Molson Coors Brewing Company
2014 Fourth Quarter Earnings Conference Call
February 10, 2015

1) Mark Hunter, President and Chief Executive Officer
2) Gavin Hattersley, Chief Financial Officer

            Welcome to the Molson Coors Brewing Company 4th 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 Mark Hunter, President and CEO of Molson Coors.

[Mark Hunter:]
Thank you, Leann. Hello and welcome everybody to the Molson Coors earnings call....
Thanks for joining us today.

With me on the call this morning from Molson Coors, we have:
•    Gavin Hattersley, CFO,
•    Stewart Glendinning, Canada CEO,
•    Simon Cox, our newly appointed CEO of Europe,
•    Kandy Anand, International CEO
•    Sam Walker, our Chief Legal and People Officer,
•    Brian Tabolt, our Controller, and…
•    Dave Dunnewald, VP of Investor Relations, and we have…
•    Tom Long, CEO of MillerCoors.

On the call today, Gavin and I will take you through highlights of our full year and 4th quarter 2014 results for Molson Coors Brewing Company, along with some perspective on 2015.  

Overall, 2014 was a good year for Molson Coors.  We grew net sales in constant currency and gross margin, as well as underlying EBITDA, free cash flow, after-tax income and earnings per share. Weak consumer demand continued across our largest markets, but we made good progress in building a stronger brand portfolio, delivering value-added innovation, strengthening our core brand positions, and increasing our share in above premium. We also continued to improve our sales execution and revenue management capabilities, increase the efficiency of our operations, implement common systems, and focus on Profit After Capital Charge as the key driver for our cash and capital allocation strategy.     

In performance headlines for the year:

  • We delivered $1.47 billion of underlying EBITDA and $768.5 million of underlying after-tax income, or $4.13 per diluted share.  After-tax income grew 5.7% from a year ago.
  • Excluding foreign currency movements and the termination of the Modelo joint venture in Canada, all of our businesses achieved improved underlying profit performance in 2014 versus the year before.
  • We drove working capital performance company-wide and achieved $957 million of underlying free cash flow, which exceeded our original 2014 free cash flow goal by more than $250 million.
  • We expanded our PACC model deeper into our company, including adding this measure to our long-term incentive plan.
  • We over-delivered against our cost savings targets, and we reduced our net debt by nearly $800 million.
  • We grew our global above-premium volume, net pricing and sales mix, and maintained market share in Europe despite a poor economy and challenging floods in some of our highest-share markets.
  • Volume challenges included Coors Light performance in the U.S. and Canada, however, Coors Light worldwide volume grew nearly 2% on the strength of its performance in Europe and International.  We also cycled the termination of the Modelo brands joint venture in Canada.
  • Despite these challenges, our overall profit and cash performance helped to drive a positive total shareholder return (TAP stock price, plus dividends) of 35.7% in 2014, which is more than two-and-a-half times the total return for the S&P500 index of large stocks last year.
  • Based on this performance and our commitment to returning cash to our shareholders, we also announced board approval today for a new 4-year, $1 billion stock repurchase program and an 11% increase in our quarterly dividend.  With this change, we have increased our quarterly dividend 156% since 2007. 

Regional highlights for 2014 are as follows:
In the U.S. underlying pretax earnings increased nearly 3%, driven by positive pricing, sales mix and cost savings.  We grew revenue per hectoliter and increased our percent of sales in above premium, while working to restore growth to Coors Light and Miller Lite.  Miller Lite returned to growth in the fourth quarter with a total brand overhaul and redesign focusing on the brand’s authenticity and heritage, and Coors Banquet grew volume for the eighth consecutive year.  We also continued to grow the Above Premium segment with higher-margin offerings, notably Redd’s, Blue Moon Belgian White and Leinenkugel’s Summer Shandy.  Brand innovations designed to drive margin improvement included Miller Fortune, Smith & Forge Hard Cider, Redd’s Wicked Apple, and Coors Light Summer Brew.

Our Canada underlying earnings declined 7.1 percent due to unfavorable foreign currency movements and the impact of terminating our Modelo joint venture early in the year, which had a combined negative profit impact of approximately $35 million.  Canada sales to retail, or STRs, declined 4.7%, with more than half of this decline due to the loss of the Modelo brands.  Molson Canadian gained share in its segment, and the combined Coors Banquet and Coors Light brand family grew Canada market share versus 2013. In above premium, Coors Banquet delivered strong volume and share growth in 2014, as did our Creemore craft brand, and we expanded Molson Canadian Cider and extended our partnership for the marketing and distribution of the Heineken and Strongbow brands.  Margin-enhancing innovations included introducing Mad Jack Apple Lager and new craft flavor extensions for Canada’s consumers.  During the year, our Canada team drove positive pricing and sales mix, achieved significant cost savings, and invested strongly in improving the efficiency of our brewery network.

