Molson Coors Brewing Company
2013 4th Quarter Earnings Conference Call
February 13, 2014

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

Welcome to the Molson Coors Brewing Company 4th 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 – – 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, Rob. 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 4th quarter 2013 results for Molson Coors Brewing Company, along with some perspective on 2014.

In the 4th quarter, Molson Coors increased underlying pretax earnings 6.5%, expanded pretax margins and generated substantial underlying EBITDA and free cash flow.  Underlying after-tax income declined less than 1% due to a higher tax rate in the quarter.  For full year 2013, we grew underlying after-tax earnings and EBITDA and exceeded our targets for cost savings, cash generation and debt reduction.  Our focus on building our core brands, growing the above-premium segment of our portfolio, and driving sales revenue from innovation was instrumental in delivering these results.   

Coors Light grew more than 30% last year in the U.K., where it is now our second-biggest brand.  In Mexico and Latin American markets, it grew even faster.  Coors Light also gained segment share in the U.S., but underperformed in Canada, an issue on which we will focus in 2014.  Miller Lite remained a challenge in the U.S.  

Carling, the U.K.’s number-one brand, reaffirmed its leading position by growing both volume and share in a soft U.K. market. A re-invigorated Molson Canadian brand increased both volume and share in Canada in 2013.  Meanwhile, Coors Banquet achieved its seventh year of growth in the U.S. and has sold well ahead of expectations across Canada following its launch there in the 3rd quarter. 

Staropramen grew share in its home Czech market and increased volume by strong double digits in the rest of our European business. Our brands grew market share in Bulgaria and achieved record shares in Croatia and Czech Republic, and in the second half of the year, we returned Romania to share growth as well.  The loss of share in Serbia is being addressed by a new management team, and the loss in Hungary was planned as we gave up low-margin private label production.

We grew our above-premium brands at a double-digit rate globally, contributing to mix-related NSR/HL growth of 1.4% in the U.S. and 1% in Europe on a comparable basis in local currency. We continue to learn and progress in the craft sector through 10th and Blake in the U.S. and Six Pints in Canada.  As a result, we accounted for 29% of 2013 craft beer growth in the U.S., according to Nielsen, and we saw our Six Pints volume in Canada increase nearly 13%. 

Finally, our innovation pipeline had its best year so far and delivered nearly 6% of global net sales. Our focus on innovation remains a top priority as we extend the reach of our portfolio to bring in new drinkers to our brands.

In summary, our overall brand performance was strong, and strategically we are gaining momentum in the areas that will have the most impact on our financial results as markets begin to improve.

Regionally, we grew U.S. 2013 pretax earnings on the strength of positive net pricing, strong sales mix and significant cost reductions. Although overall industry volume declined, we held share in the premium light segment according to Nielsen, and we led the industry in above-premium share growth.  Our above-premium portfolio now represents nearly 14% of our total net revenue, up more than 3 percentage points from 2012.

In Canada, we gained share in the value segment, which has been a source of share loss for some years, and we delivered strong cash and cost-saving results, but our overall performance was poor. We are reducing our cost base in the same way that we did in the U.K., and, as a result, we will be increasing our capital spend in Canada by approximately 40 million Canadian Dollars this year, with resulting benefits beginning to accrue in 2015.  As in the U.K., we expect to re-invest most of the benefits back into our brands.

In Europe, as well as the brand performances already mentioned, we also delivered growth in net pricing, earnings and cash flow.  Underlying income grew at double-digit rates for the 4th quarter and the full year. As in North America, our craft business is performing well and posted record volumes, with Doom Bar becoming the biggest selling cask ale in the U.K. on-premise channel.

Our International business rationalized its cost base and migrated its sales mix toward more profitable business in 2013.  As a result, we reduced the underlying International loss by nearly half versus 2012 and are on track to our goal of profitability by 2016. Internationally, the portfolio is led by Coors Light but has been reinforced by Staropramen and increasingly Blue Moon, with Carling being used tactically.

Overall in 2013, our U.S. business improved results, especially late in the year, Europe performed well in a difficult environment, Canada struggled, and International made significant progress toward its goal of profitability by 2016.

