Molson Coors Beverage Co (TAP) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Molson Coors Brewing Company 2006 fourth quarter and year end earnings Investor Relations follow-up session. [OPERATOR INSTRUCTIONS] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Dave Dunnewald, Molson Coors Brewing Company Investor Relations Director.

Thanks. Hello, and welcome, everybody. On behalf of Molson Coors Brewing Company, thank you for joining us today for our fourth quarter earnings follow-up session conference call. Ore goal is to address as many additional earnings-related questions as possible on this call, following our regular earnings conference call with Leo Kiely and Tim Wolf earlier today. We will use a standard question-and-answer session and we anticipate that the call will last about an hour. Let's get started.

With me on the call are Kevin Caulfield, Investor Relations Manager; Kay Becker, Group Manager of Global Forecasting and Analysis; Mike Gannon, Vice President and Global Treasurer; and Jay Wells, Vice President of Tax.

Now I'll preface our remarks with the usual, as usual by paraphrasing our Safe Harbor language. Some of what we discuss this morning may -- or afternoon may constitute forward-looking statements. Actual results could differ materially from what we project today, so please refer to our most recent 10-K, 10-Q, and proxy filings for a more complete description of factors that could affect our projections. We do not undertake to publicly update forward-looking statements whether as a result of information, future events, or otherwise. Regarding any non-U.S. GAAP measures that we may discuss during the call, please visit our website, www.molsoncoors.com for a reconciliation of these measures to the nearest U.S. GAAP results.

As Leo mentioned on our regular earnings call earlier today, Molson Coors Brewing Company results in 2006 showed that our brand, growth strategies, and cost reduction efforts are working and they helped us to compete and win in our second year as a merged company. We achieved solid topline momentum and profit growth despite competitive and inflationary cost challenges in each of our markets. On a full-year basis, 2006 income from continuing operations, excluding one-time items, grew more than 26% to $369.1 million or $4.26 per share. We finished 2006 with stronger brands, positive pricing, cost savings that exceeded our goals for the year, double digit earnings growth, and strong cash generation. Specifically, in the fourth quarter, Molson Coors achieved $108.4 million in income from continuing operations, excluding one-time items, which was more than double our result of a year ago.

Looking ahead, we feel good about the underlying strength of our company as we strive to make even more progress in 2007. We're confident that our teams can build on the momentum of our strategic brands, attack costs, further strengthen our financial foundation, and continue building a top-performing local brewer. With that, we would now like to open it up to questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from [Mark Astrachan], Stifel Nicholas.

Good afternoon, Dave, and everyone else. A couple of just modeling related questions first. The stock option expense number for '06, I believe Tim had said it was an $83 million number in '06, is that right?

27 million is the number I recall.

27 million.

That would be total long-term incentive plan expense, including stock options and performance shares and restricted shares and those types of things. Yes, 27 -- actually, 27 to 28 million.

Okay. So there was nothing stock option related with an $83 million?

That would be -- oh, yes, yes, okay. That was cash proceeds from exercise of options during the year.

Got you.

That's cash that we can use to pay down debt.

Okay. So that $20 some million number is a good one use going forward, I guess?

It may increase a bit the way stock options work, although it would increase a lot less than under the old plan we had.

Right.

And also, we didn't have a full year of all of those plans in 2006. So a bit higher for those two reasons. So a full year and the way that stock options work for us, I would say a modest fraction of the total long-term incentive plan expense.

Okay. Then, secondly, on interest expense, about $117 million, that was a net figure, so that includes the interest income in the U.K.?

The $117 is corporate only, so it would not include trade loan income. We do have cash balances periodically during the year, so there is a little bit of interest income in there, but it's all from the corporate segment. Then if you want a total company number, you'd subtract the trade loan interest in Europe.

Right. The actual interest expense, then, should be somewhere in the 105ish range if you use the '06 interest income number?

Yes, it'd be -- for the interest income net, for example, last year, 126, I'm showing.

Right.

And so -- but the comparable number, if you're saying 117 for '07, the comparable number in '06 was $138.5.

Right, okay. Great. And then depreciation, you had said you're not depreciating Shenandoah until the third quarter of '07, so does that mean the depreciation expense will be a little bit lower in '07 versus '06?

We will have depreciation of the Shenandoah facility will, at least in any large measure, not commence until the second quarter of this year, and depending on which equipment you're talking about, that would determine when in the second quarter. So you're right, the first full quarter would be third quarter. Yes, I think depreciation based on not having Memphis up and a lot of other puts and takes, depreciation could well be in the range of or slightly lower than last year.

