Molson Coors Beverage Co (TAP) 2011 Q2 法說會逐字稿

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Good afternoon. My name is Alicia and I will be your Conference Operator today. At this time, I would like to welcome everyone to the Molson Coors Brewing Company 2011 second-quarter investor relations follow-up call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session. (Operator Instructions)

Before we get started I want to 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 filing 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-US GAAP measures that may be discussed during the time call and from time to time in discussing the Company's performance, please visit the Company's website at www.molsoncoors.com and click on the financial reporting tab of the investor relations page for a reconciliation of these measures to the nearest US GAAP results.

Now I'd like to turn the call over to Dave Dunnewald, Vice President Investor Relations.

Thank you, Alicia. Hello and welcome, everybody. On behalf of Molson Coors Brewing Company thank you for joining us today for our second quarter 2011 follow-up earnings conference call. Our goal in this call is to address as many additional earnings-related questions as possible following our regular earnings conference call with Peter Swinburn, Stewart Glendinning, and our business unit CEOs earlier today. We will use a standard question-and-answer format and we anticipate that the call will last less than an hour. So let's get started.

With me on the call are Heather Pollard, Greg Schneider, Group Manager of Global Forecasting and Analysis, Spencer Schurr, Financing Forecast Manager, Boyson, Melissa Mentor, Senior Manager of Tax, Bill Waters, Vice President and Global Controller. As Peter Swinburn mentioned on our regular earnings call today, Molson Coors Brewing Company second quarter underlying after-tax earnings decreased about 1% as positive beer pricing and cost reductions in our core businesses along with favorable foreign exchange were offset by the impact of weak economic conditions, commodity inflation and investments in our international businesses. Despite these challenges, we remain focused on building shareholder value through growth strategies, profit and cash generation, and our disciplined use of cash. We also generated substantial cash in the quarter, a large portion of which will be returned to shareholders via our increased stock dividend and our new stock buyback program. We plan to implement this $1.2 billion stock repurchase program opportunistically over the next 3 years with the primary goal of growing long-term shareholder value. We are pleased to be in a strong position to increase cash returns to Molson Coors shareholders while preserving financial flexibility to explore growth opportunities and strengthen our balance sheet in the future.

Now before we start the Q&A, I'd like to offer some additional perspective on 2 questions that we discussed earlier. And the first one, as we mentioned this morning on the earlier call, in the third quarter, our Canada business will be cycling a non-recurring reduction in costs that we called out a year ago. I only wanted to save you the trouble of looking up the magnitude of this non-recurring reduction and just tell you that it reduced cost of goods per hectoliter about 3 percentage points a year ago in the Canada business. So it was in fact a significant factor. Also in the second half of the year in Canada, we will be ramping up our North American breweries contract brewing production which will have implications for Canada COGS and net sales in the second half.

And then second of all, if you're adding up our segment results to get to consolidated results, it would be useful to know that we now have a small amount of beer volume that our UK business is selling through our international business, which is eliminated upon consolidation. So you will not see the numbers-- you will see the numbers in the UK business but then they will be eliminated in the consolidated results. So along with 20,000 hectoliters of volume, this inter Company elimination also includes $1.3 million of net sales which is offset by $1.3 million of cost of goods for zero impact on margins and operating results in any of the segments, or I'm sorry, in the UK segment, and then obviously those sales and volume are reported in MCI and in the consolidated segments. So I hope that'll help with the modeling and with that I'd like to open it up for your questions. Alicia?

(Operator Instructions) Brett Cooper with Consumer Edge Research.

Hi, Dave, how are you?

Great, Brett, how about you?

I'm doing all right. Two things I was hoping you would help me with. Could you give me a break down or us a break down of the COGS increase in Canada in the quarter?

Yes, let's-- we gave you kind of a head start on that this morning. Let's see whether we can provide any additional help on that. We said cost of goods up 7.7% in the quarter largely driven by fixed cost deleveraging at lower volumes, input inflation, sales mix and the NAB contract. Essentially the NAB contract was about a third of that or a little less and then you've got inflation about a third and then you have fixed cost deleverage and mix being about a third.

Okay, I don't know if you'll answer the question, how far along are you guys in bringing the NAB contract online?

Yes, I mean, I would say that we just-- there was essentially none of that in the first quarter. We began the ramp up in the second quarter and we should be fully ramped up in the back half of this year. That's generally the way these things work. It takes several months to ramp up that type of an operation.

So on an annualized basis in the third quarter you would be I guess fully ramped on that, is that fair?

I think that's a good way to think about it, I mean you have seasonality to consider and things like that, but I think that's the right way to think about it.

Okay, great. Thank you.

You bet, Brett. And you may recall that this is up to 1.5 million hectoliters per year contract brewer arrangements for the Labatt brands, brewed in Canada, sold in the US, Labatt Blue and Labatt Blue Light.

