Molson Coors Beverage Co (TAP) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Molson Coors Brewing Company 2007 first quarter earnings conference call. (OPERATOR INSTRUCTIONS) As reminder this conference call is being recorded.

I would like to introduce your host for today's conference, Mr. Leo Kiely, President and Chief Executive Officer of Molson Coors Brewing Company. Sir, you may begin.

Hello and welcome everybody. Thanks for joining us today. With me on the call here are Tim Wolf, our Global CFO; Kevin Boyce, our CEO of Molson Canada; Frits van Paasschen, our CEO of Coors Brewing Company; Peter Swinburn, CEO of Coors Brewers Lmtd; Sam Walker, our Chief Legal Officer, Mike Gannon our Global Treasurer; Marty Miller, Global Controller; and Dave Dunnewald, our Investor Relations Director.

This morning Tim and I will take you through some highlights of the first quarter for Molson Coors Brewing Company along with the perspective on the balance for 2007 and then we'll open it up for questions. In the first quarter of 2007 we continued the momentum that we established in the second half of last year. With our global focus on brand building and attacking costs. While the cost in competitive challenges needs of our businesses did not lessen in the quarter, the fundamental strength of our company along with our financial results continued to improve.

Let's look at some of the highlights. We grew total company volume driven by the U.S. and Canada. We continued our keen focus on brand building and increased revenue per barrel on local currency in all three of our businesses. We captured an additional $14 million of merger synergies in the first quarter. Our merger synergies and other cost reduction programs allowed us to offset three-fourths of the cost of goods inflation companywide. We grew operating earnings at a strong double digit rate in the quarter led by the best first quarter ever for our U.S. business. In short, we are pleased with the strong focus and plausible momentum we are taking into the peak summer selling season this year. At this point I will turn it over to Tim to review first quarter financial highlights and trends. Then we will provide some perspective on the balance of 2007 for our company. Timothy?

Thanks, Leo. Hi, everybody. Starting with the first quarter financial highlights for the total company we reported consolidated sales volume of 8.9 million barrels which is up 2.9% from a year ago and sales to retail growth of 1.4% in the first quarter, both driven by brand strength in the U.S. and Canada. Net sales were $1.23 billion which is up 6.5% from the first quarter of last year. While cost of goods sold increased 3.0% per barrel. Marketing G&A expense grew 2.0% in the quarter with part of this increase reflecting our decision to invest resources for top line growth.

We achieved income from continuing operations of $25.1 million or $0.28 per share excluding special items in the first quarter which is up from a loss of $400,000 or $0.01 a share last year. Foreign exchange movements reduced our total company pre-tax profit by approximately $2.3 million in the first quarter, driven primarily by the impact of higher U.S. dollar interest expense on pound denominated debt. Please note that all of our company earning discussions today will be for continuing operations that is excluding the Kaiser Brazil business that we sold last year.

In segment performance highlights starting with Canada, pre-tax income excluding special charges was $45.3 million U.S. in the first quarter which is unchanged from a year ago. This result is driven primarily by volume growth and merger synergies and other cost savings which were offset by inflationary cost increases and higher marketing and trade support. The Canadian Dollar depreciate approximately 1.4% year over year versus the U.S. dollar which decreased Canada pre-tax results by about $700,000.

In Canada, our sales to retail, or STRs for the calendar first quarter ended March 31, increased 1.2% from the calendar quarter a year ago. Molson strategic brands which represent over 80% of our total volume and are the focus of our brand investments grew at a mid single digit rate compared to prior year. Molson benefited from double digit growth by Coors Light, Creemore, Carling, and our partner import brand portfolio. Rickard's nearly achieved double digit growth while Molson Canadian experienced a midsingle digit volume decline in the quarter as we cycle last year's strong Olympics programming. In addition, Molson Dry achieved growth in geographies.