Great. Then final question is just on Kaiser, question in terms of some of these outstanding tax issues. Does this indemnify you. Is there any sort of comments you can make on that in terms of selling that business?

Yes. Selling the remaining interest in our Kaiser business in Brazil does not take the indemnity provisions away from our company. All it does is essentially -- all it does is take that 15% ownership position and monetize it. We still have exposure to indemnities in Brazil. Those indemnities were made to FEMSA, so selling the additional ownership interest actually raises the percent that we're on the hook for, so to speak, to 83%, I believe. Sound right? Yes, 83%, there it is.

Of the potential outstanding tax issues, you're talking about?

That's correct.

Okay, got it.

Good news is a lot of those were settled last year, but we still have a significant portion left outstanding. We'll have an update on that in the 10-K that will be out in a couple weeks.

Great, well. Helpful, appreciate your help, guys.

You bet, Mark.

Thank you.

Thank you.

Our next question comes from Robert van Brugge from Sanford Bernstein.

Hey, Dave. I have a question about the U.K. pricing. I saw two different numbers. On the call you mentioned it was down 2%. In the transcript or in the press release you say they were flat in local currency. Which one is the right number to use?

The good news is they're both right. Let me clarify. The number on the call, pricing down 2%, that's just pricing. The number in the release of flat is pricing plus mix and factored brands as well. Actually, mix was not a significant factor. So really what you're looking at is pricing down 2%, factored brands actually boosted revenue per barrel and local currency in the U.K. business by about 2 percentage points to net out at a flat number in local currency for the quarter.

Got you. And was there any accounting impact this time around from the transition of some of the factored brands through an agency basis or not?

No, I'm pleased to say that there is no more invoicing change impact on our P&L, starting in the fourth quarter of '06 and going forward.

Okay, great. That's all I had.

Okay, thanks, Robert.

Thank you. Our next question comes from Brett Cooper from Morgan Stanley.

Hey, Brett.

Hey, Dave. How are you?

Great. Thanks.

Two questions. Leo mentioned that the U.S. inventories were going down by 200,000 barrels by the end of the fourth quarter. Were you guys happy with inventories before then. In other words, are you guys building 200,000 barrels in '07?

Yes and yes. We felt comfortable with our inventories at year end and there were really no significant issues with those wholesale inventories and we do anticipate rebuilding those inventories -- or that our wholesalers will rebuild inventories roughly that amount during 2007. Now that may -- that's a reasonably large number and we don't know exactly when they might rebuild those, but safe to say by peak season sometime.

Okay. I was wondering if you could give or add some direction on, of the total savings and synergies numbers that you're going to deliver in '07, what percent would go into COGS and which ones would go into MG&A?

In '07 we haven't really gone through that in any great detail except to talk about synergies. The synergies numbers in '06, we were -- let's see, yes, we had 66 million, that was roughly two-thirds of the total saving. Since Shenandoah is not a synergy, I don't expect that number to migrate too much. In fact, it may even move a little closer to even as far as total savings, but we haven't put a total savings number out there as yet. We'll see. We might give some perspective on that in New York, but not at this point. We'll just talk synergies for now and then the incremental cost savings we'll hit in New York.

Okay. Thanks.

Thanks, Brett.

Thank you. Our next question comes from Matthew Riley from Morningstar.

Good afternoon, everyone.

Hey, Matthew.

I've just been trying to put together an apples-to-apples comparison, and I know that's kind of tough at this point, but just basically going through, starting with volume, just basic shipments, starting with overall and then within each division, just on a comparable basis, so I guess on a 13-week basis, do you have those numbers? I've been trying to piece it together from the conference call and from the remarks, but it seems to get a little confused as I try to get through the particulars.

Yes, okay. Why don't we -- probably the best way to do that would be to look at it business-by-business and then total, right? So if you look at, for example, sales volume in Canada on a 52 to 52 basis, in other words comparable, it would be roughly flat in the fourth quarter.

Okay.

Were you looking for the year as well?

Yes. I guess it would probably be about the -- I could do the math, but yes, that would be great.

Don't worry, no problem. So then for the full year, they'd be about flat as well for sales volume in Canada.

Okay.

And then STRs in Canada, there is no extra week because STRs are reported on a calendar basis.

Okay.

