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Conference Call

Molson Coors Brewing Company
2015 Third Quarter Earnings Conference Call
November 5, 2015

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

            Good morning, and welcome to the Molson Coors Brewing Company 3rd quarter 2015 Earnings Conference Call.  Now, I will turn the call over to Dave Dunnewald, Global Vice President of investor relations for Molson Coors.

[Dave Dunnewald:]

Thank you Leanne and good morning to everyone on our earnings conference call today.  Before we begin, I will paraphrase the company’s Safe Harbor language.  Some of our discussion today may include "forward-looking statements."  Actual results could differ materially from what we project 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.  Our 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-US GAAP measures that may be discussed during the call and from time to time by the Company’s executives in discussing our 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 US GAAP results. Also, unless otherwise indicated, all financial results the company discusses are versus the comparable prior-year period and in US Dollars. 

As you know, Anheuser-Busch InBev announced yesterday a further extension of its Possible Offer for all of the outstanding share capital of SABMiller, and there has been some related press speculation that mentions Molson Coors.  As a matter of policy, Molson Coors does not comment on market rumors, and we will not be discussing the AB InBev / SABMiller situation on our call this morning, including during our Q&A session at the end.  We will devote our time this morning to our 3rd quarter financial results and outlook for the balance of 2015.

Now, I would like to turn the call over to Mark Hunter, President and CEO of Molson Coors….

[Mark Hunter:]
Thanks, Dave. Hello and welcome everybody to the Molson Coors earnings call....
We appreciate your joining us today.

With me on the call this morning
•   Gavin Hattersley, CFO of Molson Coors and CEO of MillerCoors,
•   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.

In the 3rd quarter, our worldwide volume increased 0.7%, driven by strong growth in Europe and International.  Underlying earnings were lower due to unfavorable foreign currency, increased brand investments, and the termination of our Miller brands agreement in Canada and the Modelo brands and Heineken brewing contracts in the UK earlier this year.  We increased gross margins on a consolidated basis, driven by the US and Europe.  We invested more in our brands in all of our businesses except International, where lower marketing was primarily due to the substantial restructuring of our China business this year.

In the quarter, we continued to transform our portfolio toward above-premium, craft and cider; we expanded the depth and reach of our international brands in fast-growing markets; and we increased our commercial capability.  We also continued to drive meaningful cash generation and disciplined cash and capital allocation. 

More Specifically:

  • In the US, MillerCoors achieved its best quarterly performance in Premium Lights in three years, as both Coors Light and Miller Lite built momentum and grew share of the segment.  We continued to roll out Coors Light’s new visual identity, and Miller Lite launched its Steinie bottle and grew quarterly volume for the second time in the past year.
  • Outside of the US and Canada, Coors Light grew strongly -- and we will soon launch our largest global brand into the highly profitable Colombian market.
  • MillerCoors announced the acquisition of a majority interest in the Saint Archer Brewing Company, a San Diego-based brewer of award-winning craft ales.  This acquisition will further strengthen our global craft portfolio, which grew nearly 10% in the 3rd quarter.
  • The integration of the Rekorderlig cider business into our UK and Ireland portfolio has gone well, and our global cider portfolio grew at a low-single-digit rate in the quarter.
  • We continued to restructure our business to ensure we are fit for the future, including the restructuring of our China business, the planned closure of the MillerCoors Eden Brewery next year (following the closure of our Alton, UK, brewery in May this year) and importantly we have reached an agreement to sell our Vancouver Brewery, which will allow us to build a more efficient and flexible brewery in British Columbia.

Other 3rd quarter performance headlines are as follows:

  • Worldwide volume increased 0.7%, driven by Europe and International – and despite the impact of the termination of our Miller brands agreement in Canada and the Modelo brands contract in the UK this year.   
  • Coors Light volume grew 1% globally, driven by nearly 20% volume growth outside the US and Canada.
  • Our net sales per hectoliter decreased 2.3% in constant currency, driven by mix changes within our Europe and International businesses, including the impact of terminating the Modelo brands and Heineken contract-brewing agreements in the UK.  We grew net pricing in the US, Canada and Europe in local currency.
  • Constant currency net sales increased 0.7% due to higher volume in Europe and International, along with positive net pricing in Canada and Europe.  By adding in the effect of foreign currency, reported net sales declined 12.9%.   
  • Underlying pretax income of $295.4 million was down 10.9% but decreased 1.7% on a constant currency basis, with the key drivers being increased brand investment and the well-documented contract terminations.
  • Underlying after-tax income decreased 4.3%, driven by unfavorable foreign currency, higher brand investments and terminated contracts.  These factors were partially offset by higher volume, positive net pricing, a lower tax rate, and results of cost savings initiatives. 
  • US GAAP net income from continuing operations increased $49.4 million from a year ago, due to lower brand impairment charges this year in Europe.  We incurred impairment charges of $275 million this quarter related to some of our Europe brands, including the Jelen brand, because of continued economic and competitive challenges and increased discount rates across the region.  We also have changed the accounting treatment of these brands from indefinite-lived to definite-lived, which we expect to increase amortization expense by approximately $15 million per year, based on current foreign exchange rates. 
  • Underlying EBITDA in the quarter was $420.2 million, a 10.4% decrease from a year ago, driven almost entirely by unfavorable foreign currency movements.  Year to date underlying EBITDA was $1.104 billion, down 7.7% from a year ago.
  • We continued to implement our four-year, $1 billion stock buy-back program, with $50 million of cash used in the 3rd quarter to repurchase more than 689,000 Class B common shares from July through early October.  Please note that in August, we committed another $50 million of cash to be used for stock repurchases during the 4th quarter under our accelerated share repurchase program.  

