Molson Coors Beverage Co (TAP) 2012 Q3 法說會逐字稿

Welcome to the Molson Coors third-quarter 2012 earnings follow-up conference call. Before we begin, I will paraphrase the Company's Safe Harbor language. Some of the discussion today may include forward-looking statements. Actual results could differ materially from what the Company projects today, so please refer to its most recent 10-K and 10-Q filings for a more complete description of factors that could affect these projections. The Company does not undertake to publicly update forward-looking statements whether as a result of new information, future events or otherwise. You should not place undue reliance on forward-looking statements, which speak only as of the date they are made.

Regarding any non-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, VP Investor Relations of Molson Coors.

Hello and welcome, everybody. On behalf of Molson Coors Brewing Company, thank you for joining us today for our third-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, Gavin Hattersley 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.

Let's get started. With me on the call are Heather Pollard, Investor Relations Manager, Spencer Schurr, Finance Forecasting Manager, Katie Walter, Senior Analyst at PA, Mike Rumley, CFO of Molson Coors International, Erik Mickelson, Manager of SEC Reporting, and Melissa Mentor, Senior Manager of Tax.

As Peter Swinburn mentioned on our regular earnings call earlier today, in the first full quarter of owning our Central Europe business, the addition of these results net of financing costs drove strong earnings growth. We continue to expect that the acquisition will strengthen our Company, enhance our growth profile and increase shareholder value. In the third quarter, we grew total Company underlying free cash flow, operating profit, after tax income and earnings per share all at double-digit rates. Looking forward, we anticipate significant volume and earnings headwinds in the fourth quarter. Recognizing these challenges in our business, we began a number of new initiatives in the third quarter to standardize and further streamline our Company over the next two years. Combining our UK and Ireland business with our new Central Europe organization to create a single Molson Coors Europe business is the start of this process. And all these steps are designed to improve efficiency and effectiveness across our Company and drive profit, cash and value for our shareholders. So with that, Sarah, we'd now like to open it up for questions.

(Operator Instructions) Bryan Spillane from Bank of America.

Yes, thanks for doing the call. Couple of questions. The first one is as we look at the fourth quarter, you gave a pretty detailed list of headwinds and tailwinds and two things I wanted to get some clarity on. First, because of the mix of profitability, is there anything that is going to drive the tax rate in an unusual way in the fourth quarter? Trying to understand how to -- if you can give us any idea at all how to model the tax rate for the fourth quarter.

Yes, okay. The best way I can help you, we did give the annual range but I realize with one quarter left, that looks pretty large from a one quarter standpoint.

Right.

But it's also an assessment of what our existing rate is an assessment of what our annual rate is subject to anything that might change including things like tax rate changes or resolution of uncertain tax positions, in other words, tax audits. I would say beyond what's in the release and the script, in other words, the actual tax rate in the guidance, I would say it's difficult to provide additional information at this point.

But I guess the extremes in the range would -- there would be some other one-off event that would cause it. I was trying to get-- because that's a pretty wide range that it implies for the fourth quarter and so if we didn't anticipate that there's be some settlement or some other thing, would the range be tighter or --?

No, that is our standard range.

Okay.

Normally, particularly on an annual basis, we actually don't tighten that up.

Okay. All right and then as we're modeling the SG&A for the fourth quarter, two things I just wanted to follow up on. One was understand that pension costs are up but that's actually part of what you had been talking -- that's not incremental to what you were expecting in the middle of the year, right? That pension expense headwind has been there all along, is that correct?

Yes, that's correct. We have had no curtailments or other changes in our pension plans to date, so that's what tends to drive a change. And so, right, it was anticipated earlier in the year. We wanted to give people a one stop shop on the call it factors that we saw in the fourth quarter.

And then given that the year has come in the way it has, are compensation expenses going to be lower, so any change in variable compensation and maybe a catch-up accrual that either would have affected the third quarter or might affect the fourth quarter favorably from a cost perspective?

Good question. Actually, we have seen some change in-- or say effect in some of our numbers through the first three quarters of the year related to that. We certainly had our share of challenges last year as well, so the magnitude of the change I guess I'll leave that for you. But in the-- for example, in the UK, we had lower compensation expense this year versus last year and incentive compensation, sorry, and that's -- it was related specifically to that.

Okay. And so it's not -- I was giving-- I don't know what the targets were and the payout targets were in Canada at the start of the year but it doesn't seem like it would be tracking towards that. Trying to get a sense for whether there was any adjustment that was met like retroactive adjustment that might have been made in the third quarter, and then again relative to what we would have been modeling for the fourth quarter before today's earnings release, I would assume that we would make some adjustment for lower compensation cost.