So you would have fourth quarter STRs up 1.1% and full-year STRs up 0.4%. In the U.S. you would have sales volume of up 1.1% in the fourth quarter and up 2% for the year. And on sales to retail, you would have an increase in the fourth quarter of 2.1% and 1.9% for the full year. And then in Europe the -- you would have volume down 4.2% in the fourth quarter and down 0.8% for the full year. And then STRs, let's see, those are already on a comparable basis. In other words, the sales volume is the same as the STRs because it's a two-tier system in Europe,.

Okay.

Same numbers, in other words. Then, let's see. If you look at the total company, you would have sales volume down 0.6% for the fourth quarter and up 0.9% for the full year and if you look at STRs, you would have in the fourth quarter up 0.1% and for the full year up 0.9%. Again, those are all comparable sales volume and sales to retail numbers, respectively.

Okay.

You need a sense of -- I think the earnings numbers we gave you, so you can do the math to get those, unless you're having an issue with a particular one?

No, I think I'm okay there. The other thing I was struggling with a bit was trying to get some idea of the top line. Also in -- I don't know if you have this available, but again, a comparable basis with FX broken out as well? I know we're getting into like six moving parts here.

That's fine. As long as you don't start mixing them, I think we can actually get through it. The sales piece, no, we didn't provide 53rd week sales information. However, we did provide the volume and the revenue per barrel would not vary in any meaningful way in that last week. So you can calculate that.

Okay.

The only other piece I would like to highlight is if you're looking at the 53rd week impact, and I'll get to FX in a minute. If you're looking at 53rd week impact, you know that the total impact was positive 6 million for the total company; right?

Yes.

And it was about 10 million in positive in Canada, flat or break even for that week in the U.S., this is all pretax; right?

Yes.

And in Europe it was negative of about 1 million. The key thing to remember is in corporate it was negative about 3.5 million, primarily on interest expense, which would have been negative about 2.5 million and G&A costs with about negative 1 million expense. Again, because there's no sales you can offset, so a disproportionate affect in the Corporate area. As far as FX goes, we gave you a total company view of FX as well as for each of the business units. The FX as well as for each of the business units. The only piece you're missing is in corporate where the FX impact was negative about 1.5 million.

Okay.

And that's essentially your natural hedge to the foreign currency in the business units. And it netted out to a positive, a little over 4 million, $4.3 million positive impact estimated for FX in the fourth quarter. For the full year, we said $27 million of positive impact for FX, which is roughly the same size as the overlap difference with long-term incentives, actually. You're looking at nonoperating items.

Okay, great. That should help me out a lot.

Okay, yes, you can see those -- the last two things I mentioned you can see in the script, which either is or will be up on the web pretty soon. You can just look through it and that would be right near the front.

Okay, great. Thank you.

Thanks, Matthew.

Thank you. [OPERATOR INSTRUCTIONS] Our next question comes from Tom Thompson and Thompson, Siegel & Walmsley.

Hi. Thank you. I heard you say on the call that you expected in the outlook section of your cost of goods sold per barrel in Canada to be up low single digits this year and in the U.S. low single digits as well, but I didn't hear you say anything about the U.K., and I was also curious as to whether you could give us any color on your expected aluminum costs year over year. What sort of increases are you seeing and how are you managing that?

I'll take a first run at this and then we'll see whether there's some additional perspective that Mike wants to provide. We did say in Canada cost of goods for the year our expectation is up low single digits. We did exclude a couple of minor items, you could call them one-time items, in the fourth quarter, for example. You may recall that. In the U.S., we also said low single digits.

In the U.K., we didn't provide guidance, but I would say that on a long-term basis, our U.K. business has done a good job of reducing costs and specifically on the cost of goods line, and they achieved significant cost savings on the cost of goods line in '06 to the point where that plus some MG&A savings actually overcame a significant portion of the margin pressures in the U.K. business. What I'm saying is they greatly offset inflation, more than offset inflation in the U.K. in '06. So I would say one reason we didn't provide guidance on that is because they have more than offset the inflationary pressures in that business.

As far as aluminum goes, we haven't provided specific guidance on that, but I would say that aluminum we -- it is our largest single commodity in the U.S. business and the U.S. business has the highest, say, packaging materials bill of any of our businesses, and so obviously aluminum is important to us, not only in the U.S. business, but as a total company. It's not so much of an issue in, especially the U.K. and as well in Canada, but it's something we really have to pay attention to and do pay attention to in the U.S. business. The way we manage it is simply through overall cost reduction initiatives and as well as risk mitigation strategies, commonly known as hedging. And we -- sorry about that. Let's see, so we don't talk much about specifics in the area of hedging that we engage in, but just to say that this is an area that is hedgable and we will look at it, but we won't provide a lot of specifics around what exactly we're doing, which is common or consistent with what our competitors provide in the area of information disclosure.

