Molson Coors Beverage Co (TAP) 2013 Q1 法說會逐字稿

Welcome to the Molson Coors Brewing Company First Quarter 2013 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. Please refer to its most recent 10-K and Q-10 filings for a more complete description of factors that could affect these projections. The Company does not undertake publicly to 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 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 period and in US dollars. I will now turn the call over to Dave Dunnewald, Global Vice President of Investor Relations for Molson Coors.

Thanks, Joanna. Hello and welcome, everybody. On behalf of Molson Coors Brewing Company, thank you for joining us today for our First Quarter 2013 Follow-Up earnings Conference Call. Our goal on this call today 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 Spencer Schurr, Finance Forecasting Manager, Katie Walter, Senior Analyst of FP&A, Jason Charpentier, Treasury Manager, Mark Saks, VP of Tax, and Zahir Ibrahim, Global Controller.

As Peter Swinburn mentioned on our regular earnings call earlier today, our first quarter numbers include the effect of the central Europe acquisition that we completed in the middle of last year. Because of this addition, we recorded volume and sales increases, but a post tax income decline. The decline was driven by three months of central Europe debt servicing costs being allocated against our lowest earnings quarter of the year in that region, along with foreign exchange losses, and increased marketing spend across the rest of the business. Weather also affected our volumes in all of our markets. Against this backdrop, though, we grew share in Europe, saw relatively flat share in the US, and lost share in Canada. Our innovation programs got off to a fast start this year and reflect the pipeline that is both full and exciting. With that as a summary, now we'd like to open it up for questions. Over to you, Joanna.

(Operator Instructions) Michael Ruddy, Goldman Sachs.

I just wanted to get a little bit more clarity from you on this whole can/bottle mix issue. Because if I look at the industry data, it seems like this shift has been happening for several years, but it seems like we're either hearing about it more now or it's accelerated now. To the extent that you could tell us whether that continues in the future or whether you start to lap this at one point or how big of a differential is that cost impact?

Yes, I won't be able to give you specifics on the cost impact, but I can tell you that, yes, it's a very long-term trend that has been going on in Canada. In fact the West, it's been going on the longest in the western part of Canada, where actually the can/bottle mix is not significantly different from what you see across the US. On the other hand, the Eastern part of Canada still has a substantial portion of total packaging in returnable bottles. Those are lower cost for us. They're reuseable up to 15 times before they need to be melted down and made into new bottles. As a result, as we see a shift from those returnable bottles to non-returnable cans, we see an increase in cost of goods per unit.

It's a long-term trend. There's some variation to that trend, depending on what kind of promotions are going on in the marketplace. I would say it's a bit difficult to predict. Another factor that was a challenge for us related to that shift last fall was, in the third quarter, we saw not only the continuing shift toward cans, in particular, in Quebec, but we also had some supply constraints because we had not fully ramped up a new can line in our Montreal brewery at that time. We've since done that, which has addressed the supply issue, but the trend is still a cost challenge that we have to manage through cost reductions and other improvements in our business.

Right. Just to help me bridge the COGS per hectoliter comments that were said on the call, I think you guys said about, of the 6 points of COGS per hectoliter inflation in Canada, about 2 points was deleverage in mix, I think about 1.7 points was the $4 million in reclassification and then you said inflation in cost saves basically offset each other, which still leaves about 230 basis points. What is that extra bucket?

Which extra bucket?

You said COGS per hectoliter were up 6. On the call, you said about one-third of that was deleverage and mix, so say 2 points. Then I think the $4 million in reclassification from MG&A to COGS, that would add another 1.7 points, I believe. Then you also said that inflation was offset by cost savings, so say that's neutral. That still leaves about 230 basis points of something else and I'm not sure what that is.

Yes, that's a good point. The other piece was mix and essentially, a shift toward higher cost products and packages.

The 2 points in deleverage and mix that they called on the call is that brand mix and then the other portion that you're talking about is packaging mix or was the 2 points just deleverage?

Sorry, I was bucketing a little bit differently than you were. Okay, so the volume deleverage in the mix is the first one-third, the reclassification another one-third, and then the last piece would be, call it miscellaneous if you want, but pension cost, a little bit of product loss, that sort of thing.

Got it. Okay, thank you.

Ian Shackleton, Nomura.

Carling Cider, very visible over here in London at the moment, certainly on the billboards. Just wondered, really, how we should think about that for Q2? It looks like this could have been the marketing going in. Just to confirm, (inaudible) it's just in the [off trade] at the moment, you can't sell into on trade due to the C&C draft agreement, is that right?

That does provide some limitations for our on-premise activities around that brand. That's true. I'm not privy to all the details behind that, but that is a good point. Our push right now is in the off-premise.

Is that something that will be quite material in terms of thinking about increased marketing costs in Q2?

