Molson Coors Beverage Co (TAP) 2013 Q4 法說會逐字稿

Welcome to the Molson Coors Brewing Company Fourth Quarter 2013 Earnings Follow-up Session 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 it and its most recent 10-K and 10-Q filings for a more complete description of factors that could effect 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 measurements 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 the Financial Reporting tab of the Investors Relation page for a reconciliation of these measures to the nearest US GAAP results. Also unless otherwise indicated, all financial results that the Company discusses are versus the comparable prior-year period and in the US dollars.

The Company also encourages investors to read SABMiller PLC News releases and trading statements that include financial and other information relating to its MillerCoors joint venture.

I will now turn our call over to Dave Dunnewald, Global Vice President of Investor Relations for Molson Coors.

Thanks, Ryan. I really appreciate it. Hello, and welcome, everybody.

On behalf of Molson Coors Brewing Company, thank you for joining us today for our fourth quarter 2013 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 and Gavin Hattersley, and our business unit CEOs earlier today. We will use a standard question and answer format, and we anticipate the call will last less than an hour.

So let's get started with an introduction to the team with me on the call. We have Kevin Kim, Investor Relations Manager, Spencer Sure, Finance Forecasting Manager, Katie Walter, Senior Analyst of Forecasting, Jason Charpentier, Treasury Director, Brian Table, Senior Director of Technical Accounting and SEC Reporting, and Mark Sachs, VP of Tax.

As Peter Swinburn mentioned on our regular earnings call earlier today, in the fourth quarter, Molson Coors increased underlying pre-tax earnings 6.5%, expanded pre-tax margins, and generated substantial underlying EBITDA and free cash flow. Underlying after-tax income declined less than 1%, due to a higher tax rate in the quarter. For full year 2013, we grew underlying after-tax earnings and EBITDA, and exceeded our targets for cost savings, cash generation, and debt reduction.

The funded status of our pension plans improved by $448 million, including our portion of MillerCoors, and we paid down $114 million of cross-currency net liabilities.

Regionally, our US business improved results, especially late in the year. Europe performed well in a difficult environment, Canada struggled, and international made significant progress toward its goal of profitability in 2016. Particular challenges included Miller Light in the US, and Coors Light in Canada, along with commercial performance in Serbia.

Nonetheless, our focus on building our core brands, growing the above premium segment of our portfolio, and driving sales revenue from innovation delivered significantly improved results this year. Our overall brand performance was strong, and strategically, we are gaining momentum in the areas that will have the most impact on our financial results as markets begin to improve.

Also in recognition of the substantial progress that we have made in paying down our debt, our Board has authorized an increase in our quarterly dividend from $0.32 per share to $0.37 per share beginning in the first quarter of 2014. This 16% increase results in an annual dividend amount of $1.48 per share, which represents a pay out ratio of 18.4% of 2013 underlying EBITDA. Equally important, our Company is adopting, for the first time, a dividend pay out ratio target of 18% to 22% of trailing underlying EBITDA, which we anticipate will keep our dividend in a competitive range for global beer companies for the foreseeable future.

Now before we start the Q&A, I'd like to offer a little bit of additional perspective on one topic that Gavin Hattersley mentioned on an earlier call, and that is sales curve accounting. As you know, this change will be applied retrospectively to our 2013 results, but it will not effect the full year results. Instead, it will change the phasing of quarterly MG&A expense within the year in most of our business units.

So to give you a start in modeling the effect of this change on our 2013 results, here are the changes in MG&A expense that we expect by quarter and by unit. These are the changes relative to what we reported through last year.

Looking at the First quarter, we expect MG&A expense to increase $9 million approximately on a consolidated basis. This is made up of an $8 million increase in Canada, and a $2 million increase in Europe, and a $1 million decrease in MG&A expense in the international group.

In the second quarter, we expect approximately $15 million increase in MG&A on a consolidated basis. And this is made up of: in Canada, a $9 million increase, in Europe, a $6 million increase, in international, a $1 million increase, and no significant impact in other areas.

In the third quarter, we expect approximately a $17 million reduction in MG&A expense. And this is made up of: a $15 million and that's consolidated, and we expect approximately $15 million reduction in Canada, $2 million reduction in Europe, and no significant effect in other areas. And then finally in the fourth quarter, we expect approximately a $7 million reduction on a consolidated basis, and this is made up of a $2 million reduction in Canada, a $5 million reduction in Europe, and no significant change elsewhere.

