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Molson Coors Brewing Company
With me on the call this morning are:
On the call today, Gavin and I will take you through highlights of our 1st quarter 2014 results for Molson Coors Brewing Company, along with some perspective on the balance of 2014.
In the 1st quarter, Molson Coors more than doubled underlying after-tax income, grew underlying EBITDA more than 20%, and expanded gross, operating and after-tax margins. Underlying earnings per share also more than doubled. U.S. GAAP after-tax earnings increased more than $135 million versus a year ago. The improvement across our company was consistent, with each of our businesses achieving improved operating margins, pretax earnings and EBITDA performance in the quarter. Our strong focus on our core brands, portfolio shift to above premium and value creating innovation is paying dividends. This strategy is underpinned by our Profit After Capital Charge, or PACC model, which aligns our entire team and each of our cash-use decisions with our priorities.
In the 1st quarter, Coors Light grew more than 30% in the U.K., and it more than doubled in Mexico and Latin America. Coors Light underperformed in the U.S. and in Canada, and we have plans to reverse this trend as we approach the summer selling season, which I will share with you in a few minutes.
Carling continued strong momentum from last year with both volume and market share growth in Europe, and particularly in the U.K., where it extended its lead as the number one beer brand. Molson Canadian gained share for the third consecutive quarter in Canada with its Olympic programming, including the hugely successful “Molson Canadian beer fridge” social media program. Coors Banquet grew volume and share in both the U.S. and Canada.
Staropramen grew volume and share across Central Europe, but this brand’s licensed volume declined in Russia and Ukraine due to political and economic turmoil.
In the quarter, U.S. pretax earnings increased nearly 5%, and while we saw positive pricing and sales mix, together with cost savings, the gain was also due to the timing of marketing spending versus last year. Industry volume declined in the 1st quarter partially related to the negative impact of the Easter holiday timing. Premium lights continued to underperform the overall market, but we gained share in the premium light segment according to Nielsen, driven by the successful re-introduction of Miller Lite’s original Lite can. We also grew share in above-premiums, but we have work to do on our Blue Moon seasonal brands.
Although the economy remains weak, our Europe business delivered 5.6% volume growth and more than a point of share growth across the region, along with cost reductions and improved margins and pretax income. Our brands grew overall market share in Czech Republic, Romania, the U.K., and Bulgaria, while we saw improved trends in Serbia and Hungary.
Our International business improved its top-line and bottom-line performance by growing volume double digits and improving its sales mix and cost base. The team continued to achieve strong Coors Light growth in Mexico and Latin America and improved their performance in China.
Now, I'll turn it over to Gavin to give 1st quarter financial highlights and a perspective on the balance of 2014. Gavin...
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.
Please see the earnings release we distributed earlier this morning for a detailed review of our business unit financial results in the quarter.
In addition, please see Table 7 in the earnings release for constant-currency net sales, pretax income and underlying pretax income for each of our segments and for our total company. We believe that these new disclosures will provide investors with more comparable data with which to analyze our company.
As mentioned on our last earnings call, beginning in 2014 we have discontinued sales curveaccounting for our marketing and sales expense. This change will have no effect on the total amount of annual marketing and sales spending reported, but it does affect the quarterly timing of this expense. This change in accounting policy is being presented retrospectively, so we have recast prior periods to reflect the new treatment, including for the 1st quarter 2013 results distributed this morning. The elimination of sales curve accounting has the effect of increasing the previously reported 1st quarter 2013 MG&A expense by approximately $9 million, which was offset in the 2nd half of the year. We posted the specific 2013 quarterly impacts on our web site earlier this morning. MillerCoors does not use sales curve accounting, so its historical results will not be affected by this change.
Underlying free cash flow for the 1st quarter of 2014 totaled a use of $65 million. This was a $16 million higher cash use versus a year ago and was driven by working capital timing, which was partially offset by higher net income. The underlying free cash flow in the 1st quarter does not include a $62.9 million non-core cash receipt related to the early termination of our Modelo brands joint venture in Canada. 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 2014 free cash flow included the following factors:
Our underlying free cash flow included $123 million of cash distributions and $95 million of cash invested in MillerCoors, along with $4 million of positive adjustments for special charges and investments in businesses.
Total debt at the end of the 1st quarter was $3.79 billion, and cash and cash equivalents totaled $338 million, resulting in net debt of $3.46 billion, approximately $98 million higher than three months earlier – and $685 million lower than a year earlier.
Looking forward to 2014:
All other full-year forward guidance is unchanged from last quarter, such that:
In 2014 cost outlook, we continue to expect…
At this point, I'll turn it back over to Peter for outlook, wrap up and the Q&A. Peter....
Overall, our strategy of building our core and above-premium brands and driving sales with our innovation pipeline is working.
In the U.S., we will continue transitioning our portfolio toward the high-margin and fast-growing above-premium segment. The roll-outs of Miller Fortune lager and Smith & Forge cider are progressing, and Redd’s Apple Ale continues to be one of the fastest growing brands in the U.S. beer category. Premium lights continue to underperform the overall market, and we are addressing this in the coming months with new advertising, fresh packaging, and our first Coors Light line extension, Coors Light Summer Brew. We are also putting more TV support behind our key value brands Miller High Life and Keystone Light. We expect to see a reversal of the marketing timing benefit that contributed to the 1st quarter MillerCoors underlying income growth.
Our volume and profit performance in Canada in the 1st quarter was impacted by the February 28 termination of our arrangement for the Modelo brands. The negative impact on underlying income of losing the Modelo brands was more than offset by the results of multi-year initiatives started last year to transform and streamline our cost base, as well as a year-over-year difference in the timing of marketing and sales spending. We will introduce new advertising this month and increased activity to improve the performance of Coors Light. We have a strong innovation pipeline, which will be led by the expansion of Coors Banquet and our vented can, but which will also include two new products that are aimed at recruiting legal-age drinkers from outside the beer category.
Europe is still experiencing constrained demand, which is fueling the growth of lower-margin segments and channels. While we expect the trends to continue, the work we have done on improving our brand propositions and execution has resulted in strong share growth in nearly all of our markets. For the balance of 2014, we have strong core brand, above premium and innovation plans, including the roll-out of cider and the introduction of cold-activated packaging to select Central European markets.
Our International business has launched global above-premium brands in select high-potential markets, including Coors and Blue Moon in Australia and Carling in major tourist destinations in India in the 1st quarter. For the remainder of 2014, we plan to roll out above-premium brands to additional markets on a selective basis, along with premium outlet distribution gains for our lead brands in China.
Finally, here are the most recent volume trends for each of our businesses early in the 2nd quarter:
Now, before we start the Q&A portion of the call, a few quick comments:
As usual, 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.
Additionally, in the next two months, we hope to see many of you at three events:
So, at this point Jay, we would like to open it up for questions please….