Molson Coors Brewing Company
2014 3rd Quarter Earnings Conference Call
November 6, 2014

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

            Welcome to the Molson Coors Brewing Company 3rd 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, Johnna. 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
•   and Pete Coors, our Chairman is also joining us today

On the call today, Gavin and I will take you through highlights of our 3rd quarter 2014 results for Molson Coors Brewing Company, along with some perspective on the final quarter of 2014.

In the 3rd quarter, our underlying after-tax income decreased 2.7% and underlying EBITDA declined 2.5%.  While we continued to expand gross margins and generate substantial cash, the underlying results were impacted by negative foreign currency movements, increased marketing spending, and the loss of the Modelo business in Canada, partially offset by the release of a reserve following the favorable resolution of a regulatory matter in Europe, all of which accounted for a combined $22 million negative pretax impact to the quarter. 

Despite these headwinds, we continued to strengthen our brand portfolio, deliver value-added innovation, grow our share of above premium, implement common processes, and focus on Profit After Capital Charge as the key driver for our cash and capital allocation strategy.  However, on a US GAAP basis, we reported a pretax loss due to a $360 million impairment of Jelen and Ozujsko, two of our brands in Europe.  The largest markets for these brands are Serbia, Bosnia and Croatia, where two primary factors drove the impairments:

  • First, weak consumer demand, which we expect to be exacerbated by the longer-term impact of the severe flooding in May and…
  • Second, the growth of the low-price value segment. 

In the 3rd quarter, Coors Light global volume (including our proportional percentage of MillerCoors volumes) decreased approximately 1% versus a year ago due to underperformance in Canada and the U.S., and we are implementing plans to reverse the trends in these markets.  Meanwhile, Coors Light grew more than 15% in the United Kingdom and much faster in Latin America, and Coors Banquet grew share in both the U.S. and Canada. 

Volume for Carling, the number-one brand in the United Kingdom, declined in the quarter as we cycled unusually warm weather a year ago and felt the after-effects of some aggressive World Cup competitor pricing noted in the 2nd quarter.  Our Carling and overall share trends in the United Kingdom improved from the 2nd quarter to the 3rd quarter, and we still expect to see overall share growth in the second half of the year.  Our Europe above premium portfolio continued to grow strongly, led by Coors Light and Doom Bar.  Staropramen volume in Central Europe outside of the Czech Republic also continued its growth trajectory, and additionally the brand achieved strong growth in the International markets of Germany and the United Kingdom.

In the U.S., pretax earnings increased nearly 3% in the quarter, driven by positive pricing, sales mix and cost savings.  The U.S. business has not recovered as quickly as we had hoped, but we were able to grow our above premium brands.  Premium and premium light beers continued to underperform the overall market, but Miller Lite held share of its segment on the strength of its original Lite package redesign, which now extends to cans, bottles, Aluminum Pints and secondary packaging.        

In Canada, our termination of the distribution rights to the Modelo brands early this year drove more than two-thirds of the decrease in constant-currency earnings in the 3rd quarter.  During the quarter, we also resolved our dispute with SABMiller regarding the Miller brands in Canada.  As a consequence, we will no longer distribute these brands after March next year.  In above-premium, Coors Banquet delivered strong volume and share growth, as did our Creemore craft brand.  The combined Coors Light and Banquet brand family grew market share from a year ago.  Canada financial results also benefited from substantial cost savings, higher net pricing and positive mix versus a year ago. 

Our Europe business grew earnings despite the ongoing negative impact of the floods in Serbia, Croatia and Bosnia earlier in the year.  Industry volume was down 6%, with the floods occurring in some of our highest-share Europe markets, therefore disproportionally affecting our business. Nonetheless, our overall market share declined only slightly in the quarter, and we grew share in Croatia, Romania and Hungary.  On a year-to-date basis, our Europe business has held share despite the impact of the floods.    

