Molson Coors Beverage Co (TAP) 2012 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is Martina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Molson Coors Brewing Company 2012 first-quarter 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 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 dates they are made.

Regarding any non-US 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, 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. Also, unless otherwise indicated, all financial results the Company discusses are versus the comparable prior-year period and in US dollars.

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

Thanks, Martina. Hello, and welcome everybody. On behalf of Molson Coors Brewing Company, thank you for joining us today for our first-quarter 2012 follow-up earnings conference call. Our goal on 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, Investor Relations Manager; Spencer Schurr, Finance Forecasting Manager; Eric Mickelson, SEC Reporting Manager; Rob Borland, Commercial Vice President for Molson Coors International; and Melissa Mentor, Senior Tax Manager.

As Peter Swinburn mentioned on our regular earnings call earlier today, when we measure our first quarter against the three pillars of our strategy that we laid out for the first time at our Investor Day in New York last year, we have grown profitability in our core markets, but only because of an exceptional quarter in the US. While the Canada market showed signs of improvement, we need to improve our gross profit margins. And while we increased share in the UK, the issue remains one of market performance.

International growth is in line with our plan, and we expect the acquisition of StarBev to improve our gross market exposure while delivering returns that will grow shareholder value. As discussed in New York, our primary focus continues to be on the improvement of total shareholder returns in our core businesses.

So with that, Martina, we would now like to open it up for questions.

(Operator Instructions) Michael Luddy, Goldman Sachs.

It's Judy, actually. Just on Canada, so when you say the industry was up 3.5% on a calendar basis and on your basis up 1.3%, can you just clarify what the difference was?

As you probably know, we have fiscal reporting periods that don't match up exactly with the -- call it the calendar quarter, where the year would start on January 1. So in -- actually in 2012, our year did start on January 1. But the prior year, a year earlier, we actually started, if I remember right, on December 25, I believe it was, whatever that Sunday is. So you have about a week call it shift in the timing of this reporting period versus the prior year. And that's our results.

When people talk about an industry number based on a calendar quarter to get to the 3.5% industry performance in Canada, that is a January 1 start to a January 1 start. Does that make sense?

Yes, that makes sense. So -- and then just in terms of your volume or STR down 0.5%, how much do you think Easter benefited that number? And then you also had the extra week last year in fourth quarter that I guess you traded out the New Year's week for the week that that was going to be more -- so it was going to be more of a negative in terms of your Q1 trend. So is that kind of a wash in terms of the Easter benefit and then the impact from the extra week in fourth quarter?

Yes, okay. So I guess we can get a couple of things from this. One, you could tell, based on the two industry numbers that we provided -- or actually, we provided 1.3% in Canada. We are just talking Canada, right?

Yes.

Then comparing that with the calendar period, it moves to 3.5%. So you can tell that that week, because of the setup of the market in Canada, which does exaggerate the impact, it is worth about two percentage points for the industry, that timing difference, if you will. And so that gives you kind of a general sense of that.

The timing of Easter is tougher to tell. There is enough noise or let's say moving parts in the numbers so that we can't provide an estimate of that. But we do believe it helped first quarter a bit, and it will be a little bit of a challenge in the second quarter in a market like Canada. It tends to be minimal in the US and noticeable in especially the UK, but also Canada to a lesser extent.

By the way, to put a little bit of perspective around it, the reason Easter is such a -- or let's say a bigger impact in the UK is it is a four-day weekend for people, so it is like a long holiday weekend. In Canada, it is a three-day weekend. In the US, it is just Sunday. So I think that gives you a sense of why the differing impact of the timing of Easter by market.

Okay, and then just staying with Canada, on pricing. If I look at your pricing -- or revenue per barrel increase in Q1, basically, it looks like pricing was up maybe 2.5%, which compares to about 1.5% pricing in Q4. So is the difference really the pricing that you've taken in the West that the competitors didn't follow, and then we should expect that to be given back to some extent in the coming quarters?

Yes, I think really we've got a few challenges on pricing there, but it is not broadly out of line with what we've seen in previous quarters. So a little bit higher than we've seen in some previous quarters, but it doesn't look like a dramatic call it spike in pricing.