Thank you very much.

Thank you.

Thank you. Our next question comes from Michael Van Aelst from TD Newcrest.

A couple of questions, did you give the depreciation number for Q4?

We didn't. That's a good question. Let me see whether we can -- whether Kay can pull that up. Do you have another question in the meantime?

Just on the U.K., the trade team profits are up quite a bit in the quarter. Is there seasonality to this, or is this something we can look at as sustainable in future quarters?

I would say there could be a little bit of seasonality, but basically we see this as an improvement in the ability of the trade team business to operate -- it's just operating better. They're more focused on costs, they have a significant new management and they're just doing a lot better than they were, say, a year ago. So, yes, basically we think it's sustainable.

Do you think you can be materially positive on that line going forward now?

Well, so far it's positive. We certainly are enthusiastic and optimistic for them to continue that, but we'll see how well they do.

Okay. On the CapEx comments that were made on the call, you said 275 to 300 million, but then you said excluding 45 million FX fluctuations. What exactly did you mean by that?

No, actually -- I'm sorry, let me clarify. The 45 million was anticipated capital spending in our non-owned -- or, I'm sorry, in our consolidated joint ventures, and the FX, all we were saying was FX moves, you'll know it, and you can adjust, and obviously we will too.

Right, okay. So the 45 million, will that actually show up on your -- do you consolidate that into your statements?

We do. Under FIN 46, those joint ventures are fully consolidated and so we are -- under those accounting rules, we put all of that depreciation through the cash flow statement and then the non-owned portion, that is the other joint venture owners, the non-owned portion is backed up under one line item called minority interest elsewhere on the cash flow statement. Does that make sense?

Yes.

I can be more specific if I need to. Okay.

One more question. I can't seem to remember which country this was for now that I wrote it down, but for one of the countries, at least, you said your MG&A was going to be up mid-single digits, or at least you said your marketing spend and sales spending.

Yes, we're looking at that in actually all three of our business units, we're looking at total front end spending in the range of mid-single digits.

So when you're talking about that, you're just talking about the marketing and sales component, not the general and admin?

That's correct.

So if you weighted average it, if you assume the other parts -- or what's the split between marketing, general, and admin?

It varies by the business unit, and I'm not going to give you a full forecast for MG&A line in '07, but suffice to say that if you look at each of the business units, for example, in the U.K., they've been very aggressive about cutting costs, including in the G&A area, and so the tone there has been declining G&A, and I would say in Canada, you just heard that they did a major reorganization in their staffing areas, so it would be hard to imagine that a trend other than flat to declining there as well. And in the U.S., we haven't provided future guidance, but I would say that Frits runs a relatively tight ship.

Okay.

As far as depreciation goes, you'd asked that -- that was your first question.

Yes.

For 2006 total year, I don't have a fourth quarter separate number, but depending on how you're tracking this, you can get to it. For the total year we'd be about 440 million reported and 59 million of that is accelerated depreciation on the Memphis brewery that we closed and that runs through special items. So most people I know of are taking that out when they're looking at depreciation for the full year. Which would put you in the mid-300s for the full year without that.

Okay. Good. Thanks a lot.

Thank you. Our next question comes from Keith Howlett from Desjardins.

Yes. I had a question on the cold -- I guess it's the cold filtered systems in the U.K. was going from 13 ,000 locations to over 50,000, if I understood right, 50,000 new locations. Just where does that go through the -- how does that affect the income statement and the capital budget, just so I understand where that's going to show up?

Mike will take that one.

Sure. The capital expenditure related to that is -- will flow through depreciation just like any other capital expenditure. So a significant portion of that cost is borne by us as the brewer and equipment that we own, even though it resides in the pubs, and just to clarify, it's not 50,000 new locations. Some locations have multiple taps on a single front, so it would be a smaller number of new locations.

To give you some texture around that, we have about 60, 65,000 pubs that carry our brands in the U.K., so as Mike said, when we say we had 13,000 of points in 2006 and 50,000 more in 2007 that we're planning, that won't cover all of those, but it is a substantial portion, and it is a substantial investment. Most of our CapEx in the U.K. actually goes for this type of equipment, things like lines and fonts and cold dispense units.