Total Canadian beer industry sales to retail grew 1.9% of the calendar first quarter, slightly ahead of Molson's first quarter growth As a result, Molson Canada market share declined approximately one-quarter of a share point versus the prior year which really is the best share performance in the past four quarters. Molson Canada sales volume totaled 1.6 million barrels for the fiscal first quarter ended April 1, which is an increase of 2.8% from a year ago. The increase in sales volume was primarily an increase in Canada market sales volume, partially offset by lower contract brewing of nonowned brands which were exported to the U.S. Net sales per barrel increased 1.3% of local currency driven by positive sales mix toward higher revenue per barrel products. Selective front line price increases implemented during the past year were offset by price discounting focused in Ontario and Quebec.

Cost of goods sold per barrel increased 4% in local currency driven by the following factors. Nearly 4 percentage points due to input cost inflation. More than 3 percentage points of reduction due to synergies and other cost savings and 3 percentage points of increase from a shift to higher cost but also higher revenue super premium domestic and partner import brands.

Marketing, and general administrative expense increased 1.8% in local currency driven by increased marketing spend which is aligned to our 2007 plan to fuel the momentum behind our strategic brand portfolio. G&A expenses were essentially unchanged versus prior year. Other income increased $1.7 million versus the prior year due to improved equity earnings from the Montreal Canadians Hockey Club. For our U.S. business, first quarter pre-tax income was $45.2 million which is up 23.1% excluding special items a year ago. This increase was driven by sales volume growth, higher net pricing, and continued strong operations cost initiatives.

Looking at the U.S. highlights, sales to retail in the U.S. increased 2.9% of the first quarter continuing our share growth trend from 2006. This increase was driven by low single digit growth for Coors Light, which achieved its eighth consecutive quarter of growth along with strong double digit growth of Blue Moon and low double digit growth of Keystone Light. U.S. volume at our wholesalers grew 4.9% due to strong sales to retail growth and increase in distributor inventories in advance of peak season and ramping up our new Virginia brewery. Distributor inventories at the end of first quarter were about 50,000 barrels higher than a year ago.

Net sales per barrel increased 1.7% in the first quarter due to higher front line pricing. For the first time in several quarters we had no significant negative impact from either discounting or mix. Cost of goods per barrel increased 0.3 of 1% in the quarter driven by higher commodity, transportation, and packaging material costs and the cycling of the gain in commodity hedges a year ago which were largely offset by cost savings initiatives and lower fixed costs per barrel due to volume leverage and lower depreciation.

Our operations cost savings in the first quarter totaled approximately $17 million and offset nearly two-thirds of our U.S. cost of goods inflation in the quarter. U.S. marketing, general, administrative expense increased 6.4% in the first quarter driven by higher brand building and sales investments and a full quarter impact of stock based long term incentive expense this year versus a partial quarter last year.

Our total Europe business reported first quarter pre-tax loss of $4.5 million excluding special items which is an improvement of $8.9 million over the same period last year. This improvement reflects increased revenue per barrel unchanged market share, higher marketing spend and lower cost of goods sold and lower administrative costs.

Now a bit more detail on our Europe business performance. Our Europe owned brand volumes decreased 1.7% compared to a similar decline for the total industry. While Carling declined slightly growth from Coors Fine Light grew by low single digit rates in the quarter. As a result, our U.K. market share was virtually unchanged.

Europe owned brand net revenue per barrel in local currency increased about 0.6 of 1% in the first quarter largely due to favorable owned brand net pricing, partly offset by the negative impact of ongoing industry channel mix channels. This represents our third consecutive quarter of improved trends in owned brand pricing an, encouraging turnaround from last year.

Cost of goods sold for our owned brands decreased 2.8% per barrel in local currency driven by cost savings from our supply restructuring -- supply chain restructuring program. Marketing, G&A administrative expenses in Europe decreased 5.5% in local currency. Looking more closely at the first quarter, marketing spending increased at a double digit rate as we continue to roll out our new ad campaign for Carling while G&A cost decline significantly due to continued savings from cost initiatives and lower payroll related expense.