Yes, I guess broadly -- so Canada had a relatively challenging year last year also. I would say that in the third quarter there was not a significant change year over year in incentive comp in that particular segment. The bigger changes have been in the UK where you actually saw a-- the types of factor you're talking about in the third quarter of last year, which is a bit of a an overlap issue for us this year, and then if you rewind to the second quarter, you saw the reverse of that where there was a reduction in incentive comp this year versus what we were expecting or booking last year.

Okay.

Does that make sense?

Yes, it does. And then marketing expense, there was a question on the call about marketing expense in Canada and I guess the idea that without -- with the NHL lockout, it would naturally affect your programming given how tied Molson is to the NHL. I wanted to make sure I understood Dave's answer to that question and so what he was saying was trying to find places to-- alternate programming, so other things to spend the money on. But we can-- it wouldn't be unreasonable to infer from that that there is some reduction potentially in advertising and consumer spend in the fourth quarter, simply because there's no NHL right now. Is that a fair way to think about it?

Yes, I think if I heard the answer clearly, Dave was saying that we have a range of brand-building programs in Canada. NHL is one of, if not the most important single program or promotion that we have. And without having that available to us, obviously that has implications for abilities to activate our brands at retail. It also frees up some dollars. We won't say how many, but some dollars for the -- to basically redirect into other activities, other promotional properties, what have you. The-- and that's what the Canada team has done. We've redirected dollars, I won't say whether it's all the dollars, but we have redirected dollars into other properties, other opportunities to support our brands. However, I think we would emphasize that there's probably not a single property in Canada that comes to mind anyway that is a higher impact than NHL. Even if you're redirecting dollars, doesn't -- it still could be a challenge to activate your brands the way we want to.

Okay.

Does that make sense?

Yes, it does. Then last one, did you give -- I might have missed it on the call, did you give a CapEx outlook for the year?

For this year?

Yes.

Yes, we did. It was $240 million, excluding MillerCoors. MillerCoors is generally low to mid $300 million. And the reason it's higher, that $240 million is higher than the year before is half a year of CapEx from Central Europe.

Okay. Okay, all right. That's helpful, Dave. I'll get back in the queue, thanks.

Great. Thanks, Bryan.

Mark Swartzberg from Stifel Nicolaus.

Yes, a couple questions on Canada and then a couple others. On Canada, the reference to $10 million in adjustments last year, can you speak to what that figure is about what's in that number?

Yes. That was adjustments to accounting, employee related and some other expense items in the fourth quarter of last year, as I say, totaling $10 million, that we do not expect to repeat this year.

Those were benefits in fourth quarter last year?

Yes, they benefited the quarter; that's right.

Okay.

Essentially stuff we'd -- yes, anyway, they were benefits in the period.

Got it. And also thinking about that 53rd week in Canada, you described it as a $12 million benefit last year, specifically in Canada. And when I look back on your comments regarding the whole of Molson Coors, the 53rd week, at least when you reported the fourth quarter, was described as a $9 million benefit. So can-- I guess two-part question. As we think about the whole of Molson Coors and lapping that 53rd week, on a total Company basis is the number still $9 million, has it gone up? And then the second question is why the delta there, if indeed there is a delta, purely from a Canada perspective?

Yes, you've definitely done your homework, which is great. It is true that the $12 million is the impact in Canada. The $9 million number -- and by the way, these are still true this year for the 53rd week impact, those did not change, the $9 million is a total Company impact. The difference between the two would be call it expense, because now we're back in 2011, right, so we had $12 million of pretax underlying income in Canada from that 53rd week, and then we had $3 million in corporate of higher interest expense and higher overhead, primarily interest.

Got it. So it's still $9 million and it's $12 million net the $3 million gets to that $9 million.

That's right.

Okay, great. And then a follow on to Bryan's question there about CapEx, did you give us an update on your free cash flow view for 2012?

We did not change the free cash flow target, still $750 million, plus or minus 10%.

Okay, great. And then finally, I don't know that we can get any more detail on contract brewing in the US, I brought it up with Tracy this morning. But can you tell us what portion of mix is contract brewing in the US and speak at least directionally to whether it was beneficial? Because it looked like not only did it accelerate sequentially in the US in the terms of rate of growth but the underlying trend, the two-year stacked rate also picked up. So I appreciate you can't get into what's driving that but is it fair to think that that was part of the benefit there in the US in the quarter?

