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Conference Call

Molson Coors Brewing Company
2015 Fourth Quarter Earnings Conference Call
February 11, 2016

1) Mark Hunter, President and Chief Executive Officer
2) David Heede, Chief Financial Officer (interim)

            Welcome to the Molson Coors Brewing Company 4th 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 – – 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, Shaun. 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:

  • David Heede, Interim Global CFO,
  • Gavin Hattersley, CEO of MillerCoors
  • Stewart Glendinning, Canada CEO,
  • Simon Cox, CEO of Europe,
  • Kandy Anand, International CEO
  • Sam Walker, our Global Chief Legal and People Officer,
  • Brian Tabolt, our Global Controller, and…
  • Dave Dunnewald, VP of Investor Relations.

On the call today, David and I will take you through highlights of our full year and 4th quarter 2015 results for Molson Coors Brewing Company, along with some perspective on 2016. 

The most important strategic development for Molson Coors in 2015 was the definitive agreement we reached late in the year to purchase the 58% of MillerCoors that we do not currently own, along with the international rights to the Miller brands.  This is a game-changing transaction for our company that is compelling both financially and strategically.   Last month, we conducted a common stock offering that will fund about 20 percent of the total purchase price and helps us to maintain investment grade ratings on our debt.  We plan to fund the balance of the purchase price with new debt and cash on hand.  We have a dedicated team working toward completion of the pending transaction, which is currently expected in the 2nd half of 2016.  Meanwhile, the rest of our organization remains absolutely focused on growing our existing business and brands, as well as delivering total returns to our shareholders.

With regard to business performance, the financial results we released this morning are in line with the preliminary 4th quarter financial results and updated 2015 free cash flow guidance ranges we issued two weeks ago.  Overall, we were pleased with the progress that our company made in 2015.  We exceeded our targets for cash generation and cost savings and expanded underlying gross and pretax margins globally. We grew our above premium business globally, including craft, Flavored Malt Beverages and cider; we gained share of the key premium light segment in the U.S.; and accelerated the growth of our International business, including a bolt-on acquisition in the fast-growing India market.  We continued to focus on building a stronger brand portfolio, delivering value-added innovation, strengthening our core brand positions through incremental marketing investments, and continuing to premiumise our portfolio. We began to see the benefits flow to our top-line performance as the year progressed.  For example, Coors Light and Miller Lite both gained share of the premium light segment in the U.S. in the last three quarters of 2015, and Coors Light grew 0.3% globally and more than 15% in our Europe and International markets for the full year.  In constant currency, we achieved positive net pricing globally, as well as in most of our major markets.  These achievements are against a backdrop of a continued difficult economy and competitive pressures, along with significant unfavorable foreign currency and the termination of major business contracts, as we highlighted through last year.  

Our focus on growing our above-premium segment continued in 2015 as we completed the acquisition of Saint Archer in the U.S., the Rekorderligcider brand distribution rights in the U.K. and Ireland, and repatriated the rights to Staropramenin the U.K.  We also expanded our global footprint and accelerated the growth of our International business through the acquisition of Mount Shivalik Breweries in India and our recent entrance into the Colombian beer market.  Our craft portfolio drove growth from Doom Bar in the U.K., Granville Island in Canada, and Blue Moon in the U.S. and U.K.  Our emerging cider portfolio delivered strong growth, led by Carling British Cider in Europe, Molson Canadian Cider and Strongbow in Canada, and Smith & Forge Hard Cider in the U.S.   

We also used our Profit After Capital Charge, or PACC, model as the key driver for our cash and capital allocation decisions.  As a result, we drove additional working capital improvements and delivered underlying free cash flow of $704 million for the year, which exceeded our original guidance by more than $150 million, or nearly 30%.  PACC informed our approach to the MillerCoors acquisition, along with the Mount Shivalik, Staropramen U.K. and Rekorderlig transactions, and the substantial restructure of our China business last year. 