Moving beyond operating business unit performance. Corporate general administrative expense in the first quarter was $21.4 million which is $8.3 million lower than a year ago. Corporate interest expense excluding U.K. trade loan interest income was $29.2 million in the first quarter which is 5.6% million lower than the year ago driven by lower net debt levels this year. Our first quarter affective tax rate was 19% including special items and 21% excluding special items which is down from 33% and 31% respectively in 2006. Our first quarter tax rate this year was lower because of the net effect of a number of factors including the completion of certain prior year audits, the mix of pre-tax income and the impact of new rules we adopted at the beginning of this year for recognizing and measuring uncertain tax provisions. Called FASB Interpretation number 48, these new rules will cause greater volatility in our effective tax rate and our first quarter in year partially reflects this new reality.

Net debt at the end of the first quarter was $2.0 billion excluding approximately $100 million of nonowned joint venture debt. This debt figure is net of $119 million of cash that we had on hand at the end of the quarter. Special items in net totaled a charge of $8.2 million pre-tax or $0.07 per share after tax primarily due to restructuring expenses of $4.1 million in Canada and $4.2 million in Europe.

Finally, in discontinued operations for the first quarter we reported a net loss of $14.8 million, which reflects an increase in the fair value of indemnity guarantees related to the Brazil Kaiser business. These liabilities increased this quarter due to changes in estimates related to the timing and amounts of estimated future outcomes and payments. Now I'll preface the outlook session as usual by paraphrasing our Safe Harbor language.

Some of what we discuss now in the Q&A 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 new information, future events, or otherwise. Regarding any non-U.S. GAAP measures that we may discuss during the call, please visit our website which is www.molsoncoors.com for reconciliation of these measures to the nearest U.S. GAAP results.

Looking forward, we anticipate 2007 corporate net interest expense of approximately $117 million, plus or minus $2 million based on the current level of market interest and foreign exchange rates. We continue to anticipate full year 2007 corporate G&A expense of approximately $97 million, plus or minus $3 million which is a reduction of approximately $24 million versus 2006. Because of the year-over-year timing of project spending, we expect these savings to be delivered in the first, third, and fourth quarters of this year with second quarter Corporate G&A spending pretty much in line with last year.

Turning to our effective tax rate, we anticipate that our full year 2007 rate will be in the range of 25% to 28% for GAAP earnings, assuming no further changes in tax laws. Since our first quarter tax rate was lower than the rate we expect for the full year, this implies that our average effective tax rate for the balance of the year will be higher than our annual rate. Note, however, the Canadian Federal Government is considering a tax law change that if enacted would result in the significant one time noncash benefit to our tax rate in the quarter of its enactment.

Also the settlement of additional open tax years and the passage of other proposed tax legislation in the U.K. and Canada could alter our tax rate outlook during the balance of this year. Our capital spending plan for 2007 continues to be approximately $320 million and that includes about $45 million of planned capital spending by our consolidated joint ventures. Note that our plan this year and a long term CapEx run rate both exclude approximately $105 million of spending for the one time reacquisition of our U.S. kegs this year -- excuse me, the U.K. kegs this year as well as foreign exchange fluctuations. We purchased our U.K. keg flow early in the second quarter after our keg management supplier was placed in receivership. We don't anticipate a significant impact to our earnings from repurchasing our U.K. keg flow.

Our free cash flow plan for 2007 is $350 million defined as cash from operations minus cap -- capital expenditures and that excludes the one time impact of buying back our U.K. kegs plus any nonstrategic asset sales. This free cash flow plan also excludes cash used for dividend payments and cash proceeds from stock option exercises with option proceeds likely to exceed $150 million this year. Now an update on our cost reduction initiatives which are critical to our reaching our growth and profit objectives.