Our Europe business in 2014 delivered higher net sales and gross margins, along with double-digit underlying pretax earnings growth. We worked against a weak economy all year, and severe flooding in some of our highest-share markets in early summer compounded the challenges.  Nonetheless, we maintained market share across the region on the strength of our core brands, above premium portfolio and innovation.  Our craft and above-premium brands performed well, with Coors Light, Doom Bar, Cobra, and Staropramen outside the Czech Republic leading growth.  Innovations during the year included Carling British Cider, new craft beer launches, and cold-activated packaging in multiple markets. 

Our International business delivered double-digit growth in volume, net sales and gross profit in 2014 despite the continuing challenges in Ukraine and Russia.  Coors Light volume in Latin America continued to grow at a strong double-digit rate, and we recently launched Coors Light in Chile and Coors 1873 in select Latin American markets.  In India, we grew volume at a double-digit rate and increased our market share.  As a result of strong top-line growth and cost control, we reduced the underlying International loss by 17.9% versus 2013.

Now, I'll turn it over to Gavin to give 4th quarter financial highlights and perspective on 2015.  Gavin...

[Gavin Hattersley]
...Thank you, Mark, and hello everybody....
In 4th quarter financial highlights:    

  • Molson Coors net sales were down approximately 5% in US dollars entirely due to foreign currency.  Constant-currency net sales grew nearly 1% on the strength of positive pricing and sales mix globally, along with higher volume in Europe and International. 
  • Worldwide beer volume for Molson Coors decreased 0.3% due to lower volume in the U.S. and Canada, partially offset by growth in Europe and International. 
  • Underlying after-tax income decreased 21% to $102.1 million, or 55 cents per share.
  • Our underlying pretax income also decreased 21%, with approximately one-third of this change driven by unfavorable foreign currency and the balance due to increased brand investments and incentive compensation this year, along with lower volume in the U.S. and Canada and the termination of our Modelo brands agreement in Canada.  Foreign currency had a negative $11 million, or 31%, impact on pretax income in the quarter.
  • On a US GAAP basis, we reported income from continuing operations attributable to Molson Coors Brewing Company of $93.2 million, which is 31.9% lower than in the prior year due to  a higher effective tax rate, unfavorable foreign currency, lower worldwide volume, and increased brand investments.  
  • Our underlying EBITDA was $273.9 million in the 4th quarter, 14.6% lower than a year ago, driven by lower earnings in the U.S., Canada 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.

In the area of cost savings, we exceeded our 2014 goals by achieving more than $70 million of cost reductions across our company, driven by Canada and Europe.  These results exclude MillerCoors, which provided another $60 million of cost savings in 2014 at our 42% ownership rate.  We expect cost savings over the next few years to be in our medium-term range of $40 to $60 million and come primarily from Canada, with diminished savings from Europe.   

We also successfully concluded our three-year working capital initiative with a total improvement of $378 million since 2012, which is $78 million above our original target.  (We drove working capital lower by $66 million, $253 million, and $59 million, for 2012, 2013 and 2014, respectively.)  We intend to continue to push hard on working capital in the years ahead to generate free cash flow.

We were also pleased that we exceeded our underlying free cash flowgoal for 2014 by generating a total of $957 million of free cash, an increase of $65 million or 7.3%, versus 2013. Higher underlying free cash flow was driven by increased distributions from MillerCoors and higher underlying income, as well as lower cash paid for pension contributions, capital expenditures, interest and taxes. These improvements were partially offset by a decreased benefit from changes in net working capital.   

Our 2014 free cash flow included the following factors:

  • $1.27 billion of operating cash flow, and…
  • $56 million of net deductions, mainly cash received for the accelerated termination of the Heineken contract brewing agreement in the U.K. and the Modelo joint venture and Miller brands agreement in Canada, which were partially offset by cash used for restructuring activities.

Investing cash outflows included:

  • $260 million of capital spending.

Our cash flows to and from MillerCoors were broadly neutral.  A detailed reconciliation of our 2014 underlying free cash flow is available in our earnings release this morning.

Total debt at the end of the 4th quarter was $3.187 billion, and cash and cash equivalents totaled $625 million, resulting in net debt of $2.562 billion, which is $171 million lower than at the beginning of the 4th quarter – and $796 million lower than a year ago.