Additionally, we continued to transform and strengthen our business through improvements to our sales execution and revenue management capabilities, increased efficiency of our operations, and implementing common global systems.  To ensure that our supply chain is fit for future, we closed two bottling lines and completed or announced plans to close four breweries across our company, along with the planned recapitalization of our Vancouver brewery.  We exceeded our cost-reduction goal of $40 to $60 million in Molson Coors by delivering almost $65 million of savings in 2015.  In addition, MillerCoors achieved $88 million of cost reductions in 2015, of which our share is $37 million.

In performance headlines for full year 2015:

  • We delivered $1.33 billion of underlying EBITDA and $700.4 million of underlying after-tax income, or $3.76 per diluted share.  Underlying after-tax income declined 9% from a year ago.
  • Foreign currency movements and terminated contracts drove the entire decline in both underlying pretax and post-tax income in 2015. Foreign currency impacted earnings by more than $64 million in 2015, while the termination of our Miller brands contract in Canada, and our Modelo brands and Heineken brewing contracts in the U.K, drove an additional negative impact of approximately $40 million. 
  • We exceeded our cash generation goal in a challenging year by delivering more than $704 million of underlying free cash flow.
  • We expanded our PACC model deeper into our company – Use less, Earn More and Invest Wisely is now a common mantra throughout Molson Coors.
  • Net sales for the year declined 2.2% in constant currency, driven by the effect of terminated contracts.
  • Strong volume performance in Europe and International helped to grow overall worldwide Coors Light volumes for the year. 
  • Our overall profit and cash performance, along with the potential of the MillerCoors transaction, helped to drive a positive total shareholder return (TAP stock price, plus dividends) of nearly 29% in 2015, which is well above the 1% increase in the total return for the S&P500 index last year.

Regional highlights for 2015 are as follows:

In the U.S., underlying pretax earnings in 2015 were unchanged from the year before, as positive net pricing, sales mix and cost savings were offset by lower volume and increased investments in marketing and information technology.  We grew revenue per hectoliter and increased our percent of sales in above premium, and grew share of the premium light segment with both Coors Light and Miller Lite, driven by continued improvements to their packaging and consumer messaging.  For Coors Light, the consumer messaging, rooted in Rocky Mountain cold refreshment, is more aspirational and reaches legal-drinking-age men and women alike, while Miller Lite continues to focus on authenticity as the original light beer.  The new ads began running for Coors Light two weeks ago, while Miller Lite benefited most recently from the limited-edition Steinie bottle.  Additionally, Coors Banquet grew volume for the ninth consecutive year.  In the higher-margin Above Premium segment, we grew FMB and craft volume with the Redd’s, Blue Moon, Leinenkugel’s and Smith & Forge Hard Cider brands. 

In Canada, underlying pretax income decreased 5.8% in constant currency, primarily due to the negative impact of terminating our Miller brands agreement last year, along with higher marketing and distribution costs and fixed-cost deleverage due to lower volume.  These factors were partially offset by substantial cost savings and positive pricing, which, along with positive mix, drove constant currency revenue per hectoliter 2.5% higher in 2015.  Canada sales to retail, or STRs, declined 6.3%, primarily due to the termination of the Miller contract.  Excluding the impact of the loss of the Miller brands, STRs declined 2.6%.  In core brands, Coors Light and Molson Canadian volumes declined, due largely to increased competitor trade spend and pricing activities in key regions, but we continue to invest behind new advertising and commercial executions for both brands.  Encouragingly, Coors Banquet delivered strong volume and share growth as the number-one new brand introduction in Canada in the past five years.  Also in above premium and craft, Mad Jack Apple Lager, Molson Canadian Cider and Strongbow Cider also grew volume and share in 2015, along with our Six Pints craft brands.   