Our marketing costs really are across the whole portfolio. As you can imagine, the Carling brand itself, the original brand so to speak, is the primary focus of our marketing investments in the UK and we'll manage the new introductions within the context of the total budget.

Okay. A couple other quick questions as well, I'm not seeing any further news on the dispute in Canada on the SABMiller brands. Has there been anything further on that?

Nothing at this point. The latest news is that there's a hearing tomorrow to look at that, specifically the injunction, I'm sorry Thursday, May 9, today's only Tuesday. Time flies when you're having fun. Yes, on Thursday, there's a hearing, a preliminary one, around the question of an injunction and then another hearing slated for December. That one could change because it's quite a ways out, but anyway, that's all we have at this point.

There could be some more news later this week or is that really a bit of a non-event on Thursday?

We'll see what happens.

Right. (inaudible) I think Peter referred in the call that somebody else had disputed in the US, who is that at the moment?

Actually, I don't know. I couldn't tell you off the top of my head. It's not one of the major importers, that I'm aware of.

Okay. Just to make sure I've got the right figure, when Gavin was confirming the financial guidance, is it corporate at $105 million for this year?

Yes, $105 million of corporate MG&A expense and that excludes FX.

Okay, so FX may move a little bit?

Yes. Yes, we had quite a bit of FX in the first quarter, but we anticipate that will be a much smaller component going forward.

Yes, understood. Great. Thanks for all that.

Robert Ottenstein, ISI.

Just so we have a sense of order of magnitude on the tailwinds or the headwinds on Quebec for you relative to your market share, can you give us a sense of what your market share for the quarter was in Quebec and in Canada, overall?

Yes, our overall Canada market share is 39%. In Quebec, we don't give out specific numbers, but I would tell you that we actually did take a small amount of share in Quebec. That was one of our better share performances in Canada in the first quarter. Our share in Quebec is higher than our national share.

Would 45% be a rough estimate? Is that too high or low?

Let's just say, yes, we're in the 40s.

Mid 40s?

Roughly, broadly speaking, mid 40s.

Okay. In terms of the April numbers for Canada, the weakening to, I think you said mid-single digit decline, is that primarily due to Easter, the timing of Easter, or I noticed last year, I think, you came out last year with the Coors Light Iced Tea last year in April. Is there comps versus that and how is that brand doing?

Coors Light Iced Tea came out of the blocks essentially in line with our expectations and we have some additional programming behind the brand this year. In other words, we're going to take it into the summer, again, this year with energy, so to speak. Beyond that, I would say, why was April soft? There's been a lot of talk about tough weather comps, the timing of Easter, which obviously is an important holiday in a number of markets, including Canada. Those factors, as well as the economy, you've heard some more recent talk about weak economy in again, some markets. I'd say all those factors have a role to play. It's really challenging to try to put a magnitude on any of them, though.

Sure. Thank you very much.

Mark Swartzberg, Stifel Nicolaus.

I guess Canada's the theme of the call here. The volume performance in April, the down mid-single, just kind of a fact check here. I have last year, down mid-single digit in April, as well, even though the quarter was positive for Canada last year. Is that a fair record of what you're facing? Because it seems like the hill's going to get steeper, so to speak, as the quarter plays out. But I don't know if that's a fair characterization of what you're facing.

Yes, okay. I'd start with the most important factor, which is it's only four weeks of data. It's hard to make a long-term trend out of that. In other words, we tend to see quite a bit of volatility in the four week data and it's not necessarily representative of the way any given period turns out. We do that every quarter, but it's important to keep that in mind. Yes, the comparisons, I don't recall the actual performance of Canada in April last year, but I do recall that we did report higher volume and STRs in the second quarter. Call that a more challenging comp than the first quarter. But it will depend on a lot of different factors how the second quarter turns out.

Fair enough. On this pick up in performance by the value brands at the expense of yours and Labatt's performance and I appreciate that you had your own performance and value that was good, but it was a contributor to the share erosion. Can you just give us some of your own commentary on what you think has caused these brands, which have been taking share for many years, to even see this pick up we've seen and any nuances you think that are important by province would be helpful as well?

Yes, I won't go too much by province, but what I would say is that the challenge in the value segment in Canada really has been going on for a number of years and the are twofold; one, particular to the industry and two, particular to us. The first one in the industry is that the smaller brewers tend to play at the value end of the category and they are given substantial tax breaks in all provinces with varying thresholds and amounts. For example, in Alberta, there's a tax break for smaller brewers that's between $50 and $60 per hectoliter. That's the cost of production for most folks in Canada, so obviously gives a lot of head room to work a variety of strategies in the marketplace and that has created some challenges for the brewers who do not get those tax advantages.