Now, I'll turn it over to Gavin to give 4th quarter financial highlights and a perspective on 2014.   Gavin...

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

In 4th quarter financial highlights:    

  • Molson Coors 4th quarter underlying pretax earnings increased 6.5% to $163.9 million, driven by higher earnings in the U.S. and Europe, along with reduced underlying interest expense. These positive factors were partially offset by lower performance in Canada and International.  Underlying after-tax income decreased 0.2% to $125.8 million, or 68 cents per share, driven by a higher underlying tax rate this year.  Our 4th quarter tax rate of 23% was higher than expected due to an out of period adjustment of $12 million increase in uncertain tax positions related to prior years.  This adjustment increased our 4th quarter underlying tax rate by approximately 7 percentage points. 
  • Foreign exchange movements had no significant net impact on pretax results in the quarter. 
  • Worldwide beer volume for Molson Coors increased 0.1% due to higher volume in Canada and Europe, offset by lower volume in the U.S. and International. 
  • In the 4th quarter, our US GAAP after-tax income more than doubled to $131.2 million due to a lower U.S. GAAP tax rate, higher non-core gains, and higher pretax earnings in the U.S. and Europe.  These positive factors were partially offset by the impairment of our Miller brands distribution contract in Canada and one-time Tradeteam contract termination fees in Europe.

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 increased 0.3% from the prior year, as higher volume and positive pricing and mix were largely offset by unfavorable foreign currency movements.  On a per-hectoliter basis, net sales increased 0.1%, driven by pricing growth across all regions and improved mix in the U.S.    
  • Underlying Cost of Goods Sold per hectoliter increased 0.4% due to higher COGS per hectoliter in the U.S. and International.
  • Total company gross margin was 37.4%, 10 basis points lower than a year ago, primarily due to gross margin contraction in the U.S. and International, partially offset by gross margin expansion in Europe and Canada.
  • Underlying Marketing, General and Administrative expenses increased 0.4%, driven by increases in Canada and Europe that were partially offset by declines in the U.S. 
  • Underlying operating margin was 10.9%, down 10 basis points from a year ago, due to margin contraction in Canada and International, which more than offset improvement in the U.S. 
  • For the full year, we increased proportionally consolidated operating income 2.3% to $1.03 billion on an underlying basis, driven by income growth in Europe and the U.S., and lower losses in International.
  • Our underlying EBITDA -- or earnings before interest, taxes, depreciation and amortization -- was $313.8 million in the 4th quarter, 2.4% higher than a year ago.  For the full year, underlying EBITDA grew 5.1% to $1.47 billion.

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 4th quarter underlying results exclude some special and other non-core gains, losses and expenses that net to a $18.6 million pretax charge.  These exclusions from our U.S. GAAP results primarily relate to the termination of our Tradeteam distribution joint venture in the U.K. and an impairment of our Miller brands distribution contract in Canada, along with restructuring-related costs in Canada and Europe.  These charges were partially offset by gains on the sale of non-core assets.  Special and other non-core items are described in detail in this morning’s earnings release.

In the area of we exceeded our 2013 goals by achieving more than $70 million of cost reductions across our company, versus our goal of $40 to $60 million for at least a five-year period beginning last year. These cost reductions came primarily from the U.K., but we expect cost savings over the next few years to accelerate in Canada.  This result excludes MillerCoors, which provided another $43 million of savings in 2013 at our 42% ownership rate. 

In the 4th quarter, our Board of Directors approved a resolution to change the company’s fiscal year from a 52 or 53 week fiscal year to a calendar year. As such, our 2013 fiscal year ended on December 31, 2013, rather than on December 28.  This change aligns our fiscal year and interim reporting periods with our Central Europe business as well as MillerCoors, both of which already use a regular Gregorian reporting calendar. The three additional days in fiscal year 2013 did not have a material impact on our consolidated financial results.