In the first quarter we captured an incremental $14 million of merger related pre-tax cost synergies. We are on target to achieve our 2007 goal of at least $55 million of merger synergies which would allow us to exceed our original $175 million of synergy commitments for the first three years following the merger. We are also well on track for the $250 million of additional next generation cost savings that we announced two months ago in New York and plan to capture by the end of 2009. These programs will provide resources for growth and a drop to the bottom line. This year we plan to capture the first $66 million of savings from initiatives in the areas of global supply chain, overheads and G&A. When combined with merger synergies we plan to capture total cost savings of $121 million in 2007 from all programs. We already delivered more than one-fourth of this annual goal in this, our first quarter. As always, we will update you on the progress along the way as our teams execute against these critical cost initiatives. At this point, let me turn it back to you, Leo, for a look ahead to 2007.

Thanks, Tim in 2007 we will continue to stay focused on building strong brands to grow the top line and reducing costs in each of our businesses to provide additional resources for growth. Looking to Canada, we continue our keen focus on brand building and reducing costs. Job one is to continue our strong momentum behind Coors Light, Rickard's, and our partner import brands. While stabilizing Molson Canadian and other other premium brands. We will drive these brands this year through new advertising and a range of exciting innovations including expanding the rollout of our successful Molson sub-zero beer dispensing equipment. The introduction of Coors Light cold certified can and the nationwide launch of Rickard's Light, a refreshing wheat beer extension to the Rickard's family. We have also begun the expansion of Creemore brand into new markets outside of Ontario.

In 2007, we plan to increase our investment behind our strategic brands. Supplemented by some modest tactical activity to slow the decline of our nonstrategic brands. Coors Light has grown consistently at double digit rates in the past two years with strong marketing programs and support and we continue to focus on stabilizing Molson Canadian and positioning this brand for growth in the future. For the month of April, our Canada sale to retail decreased at a low single digit rate primarily due to poor weather in the first half of the month which also drove soft industry sales. Keep in mind that one month is only a small portion of the quarter.

On cost in Canada, we are attacking nonconsumer visible spending across the country. Earlier this year we completed our organizational review and reduced our overhead staffing levels with an expected payback of about one year. We are also targeting aggressive operations, G&A, and synergy cost saving initiatives to reinvest in our brands and partially offset inflation.

Turning to our U.S. business, in 2007 our goal is to extend the trends that began at the end of 2005. We aim to sustain our share increases and focus on offsetting inflationary cost pressures. To do this we will pursue our winning formula for growing our overall business. First, we are focused on growing through brand strength as we head into the summer by building the equities of our key national brands. Coors Light, Keystone Light, and Blue Moon. To drive this volume we plan to increase our investment behind these branded at a mid single digit rate. We will also continue our initiatives to develop our regional brands such as the relaunch of Zima and refresh Coors banquet packaging and ad creative.

Second, we will continue to go to the market with discipline. Strengthening our key retail accounts, sharpening our focus around our multicultural initiatives and enhancing our already improved relationships with our distributor network.

Third, we will build our export markets while we maintain a leading share to Puerto Rico beer market, the economic environment remains challenging there. Fourth, we are focused on improving three tier profitability and service and to that end our Virginia brewery is on track to be fully operational by mid summer. We will reap the benefits as we diversify our brewing capability and reduce transportation time and costs to our East Coast customer base. We continue to expect U.S. cost of goods to increase at low single digit rate for the full year in 2007. And given the outlook for commodities we expect the benefit of our cost initiatives to offset a little less than half of the inflationary cost increases in the year. Any further substantial increases in aluminum, diesel fuel, or other commodities could represent a significant challenge to our U.S. profit growth rate.