So that gives you a head start on the MG&A impact of discontinuing sales curve accounting and our business starting in 2014, and what we'll be looking at from a comparison standpoint with 2013 results. Note that these changes in MG&A expense that I gave you will have exactly the inverse effect on pre-tax income in the quarters mentioned, and for the business units that I mentioned. Now we plan to provide more detailed information for you within the next few weeks.

So with that, Ryan we'd like to open it up for questions.

(Operator Instructions)

Your first question comes from the line of Ian Shackleton from Nomura, your line is open.

Yes, Dave, hello. Hello to the team. A couple of questions. Going back to the trade team arrangement that's disappeared, and the comment too is that will lead to best commercial terms. Is it going to be an ongoing margin benefit in terms of the logistic costs coming down from the previous levels that you had in Europe?

Yes, that's a good question, Ian. Really, one of the primary drivers for essentially changing our situation with distribution with trade team in the UK was essentially to improve the rates, and therefore, improve the ongoing economics of the situations for us. Mark Hunter did allude to that earlier, we do expect better rates. Yes. So from FY14, there will be some benefit coming through in Europe and the UK from that? The anticipation is for ongoing benefits, that's correct.

And just going on to the Miller brand situation -- basically the Miller brand situation in Canada. $18 million write-off, and I think last December you had about $70 million on the balance sheet, which mathematically is about 25%. Simple view, is that saying that you think there's 75% chance of keeping the contract?

Fair question. I would say no, it's not, it's not call it a direct indication of what we think the probabilities of keeping or not keeping the contract. Really, the asset value on our books is driven by a range of probability weighted scenarios. And when we take those in total, we decided that there was -- it was appropriate to adjust the value of that intangible asset downward.

Okay. So I know that the carrying value have shifted a little bit in the last year, but effectively you've written off $18 million of what's probably a bit less than $70 million is the starting point, is that right?

Sorry, say that again, Ian?

The $70 million was from December 2012 balance sheet, and obviously we'd expect that it will be an amortized slightly during the year. So it would be a slightly lower number anyway at December 2013, even if you'd not had the write-off.

Yes, okay. So actually Brian has got a more specific number on that one. Do you want to share that with him?

Yes, so the amortization expense was approximately $10 million per annum, so it would be balanced prior to the impairment would have been (inaudible) billion.

Great, thank you for that. And final question from me. Just thinking about the free cash flow guidance as being lower than in 2013. Is another factor the fact that you're going to have more cash restructuring costs this year, particularly in Canada? Is that something that's part of the reconciliation there?

So when we look at our essentially forecast and therefore target for free cash flow for the year, there are a lot of factors that go into that. And yes, I guess to the extent that there's cash used for restructuring then that would be part of it. However, keep in mind that in 2013, we had some substantial restructuring going on in various parts of the business.

So I would not call that a major driver of the change and the difference between 2013 and 2012. And also, one other point. The actual restructuring costs are excluded from our underlying free cash flow calculation. I guess that's your main answer right there.

So just going back to the main reconciliation, cash flow being effectively targeted almost $200 million [light], it's mainly the working capital that's the swing factor here?

Yes, that is the biggest single factor. We do have a bit of a CapEx increase in Canada, which we talked about on the earlier call. So but yes, primarily it's related to working capital.

Great, thanks a lot, Dave, thank you.

Thanks, Ian.

Your next question comes from the line of Brett Cooper from Consumer Edge Research. Your line is open.

Hello, Dave, how are you?

Hello, Brett, great. How are you?

Good. Earlier in the year, I think you guys gave guidance that marketing spend would be up $30 million or more than $30 million in the year. Can you give us a number of what that was?

We might be able to give you a little bit of guidance around that. Let's see, that was on a full year basis, as we roll through the year, let's just say that our marketing and sales spending was roughly in line with our expectations.

I assume there's no way I could get one -- more on your expectations for 2014?

Not at this point, no. You know our philosophy, right? We intend to invest behind our brands, innovation above premium and core brands are the primary focus, and we have a bias to invest when we have good ideas and good opportunities to drive those brands.

