Molson Coors Brewing Company
2015 First Quarter Earnings Conference Call
May 7, 2015


Speakers:
1) Mark Hunter, 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 2015 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 Mark Hunter, President and CEO of Molson Coors.

[Mark Hunter:]
Thank you Ginger. Hello and welcome everybody to the Molson Coors earnings call....
Many 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, 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.

As you know, a few months ago, we announced Tom’s plan to retire at the end of June.  While we are well into the search, we do not anticipate that we will have his successor in place by the end of next month.  As a result, the MillerCoors board has asked our own Gavin Hattersley to step in on an interim basis to lead the MillerCoors team while we complete the search for Tom’s replacement.  Gavin is an outstanding and trusted leader with ideal qualifications for the role. He has extensive beer industry knowledge and experience in the U.S. and on the global stage, along with his unique experience of having held top leadership positions with both parent companies and MillerCoors, make him the right choice to take the business forward with integrity and a strong sense of purpose.  Equally important, Gavin is not leaving Molson Coors, as he will also continue in his CFO role here, as well.  With that, let’s talk about our quarterly performance

Our results for the 1st quarter reflect continued volume pressure in our largest markets and, as expected, a significant impact from foreign currency movements, a higher tax rate, and terminations of business contracts, all of which we discussed on our last earnings call.  Despite this backdrop, we remain absolutely resolute in our focus on building our brand strength, achieving positive pricing, transforming our portfolio to the above premium segment, improving commercial execution, and embedding Profit After Capital Charge throughout our organization. 

Our 1st quarter performance headlines are as follows:

  • Our net sales per hectoliterincreased 1.8% in constant currency, driven by strong global pricing and revenue management. 
  • Constant currency net sales decreased 3.0% due to lower volume in Europe and Canada.  And by adding in the additional effect of foreign currency, reported net sales declined 14.2%.   
  • We grew Coors Light volume 0.6% globally, driven by double-digit growth outside the U.S. and Canada.
  • Our global strategic craft portfolio grew volume at a mid-single-digit rate in the quarter.
  • Worldwide volume declined 3.5%, driven by Europe, Canada and the U.S.
  • Underlying pretax income on a constant-currency basis increased 0.6%, driven by positive net pricing, along with results of cost savings initiatives.  The underlying performance of the business was stronger than this result indicates, as we cycled a particularly strong quarter last year, when pretax income nearly doubled.
  • Including the effect of unfavorable currency, underlying pretax earnings declined 4.2% on a reported basis.
  • Underlying EBITDA in the quarter was $228.6 million, a 9.0% decrease from a year ago, partially due to foreign currency movements. 
  • Underlying after-tax income decreased 15.8%, with nearly all of this driven by unfavorable foreign currency and a higher tax rate that was cycling a large discrete tax benefit a year ago. 
  • Our board approved a double-digit percentage increase in our quarterly dividend and a new stock repurchase program in the 1st quarter.
  • We began to implement this new buy-back program, with $50 million of cash used early in the 2nd quarter for Class B common stock repurchases.
  • We also completed the Mount Shivalik Breweries acquisition last month in India.  This bolt-on acquisition gives us strong leadership positions in 3 states in India, one of the fastest-growing beer markets in the world.  It also adds the strong regional Thunderbolt brand to our portfolio and gives us a platform to expand our International brands in these states.

In regional highlights:
U.S. underlying earnings increased 5% due to higher pricing, positive sales mix and strong cost control.  Volume was lower in a weak first quarter for the U.S. beer industry.  We continued to grow our largest above premium brands while also making strides toward restoring growth to our premium light brands.  Coors Light declined but improved its trend versus last year, Miller Lite again grew its share of the premium light segment, and Coors Banquet continued to grow volume and share.  In above premium, Blue Moon grew at a  mid-single-digit rate in the quarter, while Leinenkugel’s increased at a high-single digit rate, and Redd’s and Smith & Forge Cider achieved strong double-digit growth.

In Canada, underlying earnings declined 12.5%, driven almost entirely by unfavorable foreign currency and the impact of terminating our Modelo joint venture a year ago.  Canada sales to retail, or STRs, declined 3.7%, with nearly a third of this decline due to the loss of the Modelo brands.  In core brands, the Coors Light sales trend improved versus last year, benefiting from more retail programming and new advertising.  The combined Coors brand family grew Canada market share, partially due to the addition of Coors Altitude.  In above premium, Coors Banquet delivered strong volume and share growth in the 1st quarter, as did Mad Jack Apple Lager, Molson Canadian Cider, and we delivered mid-single-digit growth from our Creemore and Granville Island craft brands. 

