Molson Coors Brewing Company
2014 1st Quarter Earnings Conference Call
May 7, 2014


Speakers:
1) Peter Swinburn, President and Chief Executive Officer
2) Gavin Hattersley, Chief Financial Officer
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[Operator:]
            Welcome to the Molson Coors Brewing Company 1st 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 – www.molsoncoors.com – 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, Jay. 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

On the call today, Gavin and I will take you through highlights of our 1st quarter 2014 results for Molson Coors Brewing Company, along with some perspective on the balance of 2014.

In the 1st quarter, Molson Coors more than doubled underlying after-tax income, grew underlying EBITDA more than 20%, and expanded gross, operating and after-tax margins.  Underlying earnings per share also more than doubled.  U.S. GAAP after-tax earnings increased more than $135 million versus a year ago.  The improvement across our company was consistent, with each of our businesses achieving improved operating margins, pretax earnings and EBITDA performance in the quarter.  Our strong focus on our core brands, portfolio shift to above premium and value creating innovation is paying dividends. This strategy is underpinned by our Profit After Capital Charge, or PACC model, which aligns our entire team and each of our cash-use decisions with our priorities.  

In the 1st quarter, Coors Light grew more than 30% in the U.K., and it more than doubled in Mexico and Latin America.  Coors Light underperformed in the U.S. and in Canada, and we have plans to reverse this trend as we approach the summer selling season, which I will share with you in a few minutes.   

Carling continued strong momentum from last year with both volume and market share growth in Europe, and particularly in the U.K., where it extended its lead as the number one beer brand.   Molson Canadian gained share for the third consecutive quarter in Canada with its Olympic programming, including the hugely successful “Molson Canadian beer fridge” social media program. Coors Banquet grew volume and share in both the U.S. and Canada.  

Staropramen grew volume and share across Central Europe, but this brand’s licensed volume declined in Russia and Ukraine due to political and economic turmoil.

In the quarter, U.S. pretax earnings increased nearly 5%, and while we saw positive pricing and sales mix, together with cost savings, the gain was also due to the timing of marketing spending versus last year.  Industry volume declined in the 1st quarter partially related to the negative impact of the Easter holiday timing.  Premium lights continued to underperform the overall market, but we gained share in the premium light segment according to Nielsen, driven by the successful re-introduction of Miller Lite’s original Lite can.  We also grew share in above-premiums, but we have work to do on our Blue Moon seasonal brands.

In Canada, our volume was lower partially due to the timing of the Easter holiday.  Our overall market share declined about one-half share point versus a year ago on a comparable basis, which takes out the Modelo brands from our STR in Canada.  In above-premium, Coors Banquet delivered strong volume growth, and our craft brands Creemore and Granville Island grew volume and share.  Canada income also benefited from the timing of marketing and sales expenses, lower overhead costs, and higher net pricing, all of which drove higher pretax income and margins in the quarter. 

Although the economy remains weak, our Europe business delivered 5.6% volume growth and more than a point of share growth across the region, along with cost reductions and improved margins and pretax income.  Our brands grew overall market share in Czech Republic, Romania, the U.K., and Bulgaria, while we saw improved trends in Serbia and Hungary.

Our International business improved its top-line and bottom-line performance by growing volume double digits and improving its sales mix and cost base.  The team continued to achieve strong Coors Light growth in Mexico and Latin America and improved their performance in China. 

Now, I'll turn it over to Gavin to give 1st quarter financial highlights and a perspective on the balance of 2014.   Gavin...

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

In financial highlights:    

  • Molson Coors 1st quarter underlying after-tax earnings increased 115.2% to $102.2 million, or 55 cents per share, driven by improved financial results in all of our businesses, along with less interest expense. This strong profit performance also increased margins versus a year ago.  Our 1st quarter underlying tax rate of 5% was lower than prior year due to the release of valuation allowances in Europe and the favorable resolution of uncertain tax positions.
  • Worldwide beer volume for Molson Coors decreased 0.1% due to lower volume in the U.S. and Canada, offset by higher volume in Europe and International. 
  • In the 1st quarter, our US GAAP after-tax income from continuing operations increased $135.9 million to $165.3 million due to strong business performance and $63.1 million of special and other non-core net gains in the quarter, which compared to $21.9 million of net charges a year earlier.   The special and other non-core items this year are excluded from our underlying results andprimarily relate to income recognized upon the early termination of our joint venture that managed the Modelo brands in Canada, along with the favorable resolution of indirect-tax reserves in Europe.  These gains were partially offset by an intangible asset write-off associated with the Modelo JV termination in Canada, along with restructuring-related costs in Canada and Europe.  Special and other non-core items are described in detail in this morning’s earnings release.
  • Overall, when considering our 1st quarter results, it is important to note that this is a seasonally small profit quarter for our business, so relatively small changes in absolute income results can drive large percentage changes. 