We also decided to discontinue sales curve accounting for our marketing and sales expense in our Canada, Europe, and International businesses, beginning in 2014.  This change will have no effect on the total amount of annual marketing and sales spending reported, but it will affect the quarterly phasing of this spending.  This change in accounting policy will be presented retrospectively, so we will reclassify prior periods to reflect the new treatment.  For 2013, the elimination of sales curve accounting has the effect of increasing MG&A expense by approximately $9 million and $15 million for the 1st and 2nd quarters, respectively, and decreasing these expenses in the 3rd and 4th quarters by approximately $17 million and $7 million, respectively.   In the next few weeks, we plan to provide you the specific 2013 quarterly impacts for each of our business units and all the way down to the EPS level for consolidated results.  Note that MillerCoors has not used sales curve accounting, so its historical results will not be affected by this change.

We were also very pleased thatour focus on cash and profit after capital change resulted in us exceeding our underlying free cash flow goal for 2013 by generating a total of $892.0 million of free cash, an increase of $27.3 million or 3.2%, versus 2012. This result exceeded our original guidance for 2013 by almost $200 million and was primarily due to strong working capital management, particularly in Canada and Europe.  Underlying free cash flow in 2013 was made up of the following factors:

  • $1.17 billion of operating cash flow, which includes $539 million from MillerCoors, plus…
  • $58 million of net add-backs, mainly cash paid for restructuring activities.

Investing cash outflows were:

  • $294 million of capital spending and…
  • $41 million of cash invested in MillerCoors.
  • Total debt at the end of 2013 was $3.8 billion, and cash and cash equivalents totaled $442 million, resulting in net debt of $3.36 billion, approximately $127 million lower than three months earlier – and $687 million lower than a year earlier.
  • For the full year, the funded status of our defined-benefit pension plans improved by $448 million -- including our portion of the MillerCoors plans -- and we paid down net out-of-the-money cross-currency swap positions totaling $113.9 million.  In January, we also paid off the remaining outstanding cross-currency swaps for $65.2 million.
  • Part of the credit for our strong cash and debt performance in 2013 goes to efforts to implement our PACC model.  We will continue to drive organizational focus on cash generation, raising returns on capital, and growing total shareholder return.  We are still early in the implementation process for PACC, but we grew TSR for the company in 2013 at a faster rate than other global beer companies and the S&P 500. 
  • Also in recognition of the substantial progress we have made in paying down debt, our board has authorized an increase in our quarterly dividend from 32 cents per share to 37 cents per share, beginning in the 1st quarter.  This 16% increase results in an annual dividend amount of $1.48 per share, which represents a payout ratio of 18.4% of 2013 underlying EBITDA. 
  • Equally important, I am pleased to announce that our company is adopting for the first time a dividend payout ratio target of 18 to 22% of prior-year underlying EBITDAWe anticipate that linking the dividend payout to our underlying EBITDA – which has been strong and steady for many years – will keep our dividend in a competitive range for global beer companies for the foreseeable future. 

Looking forward to 2014:

  • Our annual target for Underlying Free Cash Flow is $700 million, plus or minus 10%.  This goal is $192 million lower than our 2013 result because of two primary factors:
    1. Higher capital spending, driven by efficiency initiatives planned for our Canada supply chain, and…
    2. We will not be able to replicate the tremendous reduction in working capital we achieved in 2013. We do plan to reduce working capital over time -- but not at the same rate as last year.
  • Currently, we expect cash contributions to our defined benefit pension plans to be in the range of $60 to $90 million in 2014, down from $156 million last year.  Meanwhile, we anticipate approximately $35 million of pension expense in 2014, down from $52 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, improved 8 percentage points from a year ago to 92% at the end of 2013.  This improvement was driven by contributions globally, strong plan asset returns in Canada and the U.K., and moderate increases in long-term interest rates in 2013.
  • Our 2014 capital spending outlook is approximately $330 million, up from $297 million last year.
  • We expect our 2014 MG&A expense in Corporate to be approximately $110 million.
  • Our consolidated net interest expense outlook for 2014 is approximately $145 million.
  • We expect our 2014 underlying effective tax rate to be in the range of 16 to 20%, assuming no further changes in tax laws, settlement of tax audits, or adjustments to our uncertain tax positions. Our 2013 underlying rate was 15% due to one-time benefits of tax law changes in Canada.  We continue to expect our long-term tax rateto be in a range of 20 to 24%, but we anticipate that it will take a few years to move to that range.

