Molson Coors Brewing Company
2013 3rd Quarter Earnings Conference Call
November 6, 2013
1) Peter Swinburn, President and Chief Executive Officer
2) Gavin Hattersley, Chief Financial Officer
Welcome to the Molson Coors Brewing Company 3rd quarter 2013 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.
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, and
• Dave Dunnewald, Molson Coors VP of Investor Relations
On the earnings call today, Gavin and I will take you through highlights of our 3rd quarter 2013 results for Molson Coors Brewing Company, along with some perspective on the fourth quarter.
In the 3rd quarter, Molson Coors increased underlying after-tax earnings nearly 8%, expanded underlying margins, grew underlying EBITDA and free cash flow, and reduced our net debt. As we anticipated on our earnings call last quarter, consumer demand remained weak across all our markets.
Despite this poor consumer uptake, we have continued to invest in our core brands. Our innovation pipeline is delivering a mid-single-digit percent of sales, and our owned above-premium brand portfolio is growing at a double-digit rate globally.
In the 3rd quarter:
U.S. revenue per hectoliter growth was driven by positive net pricing and sales mix. Coors Light grew market share in the premium light segment in the quarter, according to Nielsen, and our above-premium segment saw strong growth in Redd’s, Leinenkugel’s and Blue Moon.
In a weak Canada market, Molson Canadian grew share in the quarter, particularly in Quebec, but our other core brand, Coors Light, lost volume and share.
Our above-premium segment benefited from the launch of Molson Canadian Cider, Rickard’s Shandy, and Coors Banquet, while our Granville Island and Creemore Springs craft brands achieved strong volume growth.
We have also decided to accelerate the termination of the joint venture which controls the Modelo brands in Canada, ahead of the current expiration date of January 1, 2018. Anheuser-Busch InBev will assume control of the brands on March 1, 2014. Although there was no obligation to end the agreement early, we have reached favorable terms with ABI, resulting in compensation of CAD $70 million to Molson Coors. Additionally, our agreements to represent the Modelo brands in the UK and Japan have been confirmed through the end of 2014.
Despite weak industry demand, our Europe business grew volume nearly 1% and again increased overall market share, This was driven by positive share performance in the U.K., Croatia, Bulgaria and the Czech Republic, along with continuing share trend improvement in Romania. Carling, our largest brand in Europe, grew both volume and share in the U.K., and our above-premium brands Coors Light and Doom Bar in the U.K., as well as Staropramen outside of the Czech Republic, grew strongly.
In International, we achieved Coors Light volume growth in Mexico and Latin America. Carling gained market share in Ukraine, and we launched the brand in Russia in the 3rd quarter.
We made progress on our global cost savings and cash generation targets and paid down nearly $282 million of net debt in the quarter. We will also deliver the cost savings that Gavin announced during our June Investor Day in NY. We also continued to standardize processes to reduce complexity and improve efficiency.
We are accelerating our commitment to reduce costs, and following last year's restructuring in Europe, a similar program has been announced in the US, and we are currently benchmarking our performance in Canada to ensure that we have a competitive cost base for the future.
Now, I'll turn it over to Gavin to give 3rd quarter financial highlights and perspective on the last quarter of 2013. Gavin...
...Thank you, Peter, and hello everybody....
In 3rd quarter financial highlights:
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.
Please see the earnings release we distributed earlier this morning for a detailed review of our business unit financial results in the quarter.
It is important to note that our 3rd quarter underlying results exclude some special and other non-core gains, losses and expenses that net to a $163.1 million pretax charge. In addition to the intangible asset write-downs that I described earlier, these exclusions from our U.S. GAAP results primarily relate to the net effect of unrealized foreign exchange and fair value adjustments associated with the 500 million Euro convertible note that we paid off in the 3rd quarter, along with restructuring and integration-related costs in Canada and Europe These special and other non-core items are described in detail in this morning’s earnings release.
Underlying free cash flow for the first three quarters of this year totaled $746.8 million. This represents an increase of $1.8 million versus last year, driven by higher year-to-date net income. Free cash flow year to date this year was made up of the following factors:
- $1.03 billion of operating cash flow, which includes $438 million from MillerCoors, plus…
- $37 million of net add-backs, primarily related to cash paid for restructuring activities.
Investing cash outflows were:
- $218 million of capital spending and…
- $102 million of cash invested in MillerCoors.
Looking forward to the fourth quarter:
- Europe and International businesses. We now expect low-single-digit increases for both of these businesses for the full year in local currency. In both cases, the cost outlook changes are driven by mix shifts toward higher-cost brands, channels or geographies.
- Also, the COGS per hectoliter outlook in the U.S. has moved up into the mid-single-digit range due to the strong growth in above-premium brands, which are higher cost.
- Underlying free cash flow, which is still $700 million, plus or minus 10%, however, we currently expect this to be in the upper half of that range.
- Defined-benefit pension expense and contributions, which are expected to be approximately $50 million of expense and $150 million of cash contributions, including our 42% share of MillerCoors expense and cash,
- CorporateMG&A expense of approximately $105 million, excluding foreign exchange movements,
- Consolidated net interest expense of approximately $170 million, and…
- Cost of goods sold per hectoliter outlook for our
- Canada business continues to be up mid-single-digits in local currency,
At this point, I'll turn it back over to Peter for outlook, wrap up and the Q&A. Peter....
... Thanks, Gavin.
In the U.S., we will continue to drive the above-premium part of our portfolio through the Redd’s, Blue Moon and Leinenkugel’s franchises. High-end innovations for early next year will include Miller Fortune and Smith & Forge Cider. In premium lights, we will have fresh advertising copy and packaging for Coors Light, and we'll reintroduce the original Miller Lite can for a limited time.
In Canada, we are pleased to see the return of National Hockey League play. Nonetheless, we are not seeing last year's lost volume return, and we anticipate that Canada volume and profit trends in the 4th quarter will continue to face significant macroeconomic and promotional challenges. We will also be cycling substantial MG&A expense reductions, including much lower NHL sponsorship and promotion costs during the lockout last year.
In Europe, our portfolio and innovations are achieving their best market share performances in years in the U.K., Czech Republic, Bulgaria and Croatia. Nonetheless, the positive summer weather in the U.K. is behind us, and the region continues to be challenged by a weak economy and demand volatility, especially in Serbia, Romania and Bulgaria. While we expect difficult conditions to continue in the 4th quarter, we will remain focused on driving our core brands, above-premium and innovation. As a result, we expect higher Europe MG&A expense in the 4th quarter.
Our International business continues to focus on growth driven by Coors Light, Carling, Staropramen and Blue Moon. By year-end, we plan to launch our partnership with Coca-Cola Amatil and introduce some of our signature brands into the Australia market. In the fourth quarter, we expect higher International G&A expense due to the reversal of the third quarter overhead timing benefit and the Australia launch.
Finally, here are the most recent volume trends for each of our businesses early in the 4th quarter:
To summarize our discussion today:
In the 3rd quarter, we grew underlying after-tax earnings nearly 8%, expanded margins, grew underlying EBITDA and free cash flow, and reduced our net debt. We continue to see weak consumer demand and shifts in consumer preferences that will impact our business for some time. In this environment, we will accelerate our commitment to transformational efforts to grow our brands and make Molson Coors more competitive and to drive total shareholder return going forward.
Now, before we start the Q&A portion of the call, a quick comment:
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.
So, at this point Jay, we would like to open it up for questions….