A bit of benefit. As you know, contract brew has a relatively -- or I'm sorry, if you look at contract brew arrangements globally, you'll find that they tend to have relatively low margin structures associated with them. Makes sense, because the producer is not the brand owner. If you look at the specifically the performance in the US around that, broadly speaking one-tenth of -- not domestic, but total volume that Molson Coors reports is contract brewing and the primary customer, but certainly not the only one, is Pabst. As you may know, some of their brands have grown. That-- I think that's the main headline around that one.

Great, okay. Thank you, Dave.

Okay. You bet, Mark.

(Operator Instructions) Judy Hong from Goldman Sachs.

First in Canada, the COGS per barrel number, up 6% in the third quarter, did you guys break out how much was inflation versus mix versus if there was any impact in terms of the can shortage or even the mix shift towards the can packaging?

Yes, we didn't break out the can pack mix, but let's see. Yes, let's see essentially, inflation relatively small factor. Yes, so it really wasn't -- inflation was not a really big factor. It was -- there was some fixed cost deleverage as you know. We had -- with volumes down, that'll tend to be a factor. Cost savings actually more than offset inflation.

It's a lot of the mix driven COGS per unit increase that you're seeing in Canada?

Sorry, one more time on that one.

The 6% increase in the third quarter, it sounds like a lot -- most of that was really mix driven/

Yes, it really -- that's exactly right. I was going to say, it's mix driven and that's a combination of products. For example, now we have the -- well, let me start with package mix, different containers, shift toward cans by the way is part of that because those are higher cost than the returnable bottles that are still the main primary package in Canada. In addition to that we-- this year we have the Strongbow Cider brand as well as Newcastle in Canada. Those products are going to come through at a higher mix effect on cost of goods per hectoliter.

Isn't this going to more of an ongoing impact in terms of your COGS as the mix continues to shift both from a packaging and product perspective?

Yes, I would say directionally that sounds like the right way to think about it. We'll see what the COGS look like next year, but at this point it is important to remember that when it comes to brand mix, we're layering in new brands that hit the P&L at a higher COGS per hectoliter. Those would include Coors Light Iced T, which thankfully has higher NSR per hectoliter. And the same would be true, although the COGS are even more accentuated on those other two new brands that I mentioned, Newcastle and Strongbow. And once you cycled bringing those brands in, then usually the effect is lower, unless obviously they're doubling every year.

Yes.

And the other -- sorry.

Go ahead.

The other factor I didn't mention was pensions, also you have a COGS component there.

Right, right. Okay. And what is driving the shift towards cans in Canada?

Basically consumer preference primarily driven by convenience. In other words, you don't have to return cans to the store.

What's the shift? What's the breakdown between returnable glass versus cans in the marketplace and how does your mix stack up versus the market?

Our mix is quite similar to the market, since we're tied for market leader or whatever. And the mix varies quite a bit across Canada, but let me give you the national view first. About 10% kegs, about 40% cans and about 50% returnable bottles, call them round numbers. If you move -- and that's national. If you start in the west, actually the package mix there is much like the US, so there it's about 10% kegs, about 50% cans, and 40% bottles. And then if you move to the east there's some markets, some provinces where the -- you have 10% or less kegs and around 80% bottles, so you can see there's quite a difference depending on where you are. But definitely the overall trend in Canada is away from returnable bottles and toward cans from a pack mix standpoint.

Okay. And then in terms of Central Europe, so the COGS per, again hectoliter trends there, if we look at your guidance for the full year, certainly it's gone up from the last quarter but it still implies that fourth quarter you're going to have pretty benign COGS trend or maybe even a decline year over year to get to that mid-single digit for the full year.

Yes, I'll let you model it in, I think the point's right. The real difference between the second quarter and the third quarter, which is when we change the guidance, is simply malt costs which reading trade press and so forth, you'd see a lot of commentary around what's happened with the harvests in Europe and more so than other grains, the cost of malt tends to be a bit more regional as opposed to some commodities, like aluminum, whose prices tend to be more globally -- reflected similarly on a global basis.

Okay. So year to date what is your COGS per unit increases in Central Europe?

Let's see.

Because I think you have the second quarter up 11% and then the third quarter up 6%. The Q1, I think we have an estimate but I don't think you've ever -- may not have given us that number.

Yes, let me see, Spencer's probably got that handy. Yes, call it around 7% or 8%. Is that a local currency basis? Yes, so between 7% and 8% on a local currency basis for COGS in Central Europe.

