Molson Coors Beverage Co (TAP) 2014 Q1 法說會逐字稿

Welcome to the Molson Coors Brewing Company first quarter 2014 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 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. The Company also encourages investors to read SAB Miller PLC news releases and trading statements that include financial and other information relating to its MillerCoors joint venture.

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

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

On behalf of Molson Coors Brewing Company, thank you for joining us today for our first quarter 2014 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.

So let's get started with an introduction to the team with me on the call. We have Kevin Kim, Investor Relations Manager; Spencer Schurr, Finance Forecasting Senior Manager; Katie Walter, Finance Forecasting Senior Analyst; Mike Rumley, Treasurer; Brian Tabolt, Controller; Mark Saks, VP of Tax; and Steve Mack, Director of Tax.

As Peter Swinburn mentioned on our regular earnings call earlier today, in the first quarter, we more than doubled underlying after-tax income, grew underlying EBITDA more than 20%, and expanded gross, operating, and after-tax margins. Underlying earnings per share also more than doubled.

US GAAP after-tax earnings increased more than $135 million versus a year ago. The improvement across our Company was consistent with each of our businesses achieving improved operating margins, pre-tax earnings, and EBITDA performance in the quarter. Our strong focus on core brands, portfolio shift to above premium, and value-creating innovation is paying dividends. While the economy and beer volumes remain weak in many of our markets, our efforts to drive cash generation, raise returns on capital and deliver profit after capital charge were instrumental in achieving these results.

This year, we will have cash generation pack and total shareholder return, along with profit and top line growth, as key performance criteria in our employee incentive programs, which are designed to align our decision-making and our priorities, and to drive long-term shareholder value.

Before we start the Q&A, I'd like to offer additional perspective regarding our discontinuation of sales curve accounting, and how it will affect your models and analysis of our Company. As I mentioned on our working session call last quarter, this change will be applied retrospectively to our 2013 results, but it will not affect the full-year results. Instead, it will change the phasing of quarterly MG&A expense within the year in Canada, Europe and Molson Coors International.

Last quarter, I provided the quarterly pre-tax impacts to these business units. To assist you in modeling the effect of this change on our 2013 results this afternoon, I would like to provide the underlying after-tax impact to earnings per share.

So versus what we originally reported for 2013 a year ago, the elimination of sales curve accounting will reduce underlying EPS $0.04 in the first quarter and $0.04 in the second quarter. And it will increase underlying EPS $0.06 in the third quarter and $0.02 in the fourth quarter. Thus, our recast underlying EPS for 2013 are now -- the actual numbers for quarters one through 4, in order -- $0.30, $1.51, $1.45 and $0.68, with of course no impact on annual EPS. Please see the investor relations page of our website for all additional -- for all the details regarding this retrospective change in accounting treatment.

So with that, I'd like to now open it up for your questions. Over to you, Stephanie.

(Operator Instructions)

Your first question comes from the line of Judy Hong with Goldman Sachs. Your line is open.

Thanks. Hi, everyone.

Hello, Judy.

So just on the corporate MG&A in the quarter came in a little bit lower than last year. Anything in terms of timing? I don't think the full year has changed, so just in terms of how much maybe timing or other factors helps that number in the quarter?

Yes, I'd say the reduction was not primarily driven by timing. As always, there's a little bit of timing that goes on in any kind -- generally speaking, in those line items, but the main timing differences that we had were in Canada and the US in the quarter. Corporate was relatively small.

Okay. All right. Then on the tax rate, so I think the full year guidance is now 12% to 16%, which I think implies not just the quarter one benefit but lower than, I think, your prior guidance in the upcoming quarters. So is the second quarter where you'd see the residual benefit? Then we go back to the 18% -- the original guidance for the back half of the year?

Yes, so I'm not going to slice and dice our guidance quite that finely. What I would say is that we reduced our guidance for the year from 16% to 20% down to 12% to 16%, based on two main factors.

One was the advanced pricing agreement that we signed early in the second quarter. We have said in our 10-Q, which is now on our website and the SEC.gov website, that, that will have a significant impact on our tax rate, so that's obviously an important piece. Then also, we had some discrete items in the first quarter.

Okay. Can you explain the advanced pricing agreement? And how does it impact your long-term tax rate, if at all?

Yes, let me give some headlines around that, and then if we need some additional details, then Mark Saks can jump in.

The advanced pricing agreement is essentially something that all major international companies do to sort out the amount of costs -- or call it income and costs, and actually revenues as well. Sort out how that interplay's between geographies. It requires agreement between those governmental, call it, regulatory taxing authorities.

We were in the process of working this out between, actually, the US and Canada. We're in the process of working it out with us over the past several years, and we just reached resolution in early April. Do you need more details on how one of those works?

No, but does it impact your long term 20% to 24%, and the speed in which we get there?

No, it does not -- reaching the advanced pricing agreement does not affect the long-term tax rate. That's why we didn't change the guidance for our long-term tax rate range, but it does affect 2014.

Okay. All right. Then in terms of the Free Cash Flow guidance. So the tax rate coming in more favorably, the COGS for MCI coming in a little bit more favorably. I guess the free cash flow guidance didn't change, though.

Just what are some of the factors that made you not change the full year free cash flow guidance? Is the tax items really non-cash?

That's correct. It's substantially all non-tax -- or non-cash, sorry. Yes. Not a significant cash effect of the APA.

Okay. All right. Then my last question is just, if I think about the STR trend in the April -- in the month of April, where Canada actually seemed to have benefited from the timing of Easter, but the US didn't seem to have benefited, down 3.4, and then still down low single digits. So I don't know if you have any color, just in terms of what the impact of Easter for Canada versus the US? Or are there are other factors that may have impacted one market but not the other?

Yes, so the Canada business and the US business, and Europe for that matter, they did benefit from the timing of Easter in the first quarter -- or that is the -- sorry, the timing of Easter was a detriment to the first quarter and benefited in April. The benefit in Canada would tend to be more, and also the benefit in Europe would tend to be more than the US, because it's generally a three-day holiday in Canada, and it's a four-day holiday in Europe -- most parts of Europe.

So yes, the benefit would tend to be a bit more in April for Canada than in the US, but they did both see some benefit. As far as providing more specific numbers to that, I'm not going to be able to provide that.

Okay. All right, I'll get back in the queue. Thanks.

Thanks, Judy.

Our next question comes from the line of Ian Shackleton with Nomura. Your line is open.

Hi, Dave. A couple of questions. Going back to the one I asked on the previous call, to see if I can get a bit more granularity. Interest charge at $35 million in Q1, and we're still going for $145 million for the year.

Obviously, you would expect your net debt to be coming down, so it doesn't quite add up. Really, are there some one-offs there in Q1? Or is this just a comment that you're being pretty conservative with that full-year guidance?

Yes, so Ian, the interest expense on an underlying basis in the first quarter was $35 million. If you multiply it times four, you get pretty close to the $145 million guidance for the year.

What I would say is -- it's really what Gavin said. We have working capital that moves around a bit. You have the timing of things like - what that means is timing of things like capital spending.

I think it's also important to know that the