In terms of regional highlights:
US underlying pretax income decreased 7.5% due to lower volume, including a reduction in distributor inventories versus a year ago and continued softness in our economy portfolio, along with higher investments in brands and technology, as discussed on our last earnings call.  These factors were partially offset by positive net pricing and mix, supply chain cost savings, and lower brewing, packaging material and fuel costs.  One significant news item for MillerCoors, was the appointment of Gavin as CEO in September.  Gavin has quickly taken action across a number of areas to energize and focus the entire organization.  In brands, Coors Light and Miller Lite both grew share of segment and improved volume trends in the 3rd quarter versus the first half of this year.  Meanwhile, Miller Lite and Coors Banquet grew volume and overall market share. The US portfolio transformation toward the above-premium segment continued, with lead brands Blue Moon Belgian White, Leinenkugel’s and the Redd’s family each growing volume.  Through Tenth and Blake, the leading craft brewer in the US, MillerCoors expanded its growing craft portfolio with the acquisition of Saint Archer Brewing, which was completed in October.  We are excited about the growth opportunity offered by the Saint Archer brands, which represent a variety of styles that are complementary to the current Tenth and Blake portfolio – including some outstanding India Pale Ales.  The US team also announced the planned closure of its Eden, North Carolina, brewery.

In Canada, underlying pretax income decreased 5.4% in constant currency, primarily due to the negative impact of terminating our Miller brands agreement at the end of March this year.  The effect of lower volume in the quarter was partially offset by positive pricing and substantial cost savings.  Including the impact of unfavourable foreign currency, underlying earnings declined by 18.9%. Canada sales to retail, or STRs, declined 4.9%, primarily due to the termination of the Miller contract. Excluding the Miller brands, STRs declined 0.5%.  In core brands, Coors Light and Molson Canadian volumes declined in the quarter, but trends improved versus the 2nd quarter as we rolled out new advertising and commercial executions for Coors Light.  In above premium, Coors Banquet delivered strong volume and share growth in the 3rd quarter, as did Mad Jack Apple Lager, Molson Canadian Cider and Strongbow Cider, along with our Granville Island and Creemore craft brands.   

In Europe, underlying pretax income increased 7.1% in constant currency, driven by higher sales volume, positive pricing and lower costs, despite the loss of the Modelo and Heineken contracts in the UK this year and the release of a regulatory reserve last year.  Europe underlying pretax income decreased 6.7% in the quarter, due to the impact of unfavorable foreign currency.  Sales volume increased in 9 of 11 countries and for 8 of our 11 lead brands in the region.  Excluding the loss of the Modelo brands, the UK market would also have increased volume in the quarter.  Equally encouraging, the areas of Croatia, Bosnia and Serbia that were affected by severe flooding a year ago continued to recover.  In core brands, Carling trends improved from earlier in the year, and Ozujsko, Staropramen, Bergenbier and Borsodi grew volume and segment share in their core markets.  Our craft and above premium portfolio continued to perform well, with Coors Light, Doom Bar, and Cobra all achieving strong growth in the quarter, as did Staropramen outside of Czech.  

Our International business again delivered double-digit volume growth in the third quarter, driven by triple-digit volume growth in India and double-digit growth for Coors Light in Latin America.  India growth was due to strong performance of our existing India business and our acquisition of Mount Shivalik Breweries earlier this year.  Due to higher volume in India and Latin America along with lower MG&A, we ended the quarter with a $600 thousand improvement in International’s underlying pretax loss versus a year ago, or a $1.8 million improvement excluding the impact of foreign currency movements.

Now, I'll turn it over to Gavin to give additional 3rd quarter financial highlights and perspective on the rest of 2015.  Gavin...