Our Europe business faced weak consumer demand in some of our higher revenue and profit markets and an industry volume mix shift to the economy segment, and we deliberately chose to pursue value ahead of volume.  Our first quarter results reflect positive pricing in most of our Europe markets, but also lower volume and negative sales mix.  These factors, along with the loss of the Modelo brands in the U.K. in 2015, contributed to lower volume and market share in Europe in the 1st quarter.  Nonetheless, we maintained our focus on building our core brands and above premium portfolio, including crafts, as well as revenue management and price discipline across the region.  Our craft and above-premium brands performed well, with Coors Light, Doom Bar, and Staropramen outside the Czech Republic growing strongly. 

Our International business delivered double-digit growth in volume in the first quarter with continued momentum for Coors Light in Latin America and strong double-digit volume growth in India.  Due to unfavorable foreign currency movements and increased marketing investments, our loss for the quarter increased by $2.4 million.

Now, I'll turn it over to Gavin to give additional 1st quarter financial highlights and perspective on the rest of 2015.  Gavin...

[Gavin Hattersley]
...Thank you, Mark, and hello everybody....
In 1st quarter financial highlights:    

Underlying free cash flow for the 1st quarter of 2015 totaled a cash use of $162.2 million. This represented $97.6 million more cash use versus a year ago and was driven by lower net income and a decreased benefit from working capital timing, including higher cash paid for taxes.  Our underlying free cash flow result in the 1st quarter excludes a $227.1 million discretionary contribution to our U.K. pension plan earlier this year.  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 free cash flow included the following factors:

  • $202.6 million of negative operating cash flow, and…
  • $221.6 million of net add-backs for the discretionary U.K. pension contribution, minus the cash impact of special items.

Investing cash outflows included:

  • $73.7 million of capital spending.

Our underlying free cash flow included $310.4 million of cash distributions and $417.9 million of cash invested in MillerCoors.  A detailed reconciliation of our 1st quarter underlying free cash flow is available in our earnings release distributed this morning.

Total debt at the end of the 1st quarter was $3.251 billion, and cash and cash equivalents totaled $317.6 million, resulting in net debt of $2.934 billion, which is $521.4 million lower than 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.

Looking forward to the balance of 2015:

  • We are lowering our full-year outlook for capital spending to approximately $300 million, down from $330 million provided on our last earnings call. This improvement is driven primarily by continued weakness of various currencies versus the U.S. dollar, coupled with value engineering of some planned capital projects after running them through our PACC model.  

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

  • Our annual target for Underlying Free Cash Flow is $550 million, plus or minus 10%, at April 30 foreign currency rates.
  • We expect cash contributions to our defined benefit pension plans to be in the range of $300 to $320 million in 2015, including our 42% of MillerCoors contributions.    
  • We anticipate 2015 pension expense of approximately $27 million.    
  • We expect our 2015 MG&A expense in Corporate to be approximately $110 million,
  • Our consolidated net interest expense to be approximately $120 million, which is based on FX rates and hedging positions at the end of the first quarter,  and  
  • Our 2015 underlying effective tax rate to be in the range of 18 to 22%.  After this year, we expect our underlying tax rate to be near the low end of our long-term range of 20% to 24% for the next few years, assuming no further changes in tax laws, settlement of tax audits, or adjustments to our uncertain tax positions.  

In 2015 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 and…
  • International business COGS to decrease at a low-double-digit rate per HL.
  • In local currency, we still expect Canada COGS/HL to increase at a mid-single-digit rateand…
  • Europe todecrease at a mid-single-digit rate.

And finally, regarding the profit and cash headwind from foreign currency that we expect this year: If we were to apply foreign exchange rates at the end of April to our results for the last three quarters of 2014, it would reduce underlying pretax earnings for that period by more than $50 million -- and the impact on cash would have been even larger.  If we add the $5.1 million of FX impact in the first quarter this year, as set out in our earnings release, the full year FX estimated impact would be more than $55 million, or approximately 6-7%, on consolidated results.   We have taken steps in recent years to mitigate some of our foreign currency exposures via debt structures and hedging.

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

 [Mark Hunter:]
...  Thanks, Gavin.

As we discussed on our last earnings call, we continue to expect our 2015 results to be challenged by negative foreign currency, the termination of three major business contracts, and a higher effective tax rate.  Additionally, our Canada results will be affected by the new framework agreement that was announced by the Ontario government last month, although we expect much of the impact to be phased in over the next 4 years. We will continue to work with the government and our fellow Beer Store owners to implement the recommended changes.

Despite these challenges, we will continue to drive our strategy of building a stronger brand portfolio, strengthening our core brand positions, and increasing our share in above premium, craft and cider. We will have 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, and we will selectively build our international brands and strengthen our world-class commercial capability.  We will do this while ensuring that we have a fit-for-purpose cost base and a deeply embedded, disciplined, and PACC-led capital allocation process approach. Besides including PACC performance measures in our long-term incentive plan this year, we have been rolling out interactive training with each of our country teams to embed our value-driving PACC model from top to bottom in the organization.

Regionally:
In the U.S., we intend to lead the beer industry with innovations like Redd’s and Smith & Forge Cider – with the latest extensions being Redd’s Green Apple and Wicked Mango – and we will introduce drinkers to new styles and flavors in our craft portfolio with offerings like Blue Moon White IPA and Leinenkugel’s Grapefruit Shandy. We’ll continue to bolster Miller Lite with a new national advertising campaign, and we’ll execute a total refresh of Coors Light that will extend across all consumer touch points, starting with new packaging that emphasizes its ‘Born in the Rockies’ heritage. The brand also debuted new national television advertising in March designed to emphasize Coors Light’s unique refreshment and will launch additional new television advertising in June.  Last month, we also re-introduced the summer line extension, Coors Light Citrus Radler, with a new name and packaging.  Finally, we will 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 our American light lagers. 

In Canada, we continue to invest in our core brands and above premium, including craft, imports and flavored malt beverages.  In early March, Molson Canadian introduced the next chapter of its Beer Fridge campaign, and in April launched an NHL promotion nationally. We also introduced a new advertising campaign behind Coors Light in early March.  In above premium, consumer demand remains strong for Coors Banquet, Molson Canadian Cider, and Mad Jack Apple Lager, which will be rolled out nationally in the 2nd quarter, after a successful launch in Ontario & Quebec in 2014.  The national launch of Coors Altitude is proceeding well, as is our expanded partnership for the marketing and distribution of the Heineken, Dos Equis, Sol and Strongbow brands.  We are also launching Rickard’s Radler as a new seasonal offering for summer. 

In Europe, although some of our largest markets continue to be weak this year, our segment-leading core brands will receive incremental investments in local currency in the remainder of 2015.  We also intend to continue the strong momentum of our above premium, craft and cider portfolio, including expanding Carling British Cider to more European markets, introducing new Sharps brands in the U.K., and adding the Modelo brands to our international premium brand portfolio in Central Europe this year.  We are also taking important steps in the first half of this year to ensure that our U.K. supply chain is fit for purpose, including entering into an agreement in January to sell our Burton malting operations in the 3rd quarter and in March purchasing the brewing and kegging operation of Thomas Hardy’s Burtonwood brewery in the north of England, which will give us greater capability and flexibility to grow our U.K. craft business further.  Meanwhile, following the termination of our U.K. contract-brewing arrangement with Heineken at the end of April, we are closing our Alton brewery this month in order to ensure that our supply chain capacity is aligned with the needs of the business. 

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.  Our recent India acquisition is in line with our strategy to grow our regional brand portfolio and adds two breweries in two large Indian states and more than doubles our brewing capacity there. This acquisition gives us a powerful combination of industry-leading brewing expertise, brand reach and operational efficiency that will allow us to grow our brands even further in India, one of the fastest-growing beer markets globally.

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

  • In the U.S. through April 25, STRs decreasedat a low-single digit rate.
  • In Canada through April 30, STRswere downlow-double digits.  Excluding the Miller brands last year, our Canada STRs were down high-single digits in part due to a year-over-year shift in the timing of Easter. 
  • In Europe through April 30, sales volume was downmid-single digits, partially driven by the loss of the Modelo brands in the U.K. this year and the timing of Easter. 
  • Our International sales volume, including royalty volume, increased at a double-digit rate in April.
  • As always, 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, Molson Coors results for the 1st quarter reflect a number of headwinds, but we remain resolute in our focus on building brand strength, achieving positive pricing, transforming our portfolio to the above premium segment, improving commercial execution, embedding Profit After Capital Charge in our organization and delivering total returns to our shareholders. 

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.

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 12, 2015.
  • Second, we will hold our Annual Meeting of Stockholders on Wednesday, June 3, 2015, at our brewery in Montreal, and
  • Third, we will host our annual New York Investor/Analyst Day at the New York Stock Exchange on the afternoon of Wednesday, June 17, 2015.

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