I'm just saying sequentially, it looks like pricing did step up from Q4 to Q1, and I'm just wondering if that's all the pricing that you've taken in the West? Or was there other pricing in other markets?

Oh, thank you. So there was indeed pricing in other markets, in Ontario, Quebec, and other markets. That's right. It is not just in the West.

Okay, all right. I think that is all I have so far. Thanks, Dave.

Okay. Thanks, Judy.

(Operator Instructions) Bryan Spillane, Bank of America.

Okay, couple questions. First, resources for growth contributed $10 million to 1Q. And we guess some of that, there is some residual benefit from some of the actions you took last year. So as we're sort of modeling that out over the balance of the year, it's similar in the second quarter and then phased down in the second half. Is that -- if we're kind of going to solve for roughly a $25 million number, is that the right way to think about it?

You could, but let me give you a little extra texture around that. We've got $14 million left to go, to get to our goal of $150 million over the three-year period. Let's just say we feel very confident that we will be able to achieve that $150 million, and let's leave it at that.

When you say that -- I believe was our last caller in New York, one of the two.

Right, right, right. Okay. I was just trying to get a feel for whether even if you exceed it, just if there is anything that affects it sort of quarterly. But it doesn't sound like that's the case -- or even first half, second half.

No, not really. I think broadly you are thinking about it in the right way. We set up these initiatives to be implemented and then capture the flowthrough by call it the end of the timeframe we are talking about. And so generally speaking, you do see some trail-off, although it is hard to predict exactly what that will look like, toward the end of the program.

Okay, and then pension costs now are going to be $12 million higher than last year. And if I had it right, on the 4Q call you were actually expecting it to be $15 million. So it is a little bit more favorable than what you were expecting?

Yes, a little bit. These are big programs and so small differences in the numbers can show up. Actually, another factor that can affect that is on the quarter-end call, generally we are -- what -- a week or so away from filing the K, and the actuaries have a lot of work to do at year-end around pensions. And so sometimes you will even see a little bit of movement in the estimate for the year based on them finishing up their work. But either way, a small adjustment.

Okay. And then just -- we had spoken last -- back in February just about there was that list of headwinds, I guess, and pensions was one of them. And I think we had $8 million of brewery expense, $30 million step-up in marketing, the $3.8 million of the lapping the Canadian tax reserve, the 53rd week being worth about $9 million, and then the UK price increase shift of about $3 million.

If we just look at that list, aside from the pension being more favorable, is there anything else that has moved in terms of those items?

No. We are still talking about marketing being about $30 million higher. That excludes the increase at MillerCoors. That is the same. The brewery costs in the UK are still about $8 million. We had a pull-forward in the first quarter, a pull-forward of the volume in the UK into the fourth quarter of 2011. That was $3 million. Obviously that is behind us.

But no, it really hasn't changed. And our tax rate guidance hasn't changed. That was part of the discussion. So no, I'm not aware of any other changes, besides that minor one on the pension piece.

And then your cost of goods per hectoliter inflation or growth expectation in the UK has come down a little bit. But aside from that, none of those other parts have really changed either. Is that right? Meaning your cost of goods expectation in the other segments?

That's right. No change in guidance in any of those.

Okay. And then, you know, in terms of just how you are going to -- have you thought yet about how you are going to communicate -- assuming that the acquisition is going to close at some point during the course of the quarter, will you have another conference call? Or just trying to think about the process in terms of getting this worked into our models. Are you planning on just waiting until you report the quarter, or do you think you will do something separate to talk about -- in a little bit more detail about how to model it?

No, that is a very good question. At this point, the closing date is indefinite. We've said we plan to do it by the end of the second quarter. But the actual closing is what drives the timing of, for example, the pro formas, which you are probably very interested in, and so are we. So that until we actually know exactly what the closing date is, then we won't know when those numbers will be -- and other information will be available.

But we have a bias to share information whenever we can when it is helpful, and so we will do it as soon as we can. The one thing I would say is the pro formas will be first shared in a filing. And if I recall correctly, the deadline is somewhere around 70 to 75 days after closing. And so we will look at that and if we can beat it, great. If we can't, we will definitely at least meet it.

So I think that may give you a general idea of when we would have numbers out there; in other words, later in the summer.