In Europe, 2015 underlying pretax income decreased 5.7% in constant currency, driven by the termination of the Modelo brands and Heineken brewing contracts in the U.K.   Excluding the impact of the contract terminations, Europe’s ongoing business grew volume, sales mix, gross margins, and underlying pretax income in constant currency.  Sales volume increased in 7 of 11 countries and for 6 of our 11 lead brands in the region.  Carling grew share of its segment in 2015, and trends continued to improve as the year progressed, while Ozujsko and Bergenbier grew volume and segment share in their core markets.  Our above premium portfolio performed well, with Coors Light, the Sharps Brewery portfolio including Doom Bar, and our wider craft portfolio – including Franciscan Well – achieving strong growth in the year, as did Staropramen outside of Czech Republic.  Our Europe cider portfolio grew at a double-digit rate in 2015, and the integration of the Rekorderlig cider business into our U.K. and Ireland portfolio went well in the second half of the year, as did the ramp up for the full repatriation of the Staropramen brand into our U.K. portfolio at the start of 2016.

Our International business delivered double-digit volume growth in 2015, driven by very strong volume growth in India, primarily due to our acquisition of Mount Shivalik Breweries early in 2015, along with double-digit growth for Coors Light in Latin America, including launching the brand in Colombia.  We ended the year with a $5.1 million increase in International’s underlying pretax loss versus a year ago primarily due to foreign currency movements and the substantial restructure of our China business.  In constant currency, underlying pretax loss increased $0.8 million.

Now, I'll turn it over to David to give 4th quarter financial highlights and perspective on 2016.  David...

[David Heede]
...Thank you, Mark, and hello everybody....

As we consistently communicated throughout last year, foreign currency and the termination of business contracts were a ‘drag’ on our financial performance, including in the 4th quarter.

  • Worldwide beer volume for Molson Coors decreased 1.7%, but Coors Light grew nearly 1% globally – and more than 13% in Europe and International.
  • Headline net sales were down approximately 13% in U.S. dollars – however, excluding the previously referenced ‘drags,’ net sales increased on the strength of positive pricing, along with higher volume in Europe and International.
  • Our underlying pretax income decreased by 21.1%, with more than half of this decline driven by the foreign currency and the termination of business contracts. The balance was due to a planned increase in brand investments in the quarter in U.S. and Canada.
  • Underlying after-tax income decreased by 11.3% to $90.6 million, or 49 cents per share.
  • On a U.S. GAAP basis, we reported income from continuing operations attributable to Molson Coors of $33.4 million, which is 64.2% lower than in the prior year. In addition to the factors that drove lower underlying income, higher special and other non-core charges primarily related to supply chain restructuring and MillerCoors acquisition financing drove the decrease.    
  • Our underlying EBITDA was $227.3 million in the 4th quarter, 17% lower than a year ago, driven by unfavorable foreign currency, the impact of terminated business contracts and higher marketing investments in the U.S. and Canada. 

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 2015 goal by achieving almost $65 million of in-year cost reductions across our company, driven by Canada and Europe.  These cost savings exclude MillerCoors, of which our share is another $37 million.  We now expect cost savings over the next two years to be in the range of $50 to $70 million, slightly higher than our previous guidance of $40 to $60 million.  This view excludes cost synergies resulting from the pending MillerCoors acquisition, which we expect to be $200 million by year four following the transaction close.

We were pleased to generate more than $704 million of underlying free cash flow in 2015 and exceed our cash flow guidance by more than $150 million.  A strong 4th quarter working capital performance was further enhanced by higher-than-anticipated distributions from Miller Coors and lower cash taxes and capital expenditures. Whilst there were some ‘one-time’ impacts, we do not believe these were significant.

A detailed reconciliation of our 2015 and 2014 underlying free cash flow is available in our earnings release this morning.

Total debt at the end of the 4th quarter was just over $2.9billion, cash and cash equivalents totaled $431 million, resulting in net debt of $2.5 billion.  This is $55 million lower than prior year, primarily due to foreign currency movements.