During the past several years, we have used our cash not only for growth opportunities, but also to continue to strengthen the Company’s balance sheet and to more than double our dividends per share. The combination of strong cash generation and significant debt reduction now gives us the opportunity to increase returns to shareholders through a stock repurchase program. Our board has approved a new program to repurchase up to $1 billion of the Company’s Class A and Class B Common shares, which we expect to implement over the next four years. We anticipate that the stock repurchases will be weighted toward the last two years of the program. This new stock buyback program reflects our continued confidence in the long-term growth and cash generating potential of our Company, as well as our commitment to returning cash to our shareholders. 

Also, our board has authorized another increase in our quarterly dividend from 37 cents per share to 41 cents per share, beginning in the first quarter of 2015.  This 11 percent increase results in an annual dividend amount of $1.64 per share, which represents a payout ratio of 20.6% of 2014 underlying EBITDA.  We continue to target a dividend payout in the range of 18 percent to 22 percent of trailing underlying EBITDA, which we anticipate will keep our dividend in a competitive range for global beer companies for the foreseeable future. With the buyback and dividend announcements today, we are pleased to be in a strong position to increase cash returns to Molson Coors shareholders, while preserving financial flexibility to explore growth opportunities and meet our pension obligations in the future.

As always, potential cash uses will be vetted by our disciplined process, including our PACC model, and must meet our firm criteria of providing a clear view to near-term earnings accretion and building long-term shareholder value.

Looking forward to 2015:

  • Our annual target for Underlying Free Cash Flow is $550 million, plus or minus 10% at January 31 foreign currency rates. This goal is $407 million lower than our 2014 result because of five primary factors:
    1. Our strong push on working capital had better results than expected in 2014, including from MillerCoors, and some of these improvements were originally expected to be achieved in 2015.
    2. Some large customers paid invoices early at the end of 2014, which we were not expecting and are unlikely to repeat.
    3. At current rates, we expect foreign currency to be a significant headwind for both cash and profit generation in 2015. More on this in a few minutes from Mark.
    4. We anticipate increasing capital investment behind cost savings projects and innovation to drive future growth, profit and improved volumes.
    5. Increased cash tax payments as we continue to move toward a cash tax rate closer to our normalized effective tax rate.

Over the two-year period of 2014 and 2015, we expect to deliver more than $1.5 billion in underlying free cash flow, which averages at the top end of our original cash guidance range for last year.

  • Currently, we expect cash contributions to our defined benefit pension plans to be in the range of $300 to $320 million in 2015, up from $75 million last year, including our 42% of MillerCoors contributions.  This increase is primarily due to an additional voluntary contribution of approximately $230 million we made early this year to our U.K. pension plan, as well as moderately higher contributions to the Canada and MillerCoors plans. We do plan to exclude the additional U.K. contribution from our underlying free cash flow calculation, as we have done in the past. 
  • Meanwhile, we anticipate 2015 pension expense of approximately $27 million, down slightly from $32 million last year.  Note that all of these pension numbers include our 42% of MillerCoors.  The overall funded status of our defined-benefit pension plans, again including MillerCoors, declined about 2 percentage points from a year ago to 90% at the end of 2014.  This decrease was driven by lower year-end interest rates and longer life expectancies for pensioners versus a year ago. 
  • Our 2015 capital spending outlook is approximately $330 million, up from $291 million last year, primarily due to planned supply chain capital projects in Canada and keg purchases in Europe.
  • We expect our 2015 MG&A expense in Corporate to be approximately $110 million.
  • Our consolidated net interest expense outlook for 2015 is approximately $120 million.
  • We expect our 2015 underlying effective tax rate to be in the range of 18 to 22%, assuming no further changes in tax laws, settlement of tax audits, or adjustments to our uncertain tax positions.  We continue to expect our long-term tax rateto be in a range of 20 to 24%.

As far as our cost outlook is concerned…

  • In the U.S., we expect MillerCoors cost of goods sold per hectoliter to increase at a low-single-digit rate for the full-year 2015.
  • In Canada, we expect our 2015 COGS to increase at a mid-single-digit rate per hectoliter in local currency.
  • In Europe, we anticipate a mid-single-digit decrease in COGS per hectoliter this year in local currency, and…
  • Our International business anticipates a low-double-digitdecrease primarily due to changes in geographic mix and foreign currency.
  • In each of our businesses, we anticipate higher costs related to product and package innovation. 

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

 [Mark Hunter:]
...  Thanks, Gavin.

In 2015, we will continue to drive our strategy of building a stronger brand portfolio that is delivering value-added innovation, strengthening our core brand positions, and increasing our share in above premium, craft and cider. We will do this while ensuring that we have a fit for purpose cost base and a deeply embedded, PACC-led capital allocation approach. Through 2015 and beyond, I will additionally be leading for a relentless focus on delighting our consumers and our customers to ensure we are the First Choice brewer in the geographies and segments where we choose to play.

