this year, above-premium Staropramen (that is the Staropramen we sell outside of Czech Republic) maintained volume in the region.    

In the quarter, U.S. pretax earnings increased more than 10%, driven by positive pricing, sales mix and cost savings.  Premium and premium light beers continued to underperform the overall market, but Miller Lite sales in the original Lite can continued to grow, as did Coors Banquet.  We also gained volume and market share with the above-premium Redd’s, Leinenkugel’s Summer Shandy, Smith & Forge Hard Cider and Miller Fortune brands.  

In Canada, our termination of the distribution rights to the Modelo brands early this year drove all of the sales to retail decline in the 2nd quarter and more than all the earnings decrease in constant currency.  Coors Light trends improved sequentially from a high-single-digit decline in 1st quarter to a low-single-digit decline in 2nd quarter, but we have more work to do on our largest brand.  In above-premium, Coors Banquet continued to deliver strong volume growth.  The combined Coors Light and Banquet brand family grew volume low-single digits from a year ago, and our craft brands Creemore and Granville Island increased volume and share.  Canada income also benefited from lower marketing spending and higher net pricing versus a year ago. 

Our Europe business improved its financial performance through positive geographic mix and cost reductions, which more than offset increased marketing investment and drove improved margins. This positive financial result was delivered against a backdrop of devastating floods in Serbia, Croatia and Bosnia in May and Bulgaria in June. Our Europe market share declined by 0.7 of a percentage point as the floods primarily impacted our highest-share areas in these countries and we did not participate in value-destructive off-premise promotional activity over the World Cup period in the United Kingdom.  We grew share in Czech Republic, Romania and Hungary in the quarter. On a year-to-date basis, our overall market share in Europe was even with a year ago. 

Our International business continued improving its top-line performance by growing volume and net sales at double-digit rates.  Coors Light more than doubled in Mexico and Latin America – on top of strong growth last year -- and volume grew significantly in India.

Now, I'll turn it over to Gavin to give 2nd quarter financial highlights and perspective on the balance of 2014.  Gavin...

[Gavin Hattersley]
...Thank you, Peter, and hello everybody....
In financial highlights:    

  • Molson Coors 2nd quarter underlying after-tax earnings increased 7.9% to $292.7 million, or $1.57 per share, driven by improved financial results in the U.S. and Europe, along with lower interest expenses. We also increased margins versus a year ago. 
  • Worldwide beer volume for Molson Coors decreased 0.9% due to lower volume in the U.S., Canada and Europe, partially offset by higher volume in International.  More than half of the worldwide volume decline in the quarter was attributable to the loss of the Modelo brands in Canada this year.
  • In the 2nd quarter, our US GAAP after-tax income from continuing operations increased 9.5% to $290.7 million due to positive business performance and lower special and other non-core net charges this year.  Special and other non-core items are described in detail in this morning’s earnings release.

Now, I will provide an overview of our results with MillerCoors presented as if it were proportionately consolidated.  This is a non-GAAP approach, but we believe it provides a useful view of some key performance metrics for our business.

  • On this basis, total-company net sales increased 1.5% from the prior year, driven by positive pricing and mix, which were partially offset by lower volume.  On a per-hectoliter basis, net sales increased 2.1% due to higher pricing and mix in the U.S. and Canada, as well as positive geographic mix in Europe.       
  • Underlying Cost of Goods Sold per hectoliter increased 1.1% due to higher costs in the U.S. largely due to mix impacts and in Europe due to foreign exchange, partially offset by lower costs in Canada and International.
  • Total company underlying gross margin was 42.2%, 60 basis points higher than a year ago, primarily due to gross margin expansion in the U.S. and Europe.
  • Underlying Marketing, General and Administrative expenses increased 2.3%, driven by Europe, the U.S. and International.    
  • Underlying operating margin was 17.3%, 40 basis points higher than a year ago due to margin improvement in the U.S., Europe and International. 
  • Our underlying EBITDA was $476.2 million in the 2nd quarter, 4.0% higher than a year ago, driven by improvements in the U.S. and Europe. 

