Print Page | Close Window
Conference Call

Molson Coors Brewing Company
2015 Second Quarter Earnings Conference Call
August 6, 2015

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

            Welcome to the Molson Coors Brewing Company 2nd 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, Carmen. Hello and welcome everybody to the Molson Coors earnings call....
Many thanks for joining us today.

With me on the call this morning
•    Gavin Hattersley, CFO of Molson Coors and interim CEO of MillerCoors,
And from Molson Coors, we have:
•    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 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:

  • Our net sales per hectoliter decreased 2.2% in constant currency, driven by sales mix changes within our Europe and International businesses, including the impact of terminating the Modelo brands and Heineken contract-brewing agreements in the U.K.  These factors were partially offset by positive global pricing and revenue management in local currency. 
  • Constant currency net sales decreased 3.3% due to lower volume in Europe and Canada and negative mix in Europe and International, again partially offset by positive net pricing.  And by adding in the additional effect of foreign currency, reported net sales declined 15.4%.   
  • Coors Light volume declined 2.3% globally, driven by declines in the U.S. and Canada, partially offset by high-single-digit volume growth outside North America.
  • Our global craft portfolio grew volume high-single digits in the quarter, and our cider portfolio grew more than 30%.
  • Worldwide volume declined 1.9%, including the impact of the termination of our Miller brands agreement in Canada and the Modelo brands contract in the U.K this year.    
  • Underlying pretax income of $327.9 million was down 0.9% but increased 5.9% on a constant currency basis.
  • Underlying after-tax income decreased 9.9%, driven by a higher tax rate, which was cycling a large discrete tax benefit a year ago, and unfavorable foreign currency.  These factors were partially offset by positive net pricing and results of cost savings initiatives. 
  • Underlying EBITDA in the quarter was $455.3 million, a 4.4% decrease from a year ago, again due to foreign currency movements.
  • We began to implement our four-year, $1 billion stock buy-back program, with more than 672,000 Class B common shares repurchased in the 2nd quarter – and another $50 million of cash used early in the 3rd quarter for Class B stock repurchases.

In regional highlights:
U.S. underlying earnings increased 8% due to lower brewing and packaging materials and fuel costs, as well as higher net pricing and supply chain cost savings.  Volume was lower in a weak 2nd quarter for the U.S. beer industry.  Overall, MillerCoors achieved strong financial results, along with continued progress in transforming our U.S. portfolio toward the above-premium segment.  In core brands, Coors Light and Miller Lite both grew share of segment, while Coors Banquet grew volume and market share.  Our Above Premium portfolio, led by Blue Moon Belgian White, Leinenkugel’s and the Redd’s family, grew in the quarter. 

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...

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

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:

  • $198.1 million of operating cash flow, and…
  • $248.0 million of net add-backs for our discretionary U.K. pension contribution in January, MillerCoors investments in businesses, and the cash impact of special items.

Investing cash outflows included:

  • $139.8 million of capital spending.

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:

  • Our annual target for Underlying Free Cash Flow is $550 million, plus or minus 10%, at July 31 foreign currency rates.
  • We expect cash contributions to our defined benefit pension plans to be in the range of $300 to $320 million in 2015, including our 42% of MillerCoors contributions.    
  • We anticipate 2015 pension expense of approximately $27 million, including our portion of MillerCoors.    
  • We expect capital spending to be approximately $300 million. 
  • We expect our 2015 MG&A expense in Corporate to be approximately $110 million,
  • Our consolidated net interest expense to be approximately $120 million, which is based on FX rates and hedging positions at the end of the 2nd quarter, and  
  • Our 2015 underlying effective tax rate to be in the range of 18% to 22%.  After this year, we 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 continue to expect…

  • Canada COGS/HL to increase at a mid-single-digit ratein local currency, and…
  • International business COGS to decrease at a low-double-digit rate per HL.
  • MillerCoors, however, now expects 2015 cost of goods sold per hectoliter to be approximately in-line with the year before, versus previous guidance of a low-single-digit increase, with the change driven by lower fuel, freight and commodity costs.      
  • In Europe, we now anticipate a low-single-digit decrease in COGS per hectoliter this year in local currency, versus a mid-single-digit decrease previously, primarily due to increased sales of higher-cost above-premium brands.

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....

 [Mark Hunter:]
...  Thanks, Gavin.
In addition to the foreign currency headwind that Gavin just discussed, our results in the balance of this year will continue to be challenged by the termination of three major business contracts, which we anticipate will have a full-year 2015 profit impact of $40 million pretax, as well as a higher effective tax rate.  Additionally and importantly, we plan to significantly step up our portfolio investments across all of our businesses.  These investments will have a particularly negative impact on 3rd quarter and overall 2nd half 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 U.S., we are driving a handful of priorities:  
Job Number One is to transform our portfolio and rediscover volume growth.  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 contemporary visual identity across all packaging, and we have introduced new national television advertising that emphasizes Coors Light’s Rocky Mountain 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, along with the expansion of Blue Moon Cinnamon Horchata 6-packs, as well as the introduction of Leinenkugel’s new seasonal release, Harvest Patch Shandy.
  • Third, simplify and clarify 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.

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:

  • In the U.S. through July 25, STRs decreasedat a low-single digit rate.
  • In Canada through July 31, STRswere downhigh-single digits.  Excluding the Miller brands last year, however, our Canada STRs for this period decreased at a low-single-digit rate
  • In Europe in July, sales volume wasuphigh-single digits, driven by growth in 10 out of 11 countries in the region. 
  • Our International sales volume, including royalty volume, increased at a double-digit rate in July.
  • 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.  

To summarize our discussion today, our 2nd quarter financial results reflect 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.  We expect these headwinds to continue in the balance of this year, along with a significant step-up in our brand investments across all of our businesses, which we expect to negatively impact our short-term profit but provide longer-term benefits to our financial performance.  Going forward, we will continue to implement our strategy of driving brand-led profit growth, meaningful cash generation and disciplined cash and capital allocation.  Over time, we expect this strategy to help us unlock opportunities for growth in Molson Coors Brewing Company’s top-line, bottom-line and long-term shareholder value.

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….