Any chance you can give us some broad direction on how to reconcile what has been disclosed in terms of IFRS EBITDA to how that would look on GAAP EBITDA, like just what the parts that have to adjust are?

Specifically, no. Broadly, the differences between US GAAP and pension tend to be in areas like pension and intangibles and things like that. The StarBev business does not have a defined benefit pension plan, so that's not an issue. I guess I would call that helpful. But beyond that, no, I don't think I can provide specifics.

Okay. All right. Thanks, Dave.

(Operator Instructions) Mark Swartzberg, Stifel Nicolaus.

Couple questions here, first business and then kind of building on Bryan's questions about StarBev, just in terms of timing and how we think about that.

But on the business itself, in the US, you talked about having some added spend, marketing-related, in the second quarter, and that is more accounting driven. Could you just either repeat or elaborate on how we should be thinking about your marketing spend in the US as we move through the year?

Yes, you know, the MillerCoors business does not do sales curve accounting, as we do at Molson Coors. So when they actually spend the dollars is when they get -- when they show up in the financials. And in the first quarter, there were -- when the business was working on a lot of new programming around particularly the Miller Light Brand, but also Miller 64, Coors Light and all the other brands, as we usually do to roll them out to the distributors in late March, and then from there, of Coors roll them out to the market.

What that did this year was push more of the total marketing spend, the increment, if you will, to the second through fourth quarters. I don't know that I would call that accounting, except to the extent of having the fact that the MillerCoors business does not do sales curve accounting on their marketing and sales spending. That's the only difference -- the only accounting effect I can think of there.

And with all of the innovation that the MillerCoors business is introducing, they want to make sure that is out in the marketplace, hitting the ground running, so to speak, in the second quarter. So that is why we've highlighted the second quarter as the time when we expect higher marketing spend. Just the beginning of that time frame, though, because we also expect more in the back half of 2012 as well, more than we saw last year.

Okay, so the real pickup is going to come in the second quarter and really sustain through the balance of the year in terms of rate of growth?

We haven't provided the percentages, but I think -- yes, I think -- it is not a one-quarter phenomenon. I think you got that, which is the main point.

Got it, great. And then I don't -- I want to change the topic to the subject of how the hedges are affecting your cost of sales performance in the US, which is very different than your cost of sales performance in Canada. And it is not just the hedges.

But what I am trying to get at is when you look at the basket of costs in each of those markets -- and there is multiple variables there, but one of them is the hedges -- how would you characterize those hedges versus what the current spot market for that basket is today? I'm trying to better understand once we get past this year, where everyone has got different effects of their hedging, how that might affect the cost of sales trend beyond 2012. Because you have this rather large rate of growth in Canada and a comparatively low rate of growth in the US. So I'm just trying to isolate and really focus on the rule of hedges in that difference.

Yes, it is an important question. However, as with our competitors, we don't provide a great deal of visibility around the specific hedging activities that we do. We've given -- how do you say -- the broad strategic perspective of -- that where we can hedge commodities and other inputs that tend to be volatile, we like to smooth them, and we do that generally over a two- to three-year period, if that is possible, depending on which market you are in. For some commodities in some markets, that is simply not mechanically possible, certainly not with hedge accounting treatment.

And so I think -- let's see -- the other thing I can add is you will see differences by market in our cost of goods trends, not only because of contract brewing in Canada, with layering on the North American brewery volume, and in the UK, changes in factored brands and adding the Modelo brands to our portfolio over the last year or so; things like that can affect COGS, where we have seen relatively little of that in the US.

On the other hand, in the US, it is a very packaging-driven cost structure, whereas the other two tend to be much more distribution-driven cost structures and routes to market. So in other words, commodities tend to overindex in the US, so hedging becomes more important.

The good news is the US business has followed that two- to three-year hedging strategy on lots of commodities. And so the COGS -- and by the way, all of that hedging guidance -- or I'm sorry hedging and differences in routes to market and so forth are embedded in our guidance that we've provided for the business. And as you could tell, the US has the lowest percentage change in its guidance, and that is partly because of the route to market that I mentioned and partly because of the hedging programs, which have helped insulate that business from some of the recent spikes in commodities.

And so it sounds like each given market's hedging is conducted by management of that market. Is that fair?