Please see the earnings release we distributed earlier this morning for a detailed review of our business unit financial results in the quarter.

As I have mentioned on previous calls, we have discontinued sales curveaccounting for our marketing and sales expense beginning in 2014.  This change has no effect on the total amount of annual marketing and sales spending reported, but it does affect the quarterly timing of this expense.  Because this change is being presented retrospectively, we have recast prior periods to reflect the new treatment.  The elimination of sales curve accounting has the effect of increasing the previously reported 2nd quarter 2013 MG&A expense by $15.2 million, which was offset in the 2nd half of the year.  The specific 2013 quarterly impacts are posted on our web site. 

Underlying free cash flow for the 1st half of 2014 totaled $332 million. This $34 million decrease was driven by higher working capital versus last year, which was partially offset by higher net income. As we mentioned previously (on our 4th quarter earnings call), we do not expect to replicate the tremendous reduction in working capital we achieved in 2013.  We plan to reduce working capital over time, but not at the same rate as last year. 

Our first half 2014 free cash flow included the following factors:

  • $576 million of operating cash flow, and…
  • $50 million of net deductions, mainly $63 million of cash received for the accelerated termination of the Modelo joint venture in Canada, which was partially offset by cash used for restructuring activities.

Investing cash outflows included:

  • $126 million of capital spending.

Our underlying free cash flow included $692 million of cash distributions and $764 million of cash invested in MillerCoors, along with $4 million of positive adjustments for special charges and investments in businesses.

Total debt at the end of the 2nd quarter was $3.66 billion, and cash and cash equivalents totaled $506 million, resulting in net debt of $3.15 billion, which is $301 million lower than at the beginning of the 2nd quarter – and $612 million lower than a year ago.

In 2014 guidance:
We are raising our full-year guidance for underlying free cash flow and lowering our guidance for capital spending and consolidated interest expense.

  • We are increasing our 2014 underlying free cash flow target to $775 million, plus or minus 10%, up from $700 million, largely due to lower expected cash taxes, capital spending and cash interest.
  • We are reducing our capital spending guidance to approximately $315 million, which is $15 million lower than our previous outlook. This is the result of continued focus on the effective use of our cash, including ingraining the PACC model in all meaningful capital allocation decisions.
  • We also anticipate 2014 consolidated net interest expense of approximately $135 million, down from $145 million previously, as we have reduced our cost of borrowing more than planned, coupled with our improved cash flow outlook.

All other full-year forward guidance is unchanged from last quarter, such that:

  • We expect defined-benefit pension expense of approximately $35 million and cash contributions of $60 to $90 million, including our 42% share of MillerCoors expense and cash,
  • Corporate MG&A expense of approximately $110 million, and…
  • We anticipate our 2014 underlying effective tax rate to be in the range of 12 to 16% and near the low end of our long-term range of 20 to 24% next year, assuming no further changes in tax laws, settlement of tax audits, or adjustments to our uncertain tax positions.

In 2014 cost outlook in local currency, we continue to expect…

  • MillerCoors, Canada, and International cost of goods sold per hectoliter to increase at a low-single-digit rate for the full-year, and…  
  • Europe todecrease at a low-single-digit rate. 

At this point, I'll turn it back over to Peter for outlook, wrap up and the Q&A.  Peter....

 [Peter Swinburn:]
...  Thanks, Gavin.

Overall, our strategy of building our core and above-premium brands and driving sales through our innovation pipeline continues to deliver results.

In the U.S., we are executing our strategy to migrate our portfolio to the high end, bringing consumers exciting new innovations and craft brands that satisfy consumers’ thirst for authenticity, new flavors and styles.  We will be developing new creative for Coors Light and changing all the Miller Lite packaging and signage to the Original white design that has worked so well on the can. We will also launch and support Redd’s Wicked Ale.  We will also continue with our Business Transformation initiative, which will provide a strong foundation for growth in future years. As a result, we expect MG&A expenses to be higher in the second half and for full year 2014 versus 2013. 