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

In financial highlights:    

Underlying free cash flow for the first three quarters of 2015 totaled $476.8 million, which represents a $289.3 million decrease versus the same period last year.  This decrease was primarily driven by lower underlying after-tax income, negative foreign currency, and less benefit from working capital changes, including higher cash paid for taxes. 

Our year to date free cash flow included the following factors:

  • $461.5 million of operating cash flow, and…
  • $279.9 million of net add-backs for our discretionary UK pension contribution in January, settlement of interest rate swaps, the cash impact of special items, and MillerCoors investments in businesses.

Investing cash outflows included:

  • $208.3 million of capital spending.

Our underlying free cash flow included $1.088 billion of cash distributions from MillerCoors and $1.145 billion of cash invested in MillerCoors.  A detailed reconciliation of our underlying free cash flow is available in our earnings release distributed this morning.

Total debt at the end of the 3rd quarter was $3.002 billion, and cash and cash equivalents totaled $393.6 million, resulting in net debt of $2.609 billion, which is lower than a year ago, primarily driven by foreign currency movements and debt paydown.

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:

The following full-year forward guidance is unchanged from last quarter:

  • Although we are not changing our 2015 Underlying Free Cash Flow target of $550 million, plus or minus 10%, we currently expect our result for the year to be in the upper half of this range – that is, between $550 million and $605 million and…. 
  • We expect our 2015 MG&A expense in Corporate to be approximately $110 million.

We are revising the following full-year guidance:

  • First, we now expect capital spending to be approximately $275 million, down from $300 million previously, largely driven by foreign currency movements.
  • Second, we expect our consolidated net interest expense to be approximately $110 million, versus $120 million previously, driven by favorable foreign currency and interest rates.
  • Third, we now expect cash contributions to our defined benefit pension plans to be approximately $300 million in 2015, including our 42% of MillerCoors contributions, at today’s exchange rates.  Primarily due to foreign currency movements, this was revised from the previous range of $300 to $320 million
  • Fourth, we now anticipate 2015 pension expense of approximately $23 million, including our portion of MillerCoors, and…
  • Fifth, we now anticipate that our full-year 2015 underlying effective tax rate will be in the range of 14% to 16%, down from 18% to 22% previously, due to the favorable resolution of uncertain tax positions and other tax benefits.  After this year, we still 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 now expect our full-year cost savings to be near the upper endof the $40 to $60 million range that we have been targeting. 

By region, we continue to expect…

  • Europe, COGS per hectoliter to decrease at a low-single-digit rate this year in local currency and…
  • International business COGS to decrease at a low-double-digit rate per HL.
  • We now expect Canada COGS/HL in local currency to increase at a low-single-digit rate, down from annual guidance of mid-single digits last quarter, driven by lower brewery and distribution costs,and…
  • MillerCoors now expects 2015 cost of goods sold per hectoliter to be approximately in-linewith or slightly below the year before, versus previous guidance of in-line.  This change is driven by lower packaging, commodity, and fuel costs.      

And finally, regarding the profit and cash headwind from foreign currency that we expect this year: If we apply foreign exchange rates at the end of October to our results for the 4th quarter of 2014, it would reduce underlying pretax earnings for that period by approximately $10 million -- and the impact on cash would have been even larger.  By adding the FX impact on pretax results for the first three quarters of this year, we arrive at a full-year foreign currency impact of nearly $70 million versus our 2014 consolidated pretax results.  

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 addition to the foreign currency headwind that Gavin just mentioned, our results in the 4th quarter of this year will continue to be affected by the termination of major business contracts, which we anticipate will have a full-year 2015 profit impact of $40 million pretax.  Additionally, we plan to significantly step up our portfolio investments in the balance of this year, particularly in the US and Canada.  These investments will have a negative impact on 4th quarter bottom-line results, but we expect them to provide benefits long term, as we 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.    

In the US, we are driving three key priorities:  
Job Number One is to transform our portfolio and reignite volume growth.  We are targeting getting our volume trend to flat in 2018 and growth in 2019 for the first time since MillerCoors was formed.To do this, we have three focus areas:

  • First, take share and grow our American light lagers, Coors Light and Miller Lite. As part of Coors Light’s overhaul, we are rolling out a new contemporary visual identity across all packaging, we have a new lead ad agency on this brand, and we will have new national television advertising in the months ahead that emphasizes Coors Light’s Rocky Mountain Cold Refreshment heritage.
  • Second, continue to premiumise the portfolio and further develop Above Premium offerings that have the potential to build scale quickly and sustainably.  Examples include the successful launches of Blue Moon White IPA and Leinenkugel’s Grapefruit Shandy this year, as well as the acquisition of Saint Archer and its excellent craft brands. 
  • Third, we have begun the process of simplifying and clarifying our below-premium portfolio offering.

