Conference Call | Investors

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 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.

[Peter Swinburn:]

Thank you, _______. 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
Zahir Ibrahim, Molson Coors Controller, and
Dave Dunnewald, Molson Coors VP of Investor Relations

On the earnings call today, Gavin and I will take you through highlights of our 1st quarter 2013 results for Molson Coors Brewing Company, along with some perspective on the remainder of 2013.

Our first quarter numbers include the effect of the Central Europe acquisition that we completed in the middle of last year. Because of this addition, we recorded volume and sales increases but a post-tax income decline. The decline was driven by three months of Central Europe debt servicing costs being allocated against our lowest earnings quarter of the year in that region, along with foreign exchange losses and increased marketing spend across the rest of the business.

As reported by others, weather affected volumes in all our markets. Against this backdrop, we grew share in Europe, saw relatively flat share in the U.S., and lost share in Canada. Our innovation programs got off to a fast start and reflect a pipeline that is both full and exciting.

Regionally:

In the U.S., our portfolio transformation strategy delivered growth in domestic net revenue per hectoliter of 4% – the largest quarterly percentage increase in four years. Also, Nielsen results indicate that we gained share in each key segment in the first quarter, and we achieved initial success with the national brand launches of Redd’s Apple Ale and Third Shift Amber Lager. Coors Light grew market share, while Miller Lite declined. Overall, we again achieved market share growth in the Premium Light segment.
In Canada, the substantial excise tax increase in Quebec last November impacted volumes this quarter. Our business was disproportionately affected because of our high market share in Quebec. Late in the quarter, we relaunched the Aluminum Pint bottle and launched Molson Canadian Wheat.
In Europe, we grew overall market share, driven in particular by the strength of our brands in the U.K., Bulgaria, Croatia and the Czech Republic. Our core plus and premium portfolio performed strongly, with Staropramen, Coors Light, Doom Bar and Cobra all in growth in the 1st quarter. Carling, our largest brand in Europe, also grew in the quarter. The integration of our U.K. and Central Europe businesses is progressing well, and we are on track to deliver the synergies related to the Central Europe acquisition, as well as cost reductions associated with the U.K. restructuring. As a result, pro forma underlying results for Europe improved significantly.
In International, we achieved strong volume growth in Latin America and India, and we also introduced Staropramen Unfiltered in Sweden during the quarter.

With that as an overview, I'll turn it over to Gavin to give 1st quarter financial highlights and perspective on the balance of 2013. Gavin...

[Gavin Hattersley]

...Thank you, Peter, and hello everybody....

In 1st quarter financial highlights:

Molson Coors 1st quarter underlying after-tax earnings decreased 36% to $54.6 million, or $0.30 per share. This decline was driven by the inclusion of operating losses and 3 months of debt service this year from the Central Europe acquisition in the lowest sales and profit quarter of the year. Results a year ago did not include these impacts. This year, negative foreign exchange of $6 million pretax also contributed to lower results, along with weak economic conditions and challenging weather comparisons.
Worldwide beer volume for Molson Coors increased more than 20% due to the addition of Central Europe results.

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 10.4% in the 1st quarter, driven by the inclusion of the Central Europe business, along with growth in the U.S. Despite pricing growth across all markets, net sales on a per-hectoliter basis decreased 6.8% in the quarter due to the addition of Central Europe sales at a lower net-sales-per-hectoliter rate.
Cost of Goods Sold per hectoliter decreased 4.5% due to the addition of Central Europe, which has a lower cost structure than our other businesses, partially offset by higher COGS per hectoliter in Canada.
Total company gross margin was 36.4%, 150 basis points lower than a year ago, primarily due to higher COGS in Canada, including higher brand investments captured in this line.
Marketing, General and Administrative expenses increased 10.2% due to the addition of Central Europe results and investments for national brand launches by MillerCoors.
Underlying operating margin was 7.3%, down 170 basis points from a year ago, driven by higher Canada COGS, increased brand investments, and the addition of Central Europe MG&A, which were partially offset by positive pricing and cost savings.
Looking specifically at our new Europe segment on a pro-forma basis, which includes U.K. and Central Europe for this year and last year, this business improved financial performance substantially. Overall market share was higher, pricing increased across the region, and cost savings were achieved.

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 1st quarter underlying results exclude some special and other non-core gains, losses and expenses that net to a $21.9 million pretax charge. These exclusions from our U.S. GAAP results primarily relate to unrealized foreign exchange and fair value adjustments associated with the EUR 500 million convertible note issued as part of the Central Europe acquisition, along with restructuring charges in Europe and Canada. These special and other non-core items are described in detail in this morning’s earnings release.

