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Molson Coors Brewing Company
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.
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….
With me on the call this morning
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.
Other 3rd quarter performance headlines are as follows:
In terms of regional highlights:
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...
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:
Investing cash outflows included:
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:
We are revising the following full-year guidance:
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…
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....
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:
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….