Looking forward to 2016, all of the following metrics exclude any effects of the MillerCoors transaction, the timing of which will have a big impact on virtually all guidance measures:

  • Currently, we expect cash contributions to our defined benefit pension plans to be in the range of $45 to $65 million in 2016, down approximately $250 million from last year, including our 42% of MillerCoors contributions.   
  • We anticipate 2016 pension expense of approximately $17 million, down from $40 million last year.  Note that all of these numbers include our 42% of MillerCoors.  The overall funded status of our defined-benefit pension plans, again including MillerCoors, improved about 7 percentage points from a year ago to approximately 97% at the end of 2015.  This increase was driven primarily by the large additional voluntary contribution of $227 million to the U.K. plan in 2015. 
  • Our 2016 capital spending outlook is approximately $300 million, up from $269 million last year, largely due to planned supply chain capital projects in Canada.
  • We expect our 2016 MG&A expense in Corporate to be approximately $120 million, including additional investments behind our global commercial efforts – but excluding any costs related to the MillerCoors transaction.
  • Our consolidated net interest expense outlook for 2016 is approximately $110 million, excluding any interest costs related to the MillerCoors acquisition.
  • We expect our 2016 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.  If the MillerCoors deal closes in the 2nd half of this year, we expect our long-term tax rateto be in a range of 25 to 28%, also assuming no changes in tax laws or audit resolutions.  We expect our cash tax rate to be significantly lower than this range, due to the more than $250 million of cash tax benefits stemming from the asset nature of the MillerCoors transaction.
  • In 2016, we anticipate moderately higher investments in our brands globally.
  • The impact of terminated contracts are now largely behind us, but we anticipate foreign currency will continue to be a headwind of note, primarily as a result of the weakening Canadian Dollar. To provide a sense of the challenge, if we were to apply foreign exchange rates at the end of last month to our 2015 results, it would reduce last year’s underlying pretax earnings and free cash flow by approximately $35 million, with most of this impact in Canada.
  • Regarding underlying free cash flow guidance, we are pleased with our free cash flow track record and our performance over the last couple of years in particular, as we have further embedded our PACC methodology, which is ensuring a strong focus on cash management across our business.  You will also have seen some significant upside volatility to guidance in 2014 and 2015.  As we come into 2016, we have a number of large dynamic factors in play in relation to cash use and capital deployment, in part due to the pending MillerCoors transaction, and, therefore, we’ll issue specific 2016 free cash flow guidance later in the year with the goal of removing some of the recent volatility to guidance that has occurred.  

As far as our cost outlook is concerned…

  • We expect the cost of goods sold per hectoliter in MillerCoors, Canada, Europe and our International business, in local currency, to increase at a low-single-digit rate for the full-year 2016.
  • In each of our businesses, we anticipate higher costs related to product and package innovation. 

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

  • In the U.S. through the first 5 weeks of the year, STRs decreasedat a low-single digit rate.
  • In Canada for January, STRswere downlow-double digits.  Excluding the Miller brands last year, our Canada STRs in Januarydecreased at a high-single-digit rate
  • In Europe, volume through February 8 decreased low-single digits.
  • And our International sales volume, including royalty volume, decreased at a mid-single-digit rate in January.
  • 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.   

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

 [Mark Hunter:]
...  Thanks, David.

In 2016, 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.

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 the above premium, FMB, craft and cider segments. We will do this while ensuring that we have a fit for purpose cost base and a deeply embedded, PACC-led capital allocation approach. 