Underlying free cash flow for the 1st quarter of 2013 totaled a use of $49 million. This was a $30 million lower cash use versus a year ago and was driven by a significant improvement in working capital, which was partially offset by higher capital spending, pension contributions, and cash income taxes – all of which were anticipated. 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 2013 free cash use was made up of the following factors:

$118 million of operating cash flow, which includes $117 million from MillerCoors, plus…
$10 million of net add-backs for Central Europe acquisition-related costs, and restructuring payments.

Investing cash outflows were:

$68 million of capital spending and…
$109 million of cash invested in MillerCoors.
Total debt at the end of the 1st quarter was $4.65 billion, and cash and cash equivalents totaled $512 million, resulting in net debt of $4.14 billion, approximately $100 million higher than three months earlier due to seasonal cash use.

Looking forward to 2013:

Our full-year forward guidance is unchanged from last quarter:

Underlying free cash flow, which is still $700 million, plus or minus 10%,
Defined-benefit pension expense and contributions, which are expected to be approximately $50 million of expense and $150 million of cash contributions, including 42% of MillerCoors,
Capital spending of about $330 million for the year,
CorporateMG&A expense of approximately $105 million, excluding foreign exchange movements,
Consolidated net interest expense of approximately $170 million,
Underlying effective tax rate ranges of 16-20% for full year and 20-24% on a longer-term basis, and
Cost of goods sold per hectoliter for each of our businesses, with the…

U.S. up at a low-single-digit rate,
Canada up mid-single-digits on a local currency basis,
Europe up low-single-digits in local currency, and
International up low-single-digits for the full year.

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

[Peter Swinburn:]

... Thanks, Gavin.

In the U.S., our share performance has improved across key segments, and our net-revenue-per-hectoliter growth is the strongest it’s been in four years. For the third straight year, we are increasing our investment in innovation, and we are focusing that investment on the biggest, highest-potential opportunities -- and the most profitable parts of the U.S. beer market. We will see new activity behind Coors Light and Miller Lite, and in craft we are planning new line extensions for Leinenkugel’s and Blue Moon for summer and fall. In Above Premium, we’re building on the initial success in launching Redd’s, Third Shift and Batch 19 nationally.

In Canada, we look forward to the hockey playoffs in key markets in the weeks ahead, along with full retail activation for the new season this fall. Going forward, we have a strong innovation program following the rollout of Molson Canadian Wheat. This will include the launch of Molson Canadian Cider in select markets this summer and Rickard’s Shandy. Along with our innovative Aluminum Pint bottle, we also expect our two lead brands in Canada, Coors Light and Molson Canadian, to benefit from further packaging innovation ahead of the summer selling season.

In Europe, Romania, Serbia and Hungary are on a firmer footing than just a few months ago with trade inventories at better levels and the elimination of some low-margin package configurations. Staropramen is growing strongly across our Central Europe markets, and Carling grew volume and share in the U.K.

The innovation agenda across Europe is accelerating with Carling Cider now in market in the U.K. and performing in-line with expectations. We are also broadening our Carling Zest portfolio with the launch of a ginger variant, and we are extending our beer mix offerings across Central Europe with the introduction of a cider mix and three new flavors. Additionally, we are launching Borsodi Super Dry in Hungary, Carling in Croatia, and Molson Canadian in Ireland.

Our International business continues to focus on growth and is investing ahead of the curve in high-opportunity emerging markets behind a solid portfolio of Coors Light, Carling and Staropramen. This business is on course and continued to drive growth in our key brands in the quarter. For the balance of 2013, we will expand into select markets and reduce our investment per hectoliter as we drive our international group to profitability over the medium term.

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

In the U.S. for the 4 weeks ended April 27, STRs were down mid-single digits.
In Canada, our sales to retail for the first 4 weeks of the quarter decreased at a mid-single-digit rate.
In Europe, our sales volume increased at a mid-single-digit rate in the first month of the quarter, with growth in all our key markets apart from the Czech Republic, which experienced unseasonably cold weather.
And in the first 4 weeks, our International sales volume, including royalty volume, increased at a double-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.

[pause]

To summarize our discussion today:

Our first quarter numbers include the effect of the Central Europe acquisition that we completed in the middle of last year, which increased volume and sales but decreased income because of the seasonality of the business. Foreign exchange, brand investments and weather also affected our business. Against this backdrop, we grew share in Europe, saw relatively flat share in the U.S., and lost share in Canada. Our innovation pipeline is full, and related programs are off to a fast start.

In the remainder of 2013, our focus will continue to be on the three pillars of our growth strategy, and particularly the first one, which is to grow profitably in our core businesses through brands and innovation. We also intend to pay down debt. In combination with disciplined cash use, our growth strategy is designed to drive long-term profit, cash flow and total return for our shareholders.

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

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