Our International business continued improving its top-line performance by growing volume and net sales at double-digit rates in the quarter.  Coors Light continued to grow at strong double-digit rates in Latin America -- and volume more than doubled in India. 

Now, I'll turn it over to Gavin to give 3rd quarter financial highlights and perspective on the 4th quarter.  Gavin...

[Gavin Hattersley]
...Thank you, Peter, and hello everybody....

In financial highlights:    

  • Molson Coors 3rd quarter underlying after-tax earnings decreased 2.7% to $271.5 million, or $1.46 per share, driven by lower volume, a double-digit increase in brand investments, unfavorable foreign currency movements, and a higher underlying effective tax rate. 
  • Our underlying pretax income in constant currency increased 0.7% due to improved financial performance in the U.S. and Europe, as well as lower underlying Corporate interest.    
  • Worldwide beer volume for Molson Coors decreased 3.4% due to lower volume in the U.S., Canada and Europe, partially offset by double-digit growth in International. 
  • On a US GAAP basis, we posted a $35.7 million net loss from continuing operations attributable to MCBC, due to special charges related to the impairment of intangible brand assets in Europe.  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 0.2% from the prior year, driven by positive pricing and mix, which were largely offset by lower volume.  On a per-hectoliter basis, net sales increased 2.7% 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 2.6% due to higher costs in Europe and the U.S. largely due to mix impacts, partially offset by lower costs in Canada due to foreign currency and International due to mix.
  • Total company underlying gross margin was unchanged at 41.6%, as U.S. and Canada margins improved, and Europe and International gross margins declined from a year ago.
  • Underlying Marketing, General and Administrative expenses increased 0.9%, driven by Canada, International and the U.S., partially offset by Europe.    
  • Underlying operating margin was 18.1%, 10 basis points lower than a year ago due to lower operating margins in Canada and International. 
  • Our underlying EBITDA was $469.2 million in the 3rd quarter, 2.5% lower than a year ago, driven by lower earnings in Canada and higher foreign currency losses in Corporate.  Year to date underlying EBITDA of $1.2 billion represents an increase of 4.2% versus a year ago.

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 decreasing the previously reported 3rd quarter 2013 MG&A expense by $17.0 million, which was offset in the 1st half of the year.  The specific 2013 quarterly impacts are posted on our web site. 

Underlying free cash flow for the first three quarters of 2014 totaled $766.1 million. This $19.3 million increase was driven by higher net cash distributions from MillerCoors and lower cash paid for pension contributions, capital spending, and interest versus last year, which were partially offset by a lower working capital benefit.

Our year-to-date 2014 free cash flow included the following factors:

  • $1.06 billion of operating cash flow, and…
  • $55 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:

  • $196 million of capital spending.

Our underlying free cash flow included $1.05 billion of cash distributions and $1.10 billion of cash invested in MillerCoors, along with $5 million of positive adjustments for MillerCoors cash payments for special charges and investments in businesses.

Total debt at the end of the 3rd quarter was $3.45 billion, and cash and cash equivalents totaled $722 million, resulting in net debt of $2.73 billion, which is $422 million lower than at the beginning of the 3rd quarter – and $753 million lower than a year ago.

Our 2014 guidance is unchanged from last quarter in the following six areas:

  • Although we are not changing our 2014 underlying free cash flow target of $775 million, plus or minus 10%, we currently expect our result for the year to be in the upper half of this range -- that is, between $775 million and $850 million.
  • Our capital spending guidance is approximately $315 million.
  • Consolidated net interest expense is approximately $135 million.
  • 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 regional cost outlook in local currency, we now expect International cost of goods sold per hectoliter to decrease at a mid-single-digit rate for the full-year, driven by geographic mix and foreign currency movements. The previous guidance was for “a low-single-digit increase.” 
We continue to expect…

  • MillerCoors and Canada 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.

We continue to drive our strategy of building our core and above-premium brands and increasing sales through our innovation pipeline.