Year to date?

That's year to date, correct.

Right. The fourth quarter, is there something that happened in the fourth quarter of last year that makes the fourth quarter COGS much more benign than year-to-date number to get to the mid-single digit or is your definition of mid-single digit maybe a little bit broader in terms of the range?

Yes, I won't refine the range so to speak but I can speak to factors we saw in the first half, for example, which helped to drive our local currency COGS in Central Europe up substantially. You may recall that in Central Europe, the weather was the worst in generations in the January/February time frame, so bad that we had beer freezing in the trucks. We couldn't deliver beer, things like that. That drove COGS up in the first quarter. In the second quarter, we had some incremental costs in the COGS line related to introducing innovations into the marketplace, and those innovations are largely now out in the marketplace.

Okay, that's helpful. And then finally in the-- did the MillerCoors or the comment about the STWs catching up to STRs by year end, is the delta between STW and STR in the fourth quarter something like 150 basis points? I'm trying to get to the year-end inventory level that's in line with last year.

Yes, what I can tell you is that the year-to-date difference between STRs and STWs is 90 basis points and you can get this out of the -- you add up the MillerCoors disclosures quarter by quarter, and 90 basis points on a year-to-date basis looking at last year's call it volume base would put you in the range of 350,000 to 400,000 barrels. There are a lot of factors that go into the difference, well particularly where inventory levels might go, things like forecasts of sales by our distributors and any slippage in the system, things like that. But at least that tells you where the numbers fit on a year-to-date basis and we did say that we expect to get-- MillerCoors expects to get back to about even with year end 2011 by the end of this year, as far as inventories go.

Right, okay. Got it. Thank you.

You're welcome. Thanks, Judy.

Brett Cooper from Consumer Edge Research.

Two questions. There was a mention in the US or the MillerCoors thing about the timing of G&A in the third quarter, do you have any color on how much that was?

Let's see, we'll see whether Spencer has a view on that. Let's say it's one of the -- just one of the factor, not one of the major factors in that line item.

Okay. Because I mean, they said it was up by 0.4%, partially offset by the timing of G&A. And I was wondering as we go forward and thinking about this next year, is there-- is it a meaningful fact that we need to consider when modeling third quarter '13? I assume you're telling me no.

It's basically a timing issue within the year primarily related to incentive comp.

Okay. And then the other question I had, can you give us a number of what your own brand volume did in Canada, so not necessarily the ones you represent but we're talking a lot about the mix shift of brands that you don't own weighing on COGS and if your STRs were down I think -- I think [Canada Day] was about 200 basis points in terms of the impact. I was trying to figure out what your own brand volume did, either relative to the down 5 STR number or down 3 adjusted for Canada Day.

Yes, Canada Day, yes, right around 200 basis points of estimated impact, if you will. We don't break out non-owned versus owned brands but if-- I would say broadly speaking the non-owned brands tend of be at the high end of the category. In other words, import brands and things like that. So they will tend to outperform the portfolio. I would emphasize, though, that Coors Light Iced T was part of that dynamic I talked about earlier around COGS per hectoliter and that's obviously an owned brand and that is the biggest of any of those brands that I talked about. So I wouldn't assign too much importance to that split between the two. I think the main challenge or thought is that essentially you're layering in volume when it comes to those new brands and so you have essentially a step-up there and once you lap that, then unless you're doubling the brands every year then that's going to be a less significant factor after that.

I guess I'll take my last one. Is there any way you guys could give us either the mix or the market share of Coors Light Iced T?

Not in specifics, but I would say Coors Light is the biggest brand in the country and, let's see, Coors Light Iced T is a new product, in essentially a new segment, would be well under one share point.

Okay, perfect. Thanks.

It's very small, but within the range of our expectations for that brand.

Thanks, Dave. Great. Thanks, Brett.

John Faucher from JPMorgan.

I apologize because you may have actually mentioned this in -- on the call you guys talked about 10 -- in Canada here, cycling $10 million of adjustments last year and adjustments is a word that could go either positive or negative. I assume that was favorable last year and unfavorable this year, is that the right way to look at it?

It is, yes.

Okay, got it. Cool. That was my only question. Thanks.

Great. Thanks, John.

And there are no further questions in queue.

Great. Thank you, Sarah. In closing, I'd like to 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 Heather on her direct line and/or the main number here at Molson Coors which is 303-927-beer or 927-2337. Thank you again and have a great day.

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