(Operator Instructions) Mark Swartzberg with Stifel Nicolaus.

Thanks, hi, Dave.

Hi, Mark.

The guide you gave on cost of sales per hectoliter for the year in Canada, should we assume that that's before the impact of that benefit you had in the third quarter last year in Canada?

Actually, the guidance we gave on cost of goods, we split it 2 ways. One is owned brand and two is all in. And actually, the benefit last year or anyway let's say that this one timer will create a challenging comp for both of those pieces of guidance, does that make sense?

So on the upper end of that mid single-digit guidance, if you have that benefit there last year.

No, I'd say for example, our guidance mid-- I see, all right, well let me just say it this way. We have mid single-digit guidance in both cases, all in and owned brand. The owned brand number, let's see that one excludes, or excuse me, yes that one excludes contract brewing. And look if you And that's defined for you, that's numbers that round to 4-- between 4 and 7. So the all in number would be higher than the owned brand number. But in both cases, those pieces of guidance include going up against that one-time benefit we had a year ago.

They do, okay. So you had a comparatively lower cost of sales number last year than you would have had without that benefit and you're saying that both those numbers are with that comparatively lower base?

Yes, the guidance on a percentage basis, the guidance is higher because of that one timer a year ago, both of those pieces of guidance, that's right.

Great, fair enough. Okay, great. And then for the UK, just as we think about-- maybe you can refresh me on the fourth quarter last year. I mean, it was down pretty materially in terms of operating income and I'm just trying to recall whether that's a reasonable earnings pace or whether there's something going on there?

Yes, let's see. It feels like ancient history at this point. But you're right, we were down about 27% on the US dollar earnings, down about 24% on pound denominated earnings, cost of goods were noticeably higher, sales volume and SGRs were definitely challenged. Yes, I don't remember any specific factors. The numbers certainly point toward a challenging quarter. I guess what I'd say is take a look at the disclosures we put out in the fourth quarter and see what that looks like, and then I'll do the same and we can talk about what we talked about in the fourth quarter of last year.

Okay, great. Thanks, Dave.

Yes, thanks, Mark.

Christine Farkas with Bank of America Merrill Lynch.

Thanks, hi, Dave.

Hi, Christine.

A question on the UK. Just to go back to the price mix dynamics of the quarter. I realize that adding the Modelo brands was called out at a separate boost, you don't call that mix. But as we cycle that and when will we cycle that, will that net itself out or as long as Modelo keeps growing that's going to show up as a-- I mean will that now be mix when you cycle that anniversary?

Yes, right it will be-- well let's take it in 2 pieces. One, you have this layering it in, so you'll have 4 quarters of step up related to simply layering those brands into our business. And we started doing that, Greg will confirm, in the fourth quarter of-- I'm sorry, first of this year. So we will cycle that by the end of the fourth quarter of this year, so that's your step up. And then the second effect is yes, I mean those are, how do you say, strong brands have tended to have good growth to them and so to the extent that they grow, then that will provide a mix benefit. But generally speaking, that magnitude is not going to be as great as, unless they're growing at 100% a year, not as great as the initial layering in of those brands.

Sure, and so if I take a step back to the first quarter, if I took these notes correctly or did the math correctly, there was a reported revenue per hectoliter growth of 10% of which 5 points I believe came from this Corona layering or the layering in the Modelo brands which would suggest somewhere near 5 points of rate. And I'm wondering given the fact that we're cycling some lighter priced growth a year ago, what changed in the customer dynamics to net that out to flat or even minus?

Yes, so really 2 pieces to the question both on NSR, right?

Yes.

So 5% of Modelo brands in the first quarter I don't remember it specifically but I think that's right, it's either spot on or very close.

I think it was half of sales mix was the quote or half of the growth.

Right, so I guess the way to think about that is the Modelo brands and specifically Corona tend to be seasonal brands and so as a percent of sales and a percent of volume and so forth they tend to be higher in the summer time. This is also true in other markets where we manage the Modelo brand. So to the extent that that number would be a little bit bigger in the second quarter makes sense because of seasonality of the brand.

And then second of all, what about the customer mix? Essentially you're seeing a shift-- a customer mix shift from on-trade to off-trade which is kind of long-term trend. And also within that the customer mix that we have within the off-trade you could say that we sold a little bit more beer through lower revenue per hectoliter customers.

Okay, no that makes sense. It just seems that again, if the math is proper for the last year, it just seems that that was a big slowdown in the rate part of your reported revenue per hectoliter growth where we saw rate growth all of last year, so I'm just wondering if there's something in the quarter that shifted it dramatically and perhaps with the layering in of the seasonal Modelo as you mentioned it's just really small?