Job Number Two is to improve our commercial capability, including winning in the on-premise and increasing the relevance of our brands in this critical channel, where brands are built, and...

Job Number Three is to ensure that our cost base is competitive and fit for the future, including closing our Eden brewery next year.

Consistent with our priorities, we intend to invest significantly in our brands and information technology in the 4th quarter, including beginning a series of enterprise system ramp-ups, starting with the Shenandoah brewery.   We continue to expect our US underlying operating margins for full-year 2015 to be relatively flat versus prior year.

We will be disciplined, decisive and accountable – and remain laser-focused on growing our business in the United States and transforming MillerCoors’ portfolio.

In Canada, we continue to invest in our core brands and above premium, including craft, imports and flavored malt beverages.   In core brands, the new advertising campaign and increased focus on commercial execution on Coors Light are showing early positive signs, particularly in our highest-share regions.  The initial consumer response to our latest advertising creative for Molson Canadian has also been positive.  In the 4th quarter, we are again investing aggressively in these programs.  In above premium, our portfolio is benefiting from the strong performance of the Coors Banquet, Mad Jack Apple Lager, Rickard’s Radler and Molson Canadian Cider brands, along with the Dos Equis, Tecate, Sol and Strongbow import brands.  Belgian Moon is also performing well after three months in the Canada market.     

In Europe, the terminated Modelo and Heineken contracts in the UK will continue to present a headwind in the 4th quarter, as will the new amortization expense for the brands that we impaired this quarter and moved to definite lives.  In some Europe markets, we continue to see consumer migration to value brands and increased competitive pricing.  We will continue to invest in our core brand portfolio across Europe to ensure that these brands remain relevant and contemporary for our consumers.  In the 3rd quarter, the majority of our lead brands grew volume – including Ozujsko, Staropramen Bergenbier, and Borsodi.  In the balance of this year, our Europe team will be ramping up for the full repatriation of the Staropramen brand in the UK starting on January 1.  Additionally, we are implementing significant new initiatives to further improve the efficiency and effectiveness of our European operations and provide more resources to invest in driving top-line and bottom-line growth.  As the most recent example, we announced earlier this week that we have made a proposal and entered into a consultation process in the U.K. to close our Burton South Brewery and consolidate production within our recently modernized Burton North brewery by the end of September 2017.

Our International business is focused on attaining profitability in 2016 on a constant-currency basis and accelerating our overall growth and expansion in new and existing markets.  We will continue to drive rapid growth for Coors Light, develop Coors 1873 in Latin America, including introducing these brands to consumers in the high-potential Colombia market.  We will also continue to build on Staropramen’s momentum in greater Europe and augment rapid growth in our existing India business with growth from our newly acquired Mount Shivalik Breweries operation.

Finally, here are the most recent volume trends for each of our businesses early in the 4th quarter:

  • In the US through October 31, STRs decreasedat a low-single digit rate.
  • In Canada through October 31, STRswere downlow-double digits.  Excluding the Miller brands last year, our Canada STRs decreased at a high-single-digit rate
  • In Europe in October, sales volume wasdownmid-single digits, partially due tothe loss of theModelo brands in the UK this year. 
  • Our International sales volume, including royalty volume, increased at a double-digit rate in October.
  • 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.  

So, to summarize our discussion today, in the 3rd quarter, we grew our worldwide volume and constant-currency net sales, increased our gross margins, and invested significantly more in our brands.  Underlying earnings, however, were lower due to unfavorable foreign currency and the termination of contracts this year.    

There has been a great deal of news flow around the global beer category in recent weeks.  Notwithstanding this, our organization remains focused on our strategy of driving brand-led profit growth, meaningful cash generation and disciplined cash and capital allocation.  We remain resolute on utilizing PACC as our key business-decision framework, using our cash to reward investors and ensure a healthy balance sheet, reducing costs to provide front-end firepower, and making smart investments that deliver value-enhancing growth opportunities.  Our strategy is underpinned by highly engaged, passionate and inspired people with the ambition to be First Choice in the eyes of our consumers and customers.

Now, before we start the Q&A portion of the call: 

First, a few personal comments about Gavin as he transitions fully to the CEO role with MillerCoors….

[Impromptu personal comments about Gavin]

In order to help Gavin focus his full energy and attention on the MillerCoors business, I am pleased to announce that our Europe CFO, David Heede, will be stepping into the Global CFO role on an interim basis as we work to finalize the selection process for Gavin’s successor here at Molson Coors.  David has more than 30 years of leadership experience in many areas of our company and has played a central role in the very successful integration of our Central Europe and U.K. businesses.  David will have a strong Global Finance team supporting him, and I have every confidence that we will not miss a beat in this critical area while we complete the Global CFO search process.

Second, 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 the recorded web cast on our website.

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