That's right, managed by each business unit, and with call it a lot of discussion or appropriate discussion at a global level so that we understand how those strategies play out in each of the markets.

Can you speak just directionally about how the Canada hedges compare to the US hedges? I mean, sitting from where we sit, it might be the wrong conclusion, but one could conclude that you've had a very good hedging program -- not very good -- you've had a comparatively better hedging effect in the USA than you've had in Canada. It could be the wrong conclusion. But can you give any perspective on how the two compare -- where the comparison is not so much to each other, but versus what the spot market for the basket is?

I can't help much with the comparison versus spot, but let me help geography by geography. Actually, as I mentioned earlier, different commodities or inputs are hedgeable at differing rates and different durations in each of those markets. And the truth of the matter is, some commodities you can't hedge as long -- for as long a duration in Canada as you can in the US.

The US is probably the most hedgeable market in the world. You can hedge financially, you can hedge through contracts. Anyway, you can do all kinds of stuff. And you have fewer options in Canada than you have in the US, and you have fewer options in the UK than you have in the US. And even less in places like Eastern Europe and some of the developing markets.

So I think the main -- I guess the main headline there is some of the commodities are less hedgeable in Canada and that would be one factor which would drive a difference in the cost of goods outlook, but certainly not the only one.

Got it. That's great. And then just changing topics for you, when we think of -- we had something new from you today on the call; you chose to give us the results as if you owned MillerCoors outright, or at least on a consolidated basis. What was the thinking behind giving us that information?

It is sort of a -- I'd call it an underlying proportional consolidation. In other words, generally speaking, all of our commentary in the business, because of the setup of MillerCoors, and actually more broadly because of the structure of our Company, has moved us in the direction of talking about individual business units and not so much about the all-in numbers, right? Because the all-in numbers did not tend to be helpful in understanding the Company performance for things like net sales revenue per hectoliter and so on.

So this proportional consolidation view that Stewart provided this morning, is essentially our attempt, if you will, to provide some all-in perspective on things like cost of goods in the total business, including what's going on at MillerCoors, and trying to bring that all together to give a more complete, consolidated picture of our performance.

That's great. That was helpful. Okay, and then just shifting over to StarBev, I know we are going to -- it is a kind of a stay tuned there, so maybe stay tuned is the response here. But you highlighted the need -- you spoke about the brand support having been solid or healthy -- I don't remember the exact phraseology. But you're comfortable the brands have been getting good support, the portfolio is getting good support, but you do see some need for incremental investment or a moderate rate -- I think moderate was the term you used -- a moderate pickup in the rate of support.

Can you speak more to what the thinking there is in terms of either the baseline you are looking at, and then also what you mean when you say moderate pickup or moderate increase in rate of support?

Yes. Without -- I mean, we don't have any specifics available as far as the numbers go, but let me give you philosophy. The StarBev business is -- it is nine countries. You know about that. In the vast majority of these markets, the business has brands that are very big, very strong in their respective market. They have great scale. They have been well-developed over a significant period of time. So we feel good about that from call it a starting standpoint, from what these brands are and how they are doing in the marketplace.

At the same time, as you probably know, we are a brand-led company. We are all about building brands. That is how -- fundamentally how we build shareholder value. And we have a full innovation pipeline in our major markets in the US, Canada and the UK, and we roll some of those out to our international markets as well.

Well, some of those ideas will make a lot of sense in Central Europe, post-close. And so those innovations will require, assuming you want kind of a baseline investment level against the brands, which has been successful in the past, and the innovation would be incremental to that. And so that is what we are thinking about, is supporting innovation in the marketplace that isn't there now and some other ideas, but on a relatively selective basis.

So more about building on strength, building on what is already there, as opposed to strengthening what is already there.

Yes, that's right. Some of these brands have really healthy share in these markets. In at least one of them, it is in the 90%. So it is not that they lack scale or lack attention. It is just that we think -- call it the value of this transaction really comes from sharing ideas around things like brand-building and innovation. And really, those ideas, by the way, don't just go one direction. This is a well-run company, and they have some ideas that we can benefit from as well.

That's great. Finally on StarBev, we learned when you announced this that the volumes have turned positive again last year. Can you just speak broadly to what the recent trend has been with StarBev's top line, either on a total top-line basis or a volume and price mix basis? Can you speak directionally to what has been going on more recently for the top line?

