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Molson Coors Brewing Company
With me on the call this morning
In the 2nd quarter, our underlying pretax earnings on a constant-currency basis increased 5.9%, driven by positive net pricing, along with results of cost savings initiatives. Due to a higher tax rate and unfavourable foreign currency, our underlying after-tax income decreased by 9.9%. We increased gross margins in the U.S., Canada and Europe and grew net sales revenue per hectoliter in the U.S. and Canada in local currency. Overall Europe NSR per hectoliter declined in local currency, but if we exclude the impact of the terminated Modelo and Heineken contracts, NSR per hectolitre increased in all of our major Europe markets apart from Serbia. We also expanded global underlying operating margins, driven by our U.S. and Canada businesses.
In the quarter, we continued to implement our strategy of driving brand-led profit growth, meaningful cash generation and disciplined cash and capital allocation.
We have invested consistently behind our core brands, with for example Coors Light in the USA growing share of segment; we made progress in transforming 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. Additionally this year, we have repatriated Staropramen lager to our U.K. portfolio and purchased the Mount Shivalik Breweries business in India and the Rekorderlig cider brand distribution rights in the U.K. and Ireland. These acquisitions give us high-potential platforms to grow our business in key markets. We also made the decision to substantially restructure our China business as we focus on accelerating the performance of our overall International business, and we have closed our Alton brewery in the U.K. as we continue to restructure our U.K. supply chain.
Additionally, we remained 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 placing smart bets that deliver brand-led 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.
This progress in the quarter was against the backdrop of continued volume pressure in our largest markets, significant impact from foreign currency movements, a higher tax rate, and terminations of business contracts in the U.K. and Canada, as previously communicated.
Other 2nd quarter performance headlines are as follows:
In regional highlights:
In Canada, underlying pretax income grew 4.3% in constant currency, due to positive pricing and mix, as well as substantial cost savings – despite the negative impact of terminating our Miller brands agreement at the end of March this year. Including the impact of unfavourable foreign currency, underlying earnings declined by 5.5%. Canada sales to retail, or STRs, declined 8.1%, with the biggest individual driver being the termination of the Miller contract. In core brands, Coors Light and Molson Canadian volumes declined in the quarter, in part due to industry weakness in their highest-share regions.In above premium, Coors Banquet delivered strong volume and share growth in the 2nd quarter, as did Mad Jack Apple Lager, Molson Canadian Cider and Strongbow Cider -- and we delivered double-digit growth from our Granville Island craft brands.
In Europe, excluding the impact of currency movements and the terminated Modelo and Heineken contracts, our Europe underlying pretax income would have increased in the 2nd quarter, driven by higher sales volume, positive pricing and lower costs. Europe business underlying income decreased 21.5% in the quarter, entirely due to the impact of unfavorable foreign currency and the terminated contracts. We were pleased to see some recovery -- and higher beer volumes -- in the areas of Croatia, Bosnia and Serbia that were affected by severe flooding a year ago. In core brands, Carling trends improved from earlier in the year, and Ozujsko and Bergenbier 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 Staropramen outside of Czech all achieving strong growth in the quarter.
Our International business again delivered double-digit volume growth in the second quarter with triple-digit volume growth in India, due to strong performance of our existing India business and our acquisition of Mount Shivalik Breweries earlier this year, along with double-digit growth for Coors Light in Latin America. During the quarter, as part of our International profitability goal, we announced our decision to substantially restructure our existing China business, which resulted in the recognition of $3.6 million of price promotion expense. This additional promotional expense and unfavorable foreign currency were the primary drivers of the $2.1 million increase in International’s underlying pretax loss versus a year ago. These factors were partially offset by higher volume and lower marketing spending.
Now, I'll turn it over to Gavin to give additional 2nd quarter financial highlights and perspective on the rest of 2015. Gavin...
In financial highlights:
Underlying free cash flow for the first half of 2015 totaled $241.1 million, which represents a $90.6 million decrease versus the first six months of 2014. 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 first half free cash flow included the following factors:
Investing cash outflows included:
Our underlying free cash flow included $692.9 million of cash distributions from MillerCoors and $758.1 million 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 2nd quarter was $3.138 billion, and cash and cash equivalents totaled $413.8 million, resulting in net debt of $2.724 billion, which is $430.4 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:
The following full-year forward guidance is unchanged from last quarter:
In 2015 cost outlook, we continue to expect…
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 July to our results for the second half of 2014, it would reduce underlying pretax earnings for that period by more than $43 million -- and the impact on cash would have been even larger. By adding the FX impact on pretax results for the first half of this year, we arrive at a full-year foreign currency impact of more than $70 million versus our 2014 consolidated pretax 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....
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.
Consistent with our priorities, in the 2nd half of this year, we intend to invest significantly in our brands and information technology, and as a result we expect our U.S. underlying operating margins for full-year 2015 to be relatively flat versus prior year.
In Canada, we continue to invest in our core brands and above premium, including craft, imports and flavored malt beverages. For our core brands, a new ad campaign and increased focus on commercial execution on Coors Light will provide the foundation to help improve trends for our largest brand in Canada. Also, solid creative execution and integrated supporting programs for Molson Canadian, particularly related to our Anything for Hockey and Beer Fridge advertising, are starting to create a renewed bond between drinkers and our second-largest brand. In the 2nd half of this year, we plan to invest aggressively in these programs. In above premium, the termination of the Miller brands contract will present a headwind for our business through the 1st quarter next year. Despite this, the strong performance of the Coors Banquet, Mad Jack Apple Lager, Rickard’s Radler and Molson Canadian Cider brands are influencing the transformation of our portfolio toward the above-premium segment, and our expanded partnership for the Heineken, Dos Equis, Sol and Strongbow brands is delivering volume and share. We also recently announced that Blue Moon Belgian White, the number-one selling craft beer in the United States, is coming to Canada this month as Belgian Moon.
In Europe, we will cycle the terminated Modelo and Heineken contracts in the U.K. for the balance of this year. The Modelo brands volume represented about 1 share point in the U.K. for us last year. The repatriation of the Staropramen brand rights for the U.K. business and securing the U.K. distribution rights for Rekorderlig cider are part of the plans we said we would execute to transform our portfolio and mitigate the impact of these contract losses. Starting in 2016, we expect these two brands to add more than 350,000 hectoliters of above-premium volume annually to our Europe business and 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. Also, we continue to invest in our core brand portfolio across Europe to ensure that these critical brands remain relevant and contemporary for our consumers. The positive momentum we are currently seeing in the Carling, Ozujsko, Bergenbier and Borsodi brands illustrates that this investment strategy is working. Additionally, we intend to explore further opportunities to improve the efficiency and effectiveness of our European operations over the coming months to unlock more resources to invest in driving top-line and bottom-line growth.
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 and develop Coors 1873 in Latin America. We will also continue to build on Staropramen’s momentum in greater Europe, recognizing that volume for this brand in the U.K. and Ireland will transfer at the end of this year from our International business to our Europe operation. Additionally, we will 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 3rd quarter:
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, we hope to see many of you at the Barclays Global Consumer Staples Conference in Boston on Thursday, September 10.
So, at this point, Carmen, we would like to open it up for questions please….