As we have in previous quarters, 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 decreased 0.7% from the prior year, driven by lower volume and unfavorable foreign currency movements, which were partially offset by positive pricing and mix.  On a per-hectoliter basis, net sales decreased 0.2% due to negative foreign currency, nearly offset by positive pricing and mix in the U.S. and International, and higher pricing in Canada.       
  • Underlying Cost of Goods Sold per hectoliter decreased 1.8% due to favorable foreign currency in Canada and lower costs in Europe.
  • Total company underlying gross margin was 37.4%, 100 basis points higher than a year ago, primarily due to gross margin expansion in Europe, Canada and International.
  • Underlying Marketing, General and Administrative expenses declined 6% driven by all business segments and Corporate. 
  • Underlying operating margin was 9.2%, up 260 basis points from a year ago due to margin improvement in all businesses. 
  • Our underlying EBITDA was $251.2 million in the 1st quarter, 20.4% higher than a year ago, driven by improvements in all of our businesses and in Corporate. 

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

In addition, please see Table 7 in the earnings release for constant-currency net sales, pretax income and underlying pretax income for each of our segments and for our total company.  We believe that these new disclosures will provide investors with more comparable data with which to analyze our company.

As mentioned on our last earnings call, beginning in 2014 we have discontinued sales curveaccounting for our marketing and sales expense.  This change will have no effect on the total amount of annual marketing and sales spending reported, but it does affect the quarterly timing of this expense.  This change in accounting policy is being presented retrospectively, so we have recast prior periods to reflect the new treatment, including for the 1st quarter 2013 results distributed this morning.  The elimination of sales curve accounting has the effect of increasing the previously reported 1st quarter 2013 MG&A expense by approximately $9 million, which was offset in the 2nd half of the year.  We posted the specific 2013 quarterly impacts on our web site earlier this morning.  MillerCoors does not use sales curve accounting, so its historical results will not be affected by this change.

Underlying free cash flow for the 1st quarter of 2014 totaled a use of $65 million. This was a $16 million higher cash use versus a year ago and was driven by working capital timing, which was partially offset by higher net income. The underlying free cash flow in the 1st quarter does not include a $62.9 million non-core cash receipt related to the early termination of our Modelo brands joint venture in Canada.  Net free cash use in the 1st quarter of the year is normal in this seasonal business because this is the lowest profit and cash-generating time of the year.  Our 1st quarter 2014 free cash flow included the following factors:

  • $150 million of operating cash flow, and…
  • $57 million of net deductions, mainly the cash received for the accelerated termination of the Modelo joint venture in Canada, partially offset by cash used for restructuring activities.
Investing cash outflows were:
  • $65 million of capital spending.

Our underlying free cash flow included $123 million of cash distributions and $95 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 1st quarter was $3.79 billion, and cash and cash equivalents totaled $338 million, resulting in net debt of $3.46 billion, approximately $98 million higher than three months earlier – and $685 million lower than a year earlier.

  • In the 1st quarter, we paid off the remaining outstanding cross-currency swaps for $65.2 million and paid $46.3 million of principal temporarily withheld from the repayment of the €500 million note issued to us by the seller of our Central Europe business.

Looking forward to 2014:
We are lowering our full-year guidance for tax rate and MCI COGS per HL.

  • We now expect our 2014 underlying effective tax rate to be in the range of 12 to 16%, down from 16 to 20% previously.  This change is primarily due to an advanced pricing agreement we signed with tax authorities early in the 2nd quarter, along with the favorable impact of some discrete tax benefits recognized in the 1st quarter.  After this year, we expect our underlying tax rateto be near the low end of our long-term range of 20 to 24% for at least a few years, assuming no further changes in tax laws, settlement of tax audits, or adjustments to our uncertain tax positions.
  • For Molson Coors International COGS per HL, we now expecta low-single-digit increase, down from mid-single digits previously.