In the U.S., MillerCoors began to drive substantial changes to the business in the latter half of 2015 that were necessary to create the foundation for volume growth we aim to achieve by 2019.  In addition to Gavin taking over as CEO, new commercial leadership, and the appointment of new ad agencies, the difficult decision was made to close the Eden brewery.   In American Light Lagers, the revitalization of our two largest brands is progressing well, and we are seeing segment share growth for both Coors Light and Miller Lite for the first time since MillerCoors was formed nearly 8 years ago.  In Above Premium, we continue to focus on higher-margin offerings that can scale and stick, including further extensions from Leinenkugel’s and Blue Moon.  In cider, we are broadening the appeal of Smith & Forge Hard Cider by adding a bottle package to our line-up.  In early January to strengthen our FMB portfolio, we launched Henry’s Hard Soda, which has been met with great enthusiasm from our distributors and retail partners.   Our U.S team is also developing new strategies to improve the performance of our economy brands, which have been a drag on our volume trends.  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. 

In Canada, we have just launched our newest chapter on our Molson Canadian “Anything for Hockey” campaign generating 80 million media impressions in the first week.  On Coors Light we will significantly increase programming and further evolve our communications with a new campaign building on learnings from 2015. In above-premium, consumer demand remains strong for Coors Banquet, Belgian Moon, Molson Canadian Cider, and Mad Jack Lager.  Building on that momentum, we will introduce new variants on the successful and rapidly growing Mad Jack brand and also our ciders, which have been exceeding growth expectations. Finally, in addition to Heineken, Strongbow and Heineken’s other top-end import brands, such as Dos Equis and Sol,with the start of this year, we picked up the distribution of all Heineken trading brands in Canada, as well.  In 2016, we will also continue to restructure our business to ensure we are fit for the future, including the sale of our Vancouver Brewery, which will allow us to build a more efficient and flexible brewery over the next few years.
In Europe, the terminated Heineken contract in the U.K. will continue to present a headwind in the 1st quarter, as will the new amortization expense for the brands that we impaired in the 3rd quarter of last year and moved to definite lives.  We will continue to invest in our core brand portfolio across Europe to grow share of segment.  We will also continue to premiumise our portfolio and,  starting in 2016, we expect Rekorderlig cider and Staropramen in the U.K. to contribute more than 350,000 hectoliters of above­-premium volume annually to our Europe business and to provide attractive growth potential for the future.  In combination with the integration of the Franciscan Well craft brands in Ireland and the acquisition of the brewing and kegging operation of Thomas Hardy’s Burtonwood Brewery in England, we now have a broad range of consumer and customer offerings in the above-premium, craft and cider segments across the U.K. and Ireland.  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 two most recent examples, we closed one of our breweries in Bulgaria in November 2015, and we have entered into a consultation process in the U.K. regarding our proposal to close our Burton South Brewery and consolidate production within our recently modernized Burton North brewery by the end of 2017.

Our International business is focused on attaining profitability in 2016 on a constant-currency basis versus 2013, when we made this commitment, and continuing to accelerate our overall growth and expansion in new and existing markets.  Upon closing of the MillerCoors transaction, we are planning to integrate the Miller brands into our international portfolio and leverage a footprint that complements our growth strategy and allows us to gain entrance into high-priority markets, while increasing our business scale in current markets. We will also continue to drive rapid growth for Coors Light in Latin America, including the high-potential Colombia market, where we launched in the fourth quarter.  Going forward Coors, Miller and Staropramen will form the backbone of our international brand portfolio.  

To summarize our discussion today, the most important strategic development for Molson Coors in 2015 was the definitive agreement we reached late in the year to purchase the 58% of MillerCoors that we do not currently own, along with the international rights to the Miller brands.  Beyond this game-changing transaction for our company, we were pleased with the overall progress that our company made in 2015.  We exceeded our targets for cash generation and cost savings and expanded gross margins and underlying pretax margins globally.  We grew our above premium craft, FMB and cider business globally, gained share of the key premium light segment in the U.S., and accelerated the growth of our International business, including a bolt-on acquisition in the fast-growing India market.  In 2016, we will continue to focus on building a stronger brand portfolio, delivering value-added innovation, investing behind the strength of our core brand positions, and continuing to premiumise our portfolio—all driven through our PACC lens.

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

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