2015 will, however, throw a number of challenges our way.  For nearly a year, we have flagged for you that we expect our effective tax rate to be higher than last year. We also anticipate substantial profit and cash headwinds from foreign currency and the termination of three business contracts this year:

  • To provide a sense of our FX challenge, if we were to apply foreign exchange rates at the end of last month to our 2014 results, it would reduce last year’s underlying pretax earnings by more than $70 million, or approximately 8% -- and the impact on cash would have been even larger. 
  • Our 2015 financial results will also be negatively affected in the U.K. by the termination of our Modelo distribution agreement at the end of last year and the termination of our contract brewing arrangement with Heineken at the end of April.  In Canada, we are terminating our Miller brands agreement at the end of March.  We expect the loss of these three contracts to present a pretax profit headwind this year totaling approximately $40 million.  We are taking actions to lessen the impact of losing these income streams, including the proposed closure of our Alton brewery to adjust our U.K. cost base to reflect the loss of the Heineken contract volume, along with the addition of the Femsa brands to our business in Canada and adding the Modelo brands in Central Europe.

In the U.S., job number 1 is to drive for share in American Light Lagers, making sure consumers know the rich heritage behind Miller Lite and the cold-filtered Rocky Mountain refreshment of Coors Light.  In 2014, we returned Miller Lite to growth in the fourth quarter with a total brand overhaul and redesign focusing on the brand’s authenticity and heritage.  In 2015, we’ll bring the same focus and intensity to returning Coors Light to growth by re-staging the brand while maintaining our core messaging around Rocky Mountain refreshment.  In addition, we’ll continue to transform our portfolio to above premium with innovations like Redd’s, Smith & Forge Hard Cider and further extensions from Leinenkugel’s and Blue Moon, such as our new Blue Moon White IPA.  We’ll continue to build First Choice customer partnerships, working with our distributors to bring more resources to the on-premise with our Building with Beer retail strategy, which leverages the higher velocity and broad appeal of American light lagers.  Overall, we will invest significantly in our brands and information technology, and as a result we do not expect to grow our U.S. operating margins in 2015. 

The Canada, market remains weaker than the U.S., and our team will continue to invest in supply chain efficiency and capability and to streamline our Canada cost base.  In core brands, Molson Canadian just introduced the next chapter of its Beer Fridge campaign, and Coors Light will see more retail programming and new advertising later this quarter.  In above premium, consumer demand remains strong for Coors Banquet, Molson Canadian Cider, and Mad Jack Apple Lager.  Last month, we began the national launch of Coors Altitude, a 6.4% ABV lager that is a refreshing alternative to spirits.  This year, we also plan to introduce Rickard’s Radler as a seasonal.  In addition to Heineken and Strongbow, we are now marketing and distributing the rest of Heineken’s top-end import brands in Canada, including Dos Equis, Tecate, Sol, Moretti and Desperados. 

The Europe economy continues to struggle with weak overall consumer demand and a deflationary backdrop, and we expect the ongoing growth of the value segment and lower-margin channels and package configurations to be challenges again in 2015.  Our segment-leading core brands, such as Carling, Ozujsko and Jelen, will continue to be heavily invested in 2015, while we continue the strong momentum of our above premium, craft and cider portfolio.  We are also adding the Modelo brands to our international premium brand portfolio in Central Europe this year, but volume for these brands is currently much smallerthan the annualized volume of the brands that we are losing in the U.K.

Our International business will focus on growth and expansion in new and existing markets.  We will continue to drive strong momentum on Coors Light and Coors 1873 in Latin America, along with growth in our India business. At the same time, we will remain disciplined with our cost base as we move toward our goal of achieving profitability by 2016.

Finally, here are the most recent volume trends for each of our businesses early in the 1st quarter:

  • In the U.S. through January, STRs decreasedat a low-single digit rate.
  • In Canada for January, theywere downhigh-single digits.  Excluding the Modelo brands last year, our Canada STRs in Januarydecreased at a mid-single-digit rate
  • Our January sales volume in Europe decreased at a low-double-digit rate. Excluding the Modelo brand volume in the U.K. last year, our volumes in Europe decreased at a high-single-digit rate primarily due to weak post-holiday sales in the U.K.
  • Our International sales volume, including royalty volume, increased at a mid-single-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, we achieved good results in 2014 and built a stronger business.  We grew underlying earnings and margins, and we exceeded our goals for cost savings, cash generation and debt pay-down, despite significant headwinds during the year.  And, based on our continued confidence in the long-term growth and cash generating potential of our Company, as well as our commitment to returning cash to our shareholders, we announced a double-digit increase in our quarterly dividend, along with a new stock repurchase program.

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 Leann, we would like to open it up for questions please….

# # #