We haven't closed yet, and we are under confidentiality clauses certainly until then. What I can help with, though, is beer volume growth in those markets, over a longer period of time, call it pre-crisis in those markets, we saw, based on Euromonitor data, which by the way, is in the investor presentation we rolled out in early April, when we announced the agreement. So that was a little over 3% in the pre-crisis era, and then declining at a high-single-digit rate in the crisis years, the last -- call it '08 through 2010. And then more recently, we've seen -- in 2011 essentially and early 2012, we've seen those markets come back to growth. And at least Euromonitor was projecting 2% to 3% growth over the next several years, based on economic recovery.

That's great. Excellent. Thank you, Dave.

(Operator Instructions) Brett Cooper, Consumer Edge Research.

A couple of quick ones for you. Most of them are on the call side. So in the UK, you guys said that the majority or the highest rate of increase in cost of goods sold would be in the second quarter. And you said it was because of the incremental investment you're making in the brewery.

Yes, that's right. That $8 million of incremental spending that we're making in our brewing footprint there that we expect for this year, that increment is heavily weighted towards the second quarter, as we essentially ramp up for peak season and complete some of the projects that we started in the first quarter.

But if you are guiding to mid-single-digit COGS for hectoliter inflation in that market, there should be some underlying, I guess, acceleration from what we saw in the first quarter as well, right? Because the brewery investment is about four points, assuming that it all hit in one quarter. Is that a fair assumption as to how we should think about the rest of the year?

Well, I think -- take a run rate and assume that most of that $8 million is in the second quarter. And I think that is really all the visibility we can provide to model off of.

Okay. And then in Canada, if I move over there for COGS per hectoliter, so you had -- whatever -- I think you said about a 5.5 point hit from the NAB contract. And it should be something -- not to put words in your mouth -- but something similar in the second quarter and then dissipate significantly in the second half. Is that fair?

Yes, that is the right way to think about it. We started ramping up the NAB volume late in the second quarter of last year. And so we will essentially begin to cycle that late in the second quarter this year. So I think the way you were thinking about it is right.

Back to the UK COGS question. Increased pension costs this year, those tend to spread through the year in a very let's call it consistent way. So that may be one of the things that you are either thinking about or seeing.

Okay. Can you give us some perspective of the price point of Coors Light Ice T versus, I don't know, either the other mainstreams or versus the overall Company average?

Yes, so Coors Light Iced T, let's compare it to Coors Light. Price point on that brand would -- it varies some by channel and geography and so forth, but generally, 5% to 10% higher, with some variation around the mean.

Okay, that's all I have. Thanks, Dave.

(Operator Instructions) Michael Luddy, Goldman Sachs.

It's Judy again. Did you talk about corporate MG&A kind of still staying -- I guess your prior guidance was around 115 for the full year.

Yes, (multiple speakers) we did not -- go ahead.

Okay, because 1Q, it looks like it was down year-over-year if I take out some of the special items.

Right, we did not change our guidance. If I remember right, the prior-year first quarter, first quarter of 2011, was a little on the high side. So we were down -- what -- about (multiple speakers)

15% year-over-year in Q1 last year.

Yes, that's right.

And then this year, it was down again, like 5%, though, if you strip out the $6 million of StarBev-related expenses.

Yes, okay. We do tend to see some quarterly flow in -- or differences or variation in corporate spending by quarters, depending on what projects are going on or what incentive comp is doing at a particular time in the year. A lot of other spending tends to be pretty consistent through the year, but those two things tend to move around quite a bit.

Okay, but for the full year, we are still looking at 115. So for the balance of the year, we should see a pretty big ramp-up -- to get to the 115?

Yes, that's the guidance.

Okay. All right. Thanks.

(Operator Instructions) We have no further questions in queue. I turn the call back to Mr. Dunnewald for closing remarks.

Okay, great. Thank you, Martina, and thank you, everybody, for your questions. We appreciate 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 Heather on her direct line, or at the main number here at Molson Coors, which is 303-927-BEER, or 927-2337. Thank you again and have a great day.

This concludes today's conference call. You may now disconnect.