Yes, layering in Modelo is sort of a separate question call it mix when you're getting straight to the customer base and the pricing in the UK business. Essentially it's-- the second quarter is-- yes, there was-- certainly there was a customer difference in the quarter which made price essentially not show up as a factor in the quarter. We did actually get positive price in the on-trade and then off-trade was slightly negative for a net price of slightly negative if I recall, but again driven by customer mix more than anything else. But that-- really the overall pricing dynamic in the second quarter is a continuation of long-term trend of pricing in our UK business where we were renegotiating contracts in both the on-trade and off-trade starting about 3 years ago and put up some pretty amazing revenue per hectoliter numbers specifically related to price over the following 2 to 2.5 years. And as we-- I mean if you go back and kind of remember what we said a year or so ago, we anticipated that that level of NSR and pricing would not continue going forward because it was kind of a one-time, not a one-time, but let's say a change in the way we approached our customer negotiations. And we've actually seen that settle down quite a bit so that pricing more recently has been how do you say more normal relative to longer term trends for the last few quarters.

Okay, okay that's helpful. Thanks, Dave.

Yes, thanks, Christine.

(Operator Instructions) Lucas Klein with Putnam.

Hi, Dave, how are you?

Hi, Lucas.

A few quick questions for you. First thing is just on the free cash flow target for the year, I think you guys are tracking a little bit below where you were at this point last year, and so just curious if there are things that you guys are thinking you'll be able to do in the second half to kind of get to that $750 million target?

Yes, it essentially our free cash flow underlying so far this year in the first half is about $200 million less than it was a year ago. It's really driven by 2 factors. One, working capital of about $140 million. Most of that's common, not all of it but most of it. And then the other-- the rest of it would be less cash delivered from net cash delivered from Miller Coors in the first half.

On the timing, what specifically is that?

In our business, a 1 day difference in the calendar if we're in a [deck run] can be over $50 million. For example, excise tax payments every quarter are huge, so it's just timing of payments and receipts, especially payments. And also timing of Miller Coors cash distributions can also change by a day or two or whatever and that can be a significant factor as well.

Okay, and then as you think about kind of sources and uses of cash over the next 3 years, so the share repurchase program call it $400 million a year ratable, and I understand it's not that clean necessarily, but you guys generate I think about $400 million in free cash a year kind of after dividends. And so just-- but you're also going to have this currency swap that you're going to need to settle in 2012, so should we kind of interpret this as you're comfortable actually taking on a little more debt for the business? I mean is that kind of the right way to interpret today's announcement?

You could, but let me see whether I can provide a little more perspective around some of those factors. So after dividends, probably round numbers you'd be around $500 million of free cash flow post-- underlying free cash flow post dividends. The swap as Stewart mentioned, we're looking at the right strategy to resolve that in the best interest of our shareholders. And most likely, as he suggested, that involves some settlement in the near term but also some extension and even mentioned that that could be over a number of years, so I don't think at least at this point I would assume that that's all in 2012. And then-- and we also have, as Mark so rightly pointed out, we have $1.2 billion of cash on our balance sheet and while Stewart has mentioned that we want to have more cash on our balance sheet than we have in the past, that still gives us pretty good flexibility to work that perhaps as well.

The buyback program, what I would say on that, I would emphasize that it's an opportunistic program and so ratably maybe but the way you'd-- and we also said that the purpose of the program is to build shareholder value, long-term shareholder value. And there are a number of ways to approach buyback programs but most companies I have seen approach them either to use them as earnings per share boosters, in which case they're buying back a certain number of shares every month or every quarter or whatever as long as the program is going on. And there you see a lot of very smooth ratable sort of call it draw down of the program. And then the other type is opportunistic programs that are less focused on EPS specifically and more focused on buying more shares when the price is low. So we'll see and obviously our program is in the second bucket and so there may or may not be more lumpiness to our approach to buying back shares but we do intend to be opportunistic and build shareholder value with the program.

Great, and just on the $1.2 billion in cash, I mean I don't know how much of that is in the US versus other places, but are there going to be tax implications either cash or P&L tax implications to using some of that to buy back stock?

Yes, we've said actually for a while in our filings, that we repatriate cash when we can do it in a tax advantaged way. And we have Company structure and the capability to move cash around, particularly if we have a little bit of notice, wherever we need to. And it's never, in my recollection, never been an issue repatriating the cash we needed to the geography we needed, again particularly as long as we have a little bit of notice.

Great. All right, I'll pass it on. Thanks.

Okay, thanks, Lucas.

And we have no further questions at this time. I'd turn the call back over to you Mr. Dunnewald.

Okay, great, thanks, Alicia. Well with that, I wanted to just thank all of you for your interest in Molson Coors and for joining us today. If you have additional questions that we did not cover during our time this afternoon, please call me on my direct line or at the main number here at Molson Coors which is 303-927-beer or 927-2337, sorry, that's 2337. Thank you again and hope you have a great day.

And this concludes today's conference call. You may now disconnect.