In the U.S., we continue to migrate our portfolio to the high end, and new launches like Redd’s Wicked Apple are helping to drive positive mix and NSR per hectoliter growth.  We are in the process of changing all the primary and secondary packaging on Miller Lite to the Original white look that has worked so well on the can, and by early 2015, we will extend the redesign to every consumer touch-point.  Coors Light saw new creative in the period which brought the brand back closer to the Rocky Mountain Cold Refreshment proposition.  We are continuing with our Business Transformation initiative, and we expect this initiative, combined with brand investments, to drive significantly higher MG&A expenses in the 4th quarter versus 2013. 

Looking to the 4th quarter in Canada, the termination of our arrangement for the Modelo brands will continue to negatively impact our comparative profit performance by approximately USD$4 million.  In core brands, Molson Canadian is now rolling out the next chapter of the Beer Fridge campaign, which leverages our NHL partnership.  Early in 2015, Coors Light will see more retail activity and new advertising as part of our effort to turn around our largest brand.  In above premium, consumer demand remains strong for Coors Banquet, recently relaunched Molson Canadian Cider, and newly launched Mad Jack Apple Lager.  During the 3rd quarter, we agreed to extend our partnership for the marketing and distribution of the Heineken and Strongbow brands, and starting in January, we will also be selling the rest of their top-end import brands, including Dos Equis, Tecate, Sol, Moretti and Desperados. 

In Europe in the 4th quarter, we will be increasing marketing investment to further strengthen our share position. Carling is being supported with heavyweight advertising and consumer promotional activity, Coors Light will be concluding its successful advertising-led Ice Bar activity, the Sharps portfolio will continue to be expanded through new beer styles, and Jelen will be supported by the launch of a new creative platform in Serbia.  Despite weak consumer demand in Central Europe, our team continues to improve our brand health and sales execution.

Our International business plans to continue to invest to drive strong growth and make additional progress toward its goal of achieving profitability by 2016.  

In the 4th quarter, across all of our businesses, we anticipate higher brand investments in local currency, and at today’s rates, foreign currency will be a significant headwind, primarily in Canada. 

Finally, here are the most recent volume trends for each of our businesses early in the 4th quarter:

  • In the U.S. through October 25th, STRs decreasedat a low-single digit rate.
  • In Canada for all of October, theywere up high-single digits.  Excluding the Modelo brands last year, our Canada STRs in Octoberincreased at a low-double-digit rate, due to ourswitch to a Gregorian calendar, which includes three more days in the period this year versus last year. 
  • Our October sales volume in Europe increased at a high-single-digit rate, primarily due to the change to a Gregorian calendar in the U.K., 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, our 3rd quarter results were impacted by weak consumer demand in our core markets, higher marketing spending, the loss of Modelo brand income in Canada and unfavorable foreign currency movements.  On a US GAAP basis, we also had the impairment of the Jelen and Ozujsko brands in Europe.  Despite these headwinds, we continued to build a stronger brand portfolio, deliver value-added innovation, invest in our core brands, and increase our share of above premium.  We remained focused on the fundamentals of our business:

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

This strategy is delivering expanded gross margins, positive pricing and sales mix, and cost reductions, along with steady, strong underlying EBITDA and cash returns to shareholders.

On a more personal note:  With my retirement at the end of the year, I wanted to express my sincere appreciation for your interest in Molson Coors Brewing Company.  It has been my great pleasure over the past 6-1/2 years to lead the team here and to get to know all of you.  As I wrap up my final earnings conference call, I want to assure you that my transfer of leadership to Mark is progressing smoothly, and I am confident that he and the team here will continue to drive our growth strategy and our PACC model though the organization – all with a goal of enhancing long-term shareholder value.

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

As usual, our prepared remarks will be on our website for your reference within a couple of hours this afternoon.  Also, at 1 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.

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

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