And then just in terms of the trade team income, is it sort of going to steady -- is the Q4 rate the way it's going to go, or is that going to increase also?

We're not going to provide a forecast of trade team performance;however, I would say that what we saw in the fourth quarter, we see as a real business improvement or reflective of a real business improvement. In the way they operate and the way they've cut costs and they've streamlined and they've done a lot of good things. We're hopeful that that's going to be an ongoing sort of performance or trend line, but specifically, what each quarter looks like, we're not going to be able to provide a forecast. But the basic improvements look sustainable.

And the other factor mentioned there was the lower leasehold cost and I've forgotten what that refers to?

Yes, we had some leasehold costs a year earlier, fourth quarter of '05, and there is one -- so that's important to note. Particularly when you're looking at the year over year change of 8.7 million, I believe. It's important to know that part of the improvement was the lack of leasehold expenses in '06, whereas we had those in '05. Let's see. I'm just scanning a couple of numbers here to get that for you. Let's see, no, that's the full year, we need the full year. Here it is. Because the trade team performance was the main driver of the leasehold expenses were important as well. So, Kay's got it here. You've got a leasehold expenses a couple million lower and then really all of the income, so to speak, as opposed to the year over year change, the actual income in '06 was driven entirely by trade team.

Thanks very much.

Sure. You're welcome.

Thank you. Our next question comes from Bryan Spillane from Banc of America.

Hey, good morning -- or good afternoon, guys.

Hey, Bryan.

Dave, a question on pricing and how it relates to covering your cost inflation in '07 in the U.S. If I remember this right, back on the -- must have been the third quarter call and it was either Tim or Leo, kind of made mention that -- and in looking forward towards next year, if your input costs remained where they were, you would have to have net price realization closer to the average of the last couple of years, which I guess I interpreted to be 2% or so plus net of your cost savings in order to grow profits in the U.S. in '07. Is that pricing language still part of the equation?

The viewpoint at the third quarter certainly at that time was relevant. You could tell that we feel a little bit more optimistic about '07 at this point and part of it is because pricing has looked relatively good recently, and you saw about 2 -- more than 2.5 percentage points of positive pricing in the -- or in the range of 2.5 percentage points of positive pricing in the fourth quarter. You also have seen, generally speaking, fuel costs down. And remember, our exposure to fuel is disproportionate relative to our other U.S. competitors, because we have longer ship distances, and so on. So we are also -- we now have the Memphis brewery closed and we are closer to finishing up our Shenandoah brewery construction. You put it all together and I guess I would just say that the statement was true at the time and the pieces are still very important, but we do feel more optimistic about the outlook based on the total view of costs in the U.S.

So I guess that you don't necessarily -- you have a good idea -- or the cost savings expectations are a little higher, but you know what those are, you know what's moved in terms of your costs, so the amount of pricing you'll need to drive growth isn't as great as it was when they made this statement in October or November?

Not necessarily. We are seeing a bit better pricing, or at least we have a longer track record of better pricing now than we did at the end of October. I wouldn't completely dismiss that. Then I think the other piece is what you mentioned about our visibility on cost is a little better now. There are obviously a lot of things we're working on to mitigate those inflationary pressures as well. We've had four more months to do that.

Okay. All right. Thanks.

Thank you. [OPERATOR INSTRUCTIONS] Our next question is a follow-up from Robert van Brugge.

Yes, Dave. In previous conference call, you alluded to tax rates probably falling at the lower end of the 25 to 30% range. This time you just mentioned 25 to 30, would you still expect to be closer to the low end than to the high end of that range?

Our guidance in the call said that we expected to be in the range, unless tax laws changed or we change our company structure, that sort of thing. As you've noticed in the last year or two, there have been a few changes in tax rates in various places and Canada seems to have a disproportionate affect on our tax rate, at least in the quarter where things change. So we'll see whether those change, but at least at this point, we're sticking with the 25 to 30% tax rate.

Got you. Okay, thanks.

Thank you. [OPERATOR INSTRUCTIONS] Mr. Dunnewald, I'm showing no further questions.

Okay. Great. Thank you. In closing I would like to thank all of you for your interest in Molson Coors and for joining us today. If you have any additional questions that we did not cover on this call, please Kevin Caulfield or me on our direct lines or at the main number here at Molson Coors, which is 303-279-6565. Thank you again and have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Have a great day.