In Canada, we have more retail channel and in-case promotional activity for Coors Light this summer, and our latest Molson Canadian advertising is working well with the Beer Fridge campaign continuing to exceed expectations.  We also have a strong innovation pipeline led by the expansion of Coors Banquet, which was introduced into the Quebec market at the end of July, along with the recent roll-outs of Mad Jack Apple Ale, Molson Canadian Cider and Molson Canadian 67 Tangerine to new markets.  Looking to the second half of this year, we anticipate that the termination of our arrangement for the Modelo brands will continue to significantly impact our comparative STR and profit performance, as we will be cycling equity earnings and administrative cost recoveries totaling CAD$6.0 million in the 3rd quarter of 2013 and CAD$4.4 million in the 4th quarter.  Other expected headwinds in the 2nd half include the August 1 Quebec excise tax increase, the impact of cycling unusually low incentive compensation expense in the 3rd quarter of 2013, and unfavorable foreign currency versus last year.

Our Europe business was disproportionately affected by the flooding in the region in the 2nd quarter, and based on what we see today, we expect the aftermath of the floods to impact our volume and profit for at least the balance of this year.  We also anticipate less benefit from overhead cost reductions in the 2nd half.  Despite weather challenges and weak consumer demand in Central Europe, our team continues to improve our brand health and sales execution across Europe, and we anticipate a return to positive market share performance in the 2nd half. 

For the remainder of 2014, our International business plans to continue to drive strong growth in Coors Light, expand key brands in select markets, and make additional progress toward its goal of achieving profitability by 2016.

Across all of our businesses, we anticipate higher brand investments in the 2nd half of 2014 versus last year.

Finally, here are the most recent volume trends for each of our businesses early in the 3rd quarter:

  • In the U.S. for July, STRs decreasedat a mid-single digit rate.
  • In Canada, theywere down low-single digits in July.  Excluding the Modelo brands last year, our Canada STRs in Julyincreased at a low-single-digit rate
  • Our July sales volume in Europe decreased at a mid-single-digit rate, and…
  • Our International sales volume, including royalty volume, increased at a double-digit rate.
  • As ever, please keep in mind that these numbers represent only a portion of the current quarter, and trends could change in the weeks ahead.  

To summarize our discussion today, in the 2nd quarter:

  • We increased underlying after-tax income nearly 8%, grew underlying EBITDA 4%, and expanded gross, operating and after-tax margins.  Underlying earnings per share increased nearly 7% versus a year ago. 
  • We also achieved positive pricing and mix, resulting in higher net sales in the quarter.

The fundamentals of our business are strong and improving:

  • We have leading brand positions in the world’s most profitable beer markets
  • We are improving the efficiency of our operations    
  • We are successfully combining our distribution muscle with our proven ability to grow both large and small brands.

We have accomplished this through strong and consistent execution of our brand-led profit growth strategy and our continued commitment to Profit After Capital Charge as drivers of total shareholder return.

This strategy is generating steady, growing pretax profit; a strong and increasing EBITDA; and strong cash returns to shareholders and will have an even greater impact as market conditions continue to improve.

Now, before we start the Q&A portion of the call, a few quick comments: 

As usual, our prepared remarks will be on our website for your reference within a couple of hours this afternoon.  Also, at 2 p.m. Eastern Time today, Dave Dunnewald will host a follow-up conference call, which is an opportunity for you to ask additional questions regarding our quarterly results.  This call will also be available for you to hear via web cast on our website.

Additionally, in the next few months, we hope to see many of you at two events:

  • First, as I mentioned at the start, Gavin, Mark and I will attend the Barclays Back to School Consumer Conference on Thursday, September 4, 2014, in Boston.
  • Second, our company will co-host a MillerCoors regional seminar with SABMiller in NY on December 3rd and in London on December 5th.
  • We will share additional details when we are closer to these events.

So, at this point Chrissy, we would like to open it up for questions please….

# # #