So we've generally had not only a strong level of investment, but generally, unless there was how do you say something duplicative for example, if you put two businesses together or something like that or there are other situations where there may be a way to cut marketing and sales spending and still maintain the impact. With the exception of those situations, generally we've had similar or moderately increasing marketing and sales spend over a longer period of time.

Okay. Is there any way that you could give us the pension expense break out by region just for modeling purposes? I know you gave the overall number today, I was just trying to put that through to [regions].

Let's see, there will be more of that information in the 10-K, if I recall correctly. Bryan is correcting me. We don't have it by region in the K, but you will have visibility when we file it over the next, in next few days, that's the anticipated filing time. Visibility to MillerCoors, and then the pensions, the rest of the Company essentially.

I'm sorry. But were the numbers that were given out today, were those, and I may have missed it, but were those inclusive or exclusive of MillerCoors?

Those were including MillerCoors.

42% of MillerCoors, or all of it?

42%.

Okay. Last question from me is just, would you be willing to give us a break down of savings either in 2013 or ideally expectation in 2014 between cost of goods sold and SG&A?

Yes, so what I can tell you is that the savings in 2013 lean toward MG&A. And we expect that as we move further into some of the cost savings initiatives that we have going on, those will migrate so that they lean a bit more toward COGS in the future over the coming years, so to speak.

Okay, perfect. That's all for me, thanks, Dave.

Thanks, Brett. And by the way, the cost savings will also tend to migrate toward Canada this year relative to last year when they were more heavily centered in the UK.

(Operator Instructions)

Your next question comes from the line of Michael Dudley from Goldman Sachs.

Hello, Dave.

Hello, Mike.

Just on the calendar shift impact that we saw this quarter, are there any other quarters that you would want to call out for 2014 that are impacted by that?

No, that's the big one. Brian is saying he's not aware of any other significant ones. You have minor shift because the days don't line up exactly or whatever, but the number of days should be essentially consistent through the year.

Got it.

Now at the end of 2014, we will have a period that's slightly three days shorter than the fourth quarter of 2013, so that will be a comparison challenge. So that's the main issue to be aware of.

Got it. And then on Europe, can you just give a little bit more color on I guess both the top line and the rest of that business, I guess which are you -- I guess the market was down about 3% in volume this year. Are you still thinking that it's going to be a down market broadly for you in 2014? Is there any major variance in pricing outlook by region? And then also I just wanted to get a little bit of color on why COGS per Hectoliter are going down.

Yes, okay. So a few questions there. On Europe outlook volume or call it performance of the market, no I'm not going to provide a crystal ball on that one. As you know, the Euro zone has been very challenged, particularly over the last two years.

What I can say is that our business within the context of that very difficult situation has actually performed relatively well, and you can see that show up in the share numbers, and the profit numbers, and the pricing numbers, and so on. So pricing actually has held up despite the difficult situation there. You've seen some negative mix in Europe, and that is driven mostly by, I mean a little bit of channel mix going on there, but primarily it's more geographic. As in when our sales tend to -- the total sales mix by country if it increases in places where the revenue per Hectoliter for example, is not as favorable, then you'll see a negative mix impact on the NSR line.

However, one other effect of that aside from just tight cost control, is the cost of goods also can have an advantage there too. Because in the markets where NSR is lower, in some cases, the cost of goods are also lower. And for some pack types, the same thing could be said, it's lower NSR, but it's also lower COGS in a particular market. Or in a particular channel, you could get the same effect.

Got it. And then can you just remind me one more time on your leverage target, is it on debt to EBITDA or net debt to EBITDA?

It is underlying, sorry, leverage target. Yes, well we have to look at a number of different targets when we talk about leverage. The two that we've generally talked about are the most conservative one which is the S&P leverage ratio, and that one includes lots of liabilities beyond debt. And there, we've talked about getting that ratio in the range of or below 3 times adjusted EBITDA as S&P calls it.

And then but actually the most commonly used metric is net debt, which you referred. And that one, we'd are get in the range of just South of 2 times underlying EBITDA. That's the goal on that one. And they kind of move in tandem, if you know what I mean, because they have different denominators and different numerators.

Got it. Okay, thank you.

Thanks, Mike.

We have no further questions in queue.

Okay, great. Well thank you, Ryan.

In closing, we'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 out time this afternoon, please call Kevin Kim or me on our direct lines 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.