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 2014.
  • In Canada, we expect our 2014 COGS to increase at a low-single-digit rate per hectoliter in local currency.
  • In Europe, we anticipate a low-single-digit decrease in COGS per hectoliter this year in local currency.
  • Our International business anticipates COGS per hectoliter to increase at a mid-single-digit rate for the full year.
  • 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 Peter for outlook, wrap up and the Q&A.  Peter....

 [Peter Swinburn:]
...  Thanks, Gavin.

So, regionally:
In the U.S., we are addressing the weak market by migrating our portfolio toward the high-margin and fast-growing above-premium segment on the strength of Redd’s, Leinenkugel’s, and Blue Moon. We will also introduce Miller Fortune and Smith and Forge to augment the portfolio.  In premium lights, the reintroduction of the original Miller Lite can has exceeded our expectations and will be extended through September. Coors Light will be introducing new packaging designs and a Summer Brew line extension debuting on Memorial Day. 

Our profit performance in Canada this year will be impacted by our decision to accelerate the termination of the joint venture that controls the Modelo brands in Canada. These brands provided approximately $18 million (US dollars) of pretax profit for our Canada business in 2013, and they will only provide only two months of income in 2014.  We will, however, be paid CAD $70 million of compensation by Anheuser-Busch InBev when it assumes control of these brands on February 28, 2014.  Note that this cash inflow will be excluded from our underlying free cash flow for 2014.   

To become a more competitive business, the Canada team in 2014 will continue the work it started last year to transform and streamline its cost base.  We will introduce new advertising and increased activity to improve the performance of Coors Light, along with rolling out our proprietary vented can for this brand and Molson Canadian.  Molson Canadian will also benefit from strong programming led by the Winter Olympics. We will build on the successful launch of Coors Banquet and will accelerate our craft performance through Creemore and Granville Island. 

In Europe, total industry volume declined more than 3% in 2013, but in the markets where we operate, we grew share by nearly a half point.  Some economies in the region are forecast to improve slightly driven by export trends, which will take time to translate into consumer spending, but there will eventually be a benefit for our business.  We also expect the continued growth of the value segment and lower-margin channels and package configurations to be headwinds in 2014.  In this challenging market, our strategies for core brands, above premium and innovation are driving solid share in most of the region.  For 2014, we plan to roll out innovative new packaging and above-premium beer mixes and other products to new markets in Europe.

Our International business in 2014 will increase its focus on driving top-line growth through Coors Light, Carling, Staropramen and Blue Moon, along with other brands unique to the International markets. This, together with lower MG&A expense per hectoliter, is expected to deliver a profitable business as promised by 2016.

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

  • In the U.S. for January, STRs decreased low-single digits.
  • For our other businesses in January on a comparable basis:
  • our sales to retail in Canada decreased at a low-single-digit rate, 
  • our sales volume in Europe increased at a mid-single-digit rate, and…
  • our International sales volume, including royalty volume, increased at a low-single-digit rate.
  • 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.

To summarize our discussion today, in 2013:

  • We grew underlying after-tax income, EBITDA and earnings per share. 
  • We implemented our PACC model through our company to drive focus on the key value drivers in this business.
  • We drove working capital performance company-wide and exceeded our 2013 free cash flow goal by nearly $200 million.
  • We over-delivered against our cost savings  and
  • We reduced our net debt by nearly $700 million.
  • The funded status of our pension plans improved by $448 million (including our portion of MillerCoors), and we paid down $114 million of cross-currency net liabilities.
  • Particular challenges included Miller Lite in the U.S. and Coors Light in Canada, along with commercial performance in Serbia.
  • Nonetheless, our focus on building our core brands, growing the above-premium segment of our portfolio, and driving sales revenue from innovation delivered significantly improved results in the year.
  • We are gaining momentum in the areas that will have the most impact on our financial results as markets begin to improve.

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

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