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

  • Underlying free cash flow guidance is $700 million, plus or minus 10%,
  • 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,
  • We also anticipate 2014 capital spending of approximately $330 million,
  • CorporateMG&A expense of approximately $110 million, and…
  • Consolidated net interest expense of approximately $145 million.

In 2014 cost outlook, we continue to expect…

  • MillerCoors cost of goods sold per hectoliter to increase at a low-single-digit rate for the full-year.
  • In local currency, we still expectCanada to increase at a low-single-digit rateand
  • 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 with our innovation pipeline is working.

In the U.S., we will continue transitioning our portfolio toward the high-margin and fast-growing above-premium segment.  The roll-outs of Miller Fortune lager and Smith & Forge cider are progressing, and Redd’s Apple Ale continues to be one of the fastest growing brands in the U.S. beer category.  Premium lights continue to underperform the overall market, and we are addressing this in the coming months with new advertising, fresh packaging, and our first Coors Light line extension, Coors Light Summer Brew. We are also putting more TV support behind our key value brands Miller High Life and Keystone Light.  We expect to see a reversal of the marketing timing benefit that contributed to the 1st quarter MillerCoors underlying income growth.

Our volume and profit performance in Canada in the 1st quarter was impacted by the February 28 termination of our arrangement for the Modelo brands.  The negative impact on underlying income of losing the Modelo brands was more than offset by the results of multi-year initiatives started last year to transform and streamline our cost base, as well as a year-over-year difference in the timing of marketing and sales spending.  We will introduce new advertising this month and increased activity to improve the performance of Coors Light.  We have a strong innovation pipeline, which will be led by the expansion of Coors Banquet and our vented can, but which will also include two new products that are aimed at recruiting legal-age drinkers from outside the beer category.

Europe is still experiencing constrained demand, which is fueling the growth of lower-margin segments and channels. While we expect the trends to continue, the work we have done on improving our brand propositions and execution has resulted in strong share growth in nearly all of our markets. For the balance of 2014, we have strong core brand, above premium and innovation plans, including the roll-out of cider and the introduction of cold-activated packaging to select Central European markets.

Our International business has launched global above-premium brands in select high-potential markets, including Coors and Blue Moon in Australia and Carling in major tourist destinations in India in the 1st quarter.  For the remainder of 2014, we plan to roll out above-premium brands to additional markets on a selective basis, along with premium outlet distribution gains for our lead brands in China.

Finally, here are the most recent volume trends for each of our businesses early in the 2nd quarter:

  • In the U.S. for April, STRs decreased low-single digits.
  • In Canada, theywere approximately flat.  Excluding the Modelo brands last year, our Canada STRs in Aprilincreased at a low-single-digit rate
  • Our April sales volume in Europe increased at a high-single-digit rate,  and…
  • our International sales volume, including royalty volume, increased at a double digit rate.
  • All of these April results benefited from the timing of Easter this year.  Also, please keep in mind that these numbers represent only a portion of the current quarter, and trends could change in the weeks ahead.  

 [pause]
To summarize our discussion today, in the 1st quarter:

  • We more than doubled underlying after-tax income, grew underlying EBITDA more than 20%, and expanded gross, operating and after-tax margins. 
  • Underlying earnings per share also more than doubled. 
  • The improvement across our company was consistent, with each of our businesses achieving improved operating margins, pretax earnings and EBITDA performance in the quarter.
  • While the economy and beer volumes remain weak in many of our markets, our focus on driving cash generation, raising returns on capital, and delivering Profit After Capital Charge was instrumental in achieving these results. 
  • This year, we have cash generation, PACC and total shareholder return – along with profit and top-line growth – as key performance criteria in our employee incentive programs, which are designed to align our decision-making and our priorities and to drive long-term shareholder value. 

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 two months, we hope to see many of you at three events:

  • First, Gavin will present at the Goldman Sachs Global Staples Summit in New York on Tuesday, May 13, 2014.
  • Second, we will hold our Annual Meeting of Stockholders on Wednesday, June 4, 2014, here in Denver at the Ritz Carlton Hotel.
  • Third, we will host our annual New York Investor/Analyst Day at the New York Stock Exchange on the afternoon of Wednesday, June 25, 2014.

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