Overall, in the first five weeks of the second quarter our 50 state U.S. sales to retail were up slightly from a year ago, impacted by a shift to the timing of the Easter holiday which gave us only one week of selling in during April this year versus two weeks of sell in last year. In our Europe business, the competitive environment in the U.K. beer industry continues to be challenging but we remain focused on building great brands and lowering our costs. On building great brands we are increasing media investments behind the Carling's new marking campaign and have received positive consumer feedback on our new outdoor and television advertising with awareness now at its highest level since we began tracking this measurement in 1995.

We also recently launched a television campaign for C2, our mid stream lager with strong linkage to the Carling campaign. We extended on from a sampling to 30,000 outlets during the first quarter and we will continue follow-up during the second quarter as we continue to build this exciting new category. In addition we are rolling out Carling Premier, a colder, smoother lager that rounds out our Carling family. And early distribution for this offering has been strong. And we continue to roll out our new cold dispense technology and distinctive above bar fonts, which support our entire portfolio including Coors Light. We completed 10,000 installations during the first quarter and currently expect a further 33,000 over the balance of the year. We continue to see sales with uplift from these installations.

Imagine costs will continue to attack cost to provide fuel for brand growth and offset cost inflation. While the flow through of cost savings implemented in the first half of 2006 will have less impact on the second half this year additional cost reduction initiatives are underway. It's important to recognize that these cost reductions are being achieved while we are investing more to support our brands.

In the first five weeks of 2007 -- excuse me, first five weeks of second quarter our Europe sales to retail have increased at a mid single digit rate from a year ago driven in part by particularly favorable weather. It's important to bear in mind that our comparisons later in the second quarter will be negatively impacted by recycling the strong World Cup volume in the second quarter last year and the smoking ban in England takes effect on July 1. In 2006 our Europe profit growth was primarily driven by cost reductions which more than offset the market head winds.

In 2007 and beyond, as we cycle through the 2006 cost savings, we expect our profit growth to be driven by a balance of cost initiatives, portfolio development, innovation, and ongoing volume and price management. As you can see, for the balance of 2007, our entire organization is focused on building key brands and attacking costs. On the top line, we are starting the year with positive momentum for our strategic brands and will increase our investments behind these brands and in our sales capabilities. We will generate resources for top line growth from the final year of our merger synergies as well as the first year of our next generation cost initiatives. These cost savings will also help us offset significant inflation challenges this year from aluminum, energy, agricultural commodities and other inputs while also providing resources to grow the bottom line.

Looking ahead, we are pleased with the fundamental strength of our company and the momentum of our priority brands as we prepare for peak summer selling season this year. We were confident that our teams can build on that momentum and win the summer. While we make even more progress building great brands attacking costs and becoming a top performing global brewer.

Now before we start the Q&A portion of the call, just a quick comment. Our prepared remarks will be on the website for your reference within a couple of hours this afternoon. Also at 3:00 p.m. Eastern time today, our investor relations team led by Dave Dunnewald will host a follow-up conference call. Essentially a working session for analysts and investors who have additional questions regarding our quarterly results. This call will also be available for you to hear via webcast and recorded replay at our website. At this point let's open it up to questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Robert van Brugge from Sanford Bernstein.

Good afternoon.

Hey, Robert.

I was wondering, Frits, if you could comment on the U.S. pricing environment. It seems like pricing may not be recovering as fast as some may have anticipated, particularly given some of the volume weakness by your primary competitor.

As you saw in our announcement most of the increase in revenue per barrel that we achieved in the first quarter was a function of pricing. And not to comment more generally about the industry, we feel confident that the robust growth in pricing for our own brands and few markets in particular, for example, Pacific Northwest and Florida, where there has been more scanning activity, we have elected not to follow and have been able to maintain our volume trends.

Thanks.

Our next question comes from Brian Spillane from Banc of America.

Good afternoon. For Frits and Tim, it seems that given how strong your shipments were in the first quarter in the U.S., that you may have -- I guess I would have thought that you would have developed a little more, or generated a little bit more operating leverage in the first quarter. If you could talk a little bit about some of the dynamics in the quarter, did you get -- was the Shenandoah startup a drag in terms of operating profits? Also, just any comments you have Tim on, it seems like working capital was a pretty big use of cash in the first quarter. Anything that drove that?