The second piece that's more particular to our business is actually, our value portfolio, call it value brands in Canada, was a relatively weak part of our portfolio if you go back a few years. We've been working to strengthen that in the last two to three years and I think it made really good progress in that with Keystone, Keystone Light, strengthening in the Carling brand, and some of those types of activities. The key is, we are a brand building Company fundamentally and so our preference is to address these, call them, portfolio or segment issues by a brand strategy rather than primarily by a price strategy. Obviously, we will price in the best interest of our brands to insure that they are competitive market-by-market, brand-by-brand, pack-by-pack, and channel-by-channel, but the best solution is a brand solution when you have challenges in the marketplace.

On the margin, this collection of brands coming largely from competing brewers has picked up. Do you think it's more of a macro symptom? Do you think it's a change in their own tactics, they're getting more promotional with their products? We saw your own revenue per hectoliter slowdown in terms of rate of growth. What do you think is really happening on the margin for these products?

Yes, the way I look at it, I'm not a marketing guy, but I am a student of the category, call it. The way I see it, there's push and pull. The push is what I mentioned earlier where you have new brewers coming into the market, it's similar to the US market except the new, some of them are craft style, some of them are not, but the new brewers coming in tend to be at the lower end of the category in Canada, whereas the US, they tend to be at the upper end of the category. But setting aside that difference, you have a lot of new folks coming in and the tax breaks certainly help that, particularly in Canada where they're so large. The pull component is consumers and it's similar to what you're seeing in the US. Consumers are looking for increasing taste and brand choices, more than they ever have before. If consumers are asking for it and you have new brewers who want to provide it, then obviously, that's something that we want to make sure that we're addressing that in the marketplace.

Got it. Okay, thanks, Dave.

(Operator Instructions) Bryan Spillane, Bank of America Merrill Lynch.

First, as we're modeling Europe over the next few quarters, is there going to be a restatement of or some pro forma financials provided for the second quarter to try to kind of match up what you'll report as we're forecasting to try to get a better sense of how to match up against what you're going to report?

Yes, so yes. The way we provided pro forma Europe results in the release this morning, in other words, giving you combined UK and Central Europe for the prior year and then obviously, comparing against or comparing with the actual results for Europe, which combined those two businesses this year, we'll do the same thing in the second quarter and give you a pro forma. That's our plan, give you a pro forma summary of operations or income statement for the second quarter.

But between now and then, I'm just trying to think about as I'm trying to model Europe now for the second quarter today, we're not going to get that pro forma information for last year to work with until you actually report the results, is that right?

Yes, that's true. We did give you pro forma results for Central Europe and you, obviously, have UK results for last year, so you can work with those. It won't be exactly the same because we did move the Central Europe export business, but we did give you some visibility to how much that is, it's a few million a quarter, $2 million to $3 million a quarter of pre-tax income, generally.

Okay. I'm trying to think of the best way to try to estimate it and aside from making that adjustment on the change in the export business, is there anything else that we should think about with trying to mash those two together? Again, I'm just talking about a base for '12, more or less.

Yes, the only other piece I can think of, unless Spencer can remember something else, is there's interest income, just a very small amount, in the Central Europe business that reclasses to the corporate segment.

Okay. In the quarter, in the corporate expense line, one of the things that was cited in terms of expenses in the quarter was accelerated incentive compensation expense. Can you just give us a little more color on what that is?

Yes, in the first quarter, we had, as you say, accelerated incentive comp. It's related to long-term incentives. We had, call it, a moderate redesign in our long-term incentive comp plan this year with essentially performance share units instead of performance units. What really matters is, under this new plan with the grants, we had some of those grants were accelerated, whereas last year they were not. I guess the bad news, if you will, is that we had additional expense in the first quarter. The good news is that's expense we would have recognized over time anyway and so we don't anticipate that the amount of that increase in expense to be as significant in the balance of the year as we saw.

How big was that in the first quarter?

My recollection, it was in the range of around $4 million or so.

Okay. The other income expense line was, and that's always sort of like trying to hit a knuckle ball, but can you just kind of go through some of the things that drove that? Because it was definitely a swing versus the way we modeled it in the quarter. If you could just talk a little bit about some of the factors that were inside that number?

Yes, let me grab that. Yes, the biggest piece that probably threw you for a loop was some foreign exchange, about $4 million in that line item related to, primarily, Europe.

That's just currency translation?

Yes, essentially. Yes, it's currency translation related to cash balances and, call it, structure in the Europe business. In other words, we've got some cash balances that are in euros or other currencies.

Okay. You've now got three quarters or so of accumulating cash in Europe, so will that be more of a volatile factor on that line item going forward or are you doing something to, I don't know, hedge it or something else that'll quiet the volatility?

Yes, we are, as we mentioned in the release this morning, we don't expect the foreign exchange volatility, if you will, in that line item to be as significant in the balance of the year because yes, we're making changes so that should be less of a factor going forward.

Okay. As we look at the Europe segment itself, last year, if I remember and I'm going back to the pro forma figures that were released for StarBev or for Central Europe last year and if I remembered it correctly, there was an unusual amount or a higher than normal level of marketing that was spent by the previous owners before the transaction occurred. That kind of made the first quarter comparison a little bit funky. As we're looking at the second quarter, just even looking at those pro formas, is there anything else that was just sort of unusual about that time frame as we're trying to figure out what would be a more normal level of spending specifically? If there's anything else that was just unusual in the quarter, because it's right before the transaction closed. It just seems like, even with having a pro forma figure, that might not be a completely normal comparable quarter.

Yes, we did accelerate some of the marketing and sales spending in the Central Europe business last year from what we otherwise would have or certainly what we expected before the year began. At the same time, around the time of the deal, we said a) we did that and b) we expected the full-year marketing spend to be roughly flat to the prior year, pro forma, and in fact it was when we finished up the year. What that means is that relative to 2011, the marketing and sales spend was a bit more front-end loaded in the year and then the back part of the year was a little bit lighter than 2011.

As we're modeling off of that pro forma in Central Europe for the second quarter, we should sort of think that way as well in terms of how the spending was faced?

Yes, I can't tell you what we will actually do this year, but certainly 2012 relative to 2011, we spent more on marketing and sales in the second quarter. It was not a light quarter for that kind of spending, primarily due to introducing innovations into the marketplace.

Okay. I think I caught on the call, you talked a bit about, are there two tranches of debt that will come due between now and the end of the year?

Yes, we have two convertibles. One is the convertible issued to the seller of the StarBev business. That's EUR500 million. It could be put to us at any time between now and the end of the year. Obviously, the details are in the filing. Then the second convertible is from 2007, if I remember correctly, and that one is $575 million with a 2.5% coupon that comes due on July 30 of this year.

Okay and those convert to stock?

Those, if they are above the conversion premium threshold, then those could -- the principal would be paid in cash or excuse me, let me clarify. Convertibles are not simple, so if they convert then or I'm sorry, if they're over the conversion premium then they can be converted under certain circumstances that are, again, described in the filings. If, in fact, they're converted then, in both of those cases, the principal is paid in cash and then the amount above that is paid in cash or stock at our discretion. I would hasten to add, though, on the $575 million convertible, we bought some derivative instruments from a real to essentially buy up the premium amount to, how do you say, eliminate economic dilution up to 160% of the original issue value.

We don't really risk that there's going to be shares issued? That's the point, right, is that you've kind of eliminated, at least from our perspective, the risk that we're going to get share creep because of this?

Yes, it depends on what the stock price does for the $575 million. It's just dependent on the stock price. It's pretty complicated, we may want to take that offline, but essentially we have bought the initial premium is 125% of the original stock price and we've essentially bought that up to 160% from an economic standpoint. Between those two percentages, the counterparty, the bank, essentially provides shares if it converts within that range. Above the 160%, we're on our own to figure that out but I think that price level is around $66, so it's quite a ways up there. On the euro convertible note issued to the seller of StarBev, that one's dependent, it's denominated in euros, so it's dependent on not only our stock price, but also the euro conversion or FX to the US dollar, so you have to keep track of both of those. We're just below the threshold on that one, maybe $1 or $2 or I should say, EUR1.

On the stock price, meaning that it's $1 below on the stock price threshold?

Yes, that's right.

Okay. More simplistically, we have an outlook for net interest expense for the year and I'm assuming that outlook contemplates these two tranches of debt coming due and potentially having to be refinanced and whatever costs and whatever rate that this debt is refinanced at has been contemplated in the guidance that you've given?

Yes, it is. We, obviously, have to make an assumption around actually both of them, especially the euro note, because it's the discretion of the holder when it's put to us, we don't know. We've made an assumption around that and then the $575 million yet to make at least some modest assumptions around that one as well. One thing I was going to add when we talk about debt coming due, we also have a couple of cross currency swaps or couple, excuse me not a couple. We have some cross currency swaps that are out of the money and they're in the latest filing around $200 million. $206 million, Zahir said, so that's another, call it, notable liability that's coming due. Those are due early next spring, but we have the option of settling them earlier if we choose to, like any derivative, generally.

That would affect your, also the net interest, just kind of what we're modeling for interest expense for the year, that's another factor that could affect it?

Interest, perhaps, but really more of a cash use question.

Got it, okay.

That's the main reason I highlighted it for you.

Thanks, Dave, that's very, very helpful.

(Operator Instructions) There are no further questions at this time. I would now like to hand the call back over to Dave Dunnewald for closing remarks.

Thanks, Joanna. I just had one additional point from Ian Shackleton's question earlier. Our importer of the Staropramen brand in the US is S&H and so we appreciate their efforts on behalf of the Staropramen brand. Beyond that, 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 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.