Yes, let me jump in first on the operating leverage aspect to the strong shipments in the first quarter. I think the thing to keep in mind here is that as with last year and in fact probably even to a greater extent, there is significant cost in commodity increase pressures on our business. The fact that we were able to offset most of those in the first quarter is something we feel really good about.

Would you expect that your shipments will -- are your trade inventories at a normal level right now? Or should we expect STRs to exceed STWs over the back three quarters of the year?

I'm not going to comment specifically forward looking about that relationship over the next few quarters. I will tell you that we feel very comfortable with our inventory levels right now and they are very much in the range of what we plan given the Shenandoah ramp up and the fact we are coming into peak season.

Shenandoah start up a little later than you would have thought. It just seems like the timing has been pushed back a little bit but that may just be a bad perception by me.

Just to be clear. As about a year ago I think we were fairly explicit about saying we were going to begin brewing in March of 2007 and be fully on stream by mid-summer, we are exactly halfway between those two time periods and very much on schedule with where we anticipated to be.

Okay. And Tim, on just working capital, just what drove that in the quarter?

Hey, Brian, we are right in line with where we expected to be. Obviously this first quarter is a heavy working capital quarter. There is a bit of an anomaly which makes it look like we used more because of the anomaly of the 53rd week last year. So there is that playing. We are still right on track we believe for our $350 million full year free cash flow plans. Just a bit of an anomaly on timing. That's all.

That's great. Thanks, guys.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question comes from Christine Farkas from Merrill Lynch.

A question on Canada if I could. I know the reported numbers came in pretty much in line with a year ago, but underlying operating income was slightly softer. Can you comment a little bit about the environment of discounts on your premium brands versus the growth of the sub premium brands or sector -- in Canada?

We had actually a very good quarter from a strategic brand growth area and we are very encouraged by that. We did spend more money behind the brands in a marketing standpoint and we were a little bit aggressive in Ontario to make sure we started the year off strongly. You are seeing a lot of activity behind our brands and we are quite comfortable with that activity and we look forward to the balance of the year.

In terms of the growth of the segment or the sub segments in Canada, is it about as you expected? Are you seeing anything accelerate or decelerate beyond your expectations?

There is a little bit of shifts within segments and I would say if there is any segment to highlight in the first quarter it would have been that the super premium segment had a very strong quarter. Broadly speaking pretty well much as we anticipated.

And the rate in Canada then in terms of your revenue per barrel grossed, how -- what is your outlook for the year in terms of the competition? Is this also somewhat stable or rational?

Well, most of the rate in the first quarter had to do with mix. We would continue to see we were having good success with our super premium brands and we are focusing on some of those brands. Most of the pricing for the year was taken in the first quarter or at the end of the first quarter. There is still some areas of the country that haven't taken price but certainly the bigger provinces tended to move in the first quarter.

Okay. That's helpful. Then just a final question. Back to the I guess the difference between STWs and STRs in the U.S., we were to read into this then based on your plan with Shenandoah that we wouldn't necessarily see a reverse or much of that inventory destocking hurt the relationship in the second quarter?

I think that's right, Christine. We came into the year with inventories a little bit less than what we wanted. First quarter is up modestly. Right now we are right on track with our plans. I wouldn't see any significant impact from a change.

And also underlying that is any question on whether we see softness in our current trends, I think, we feel very good about our share growth and our volume momentum going into the peak season.

Okay. That point was clear. Thanks a lot.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS) Mr. Kiely, I'm showing no further questions.

That's terrific. Thanks for being with us, everybody. Really appreciate it. We are really pleased to start off the year with good momentum and we are ready to take on the summer selling season in the beer business. We will be back with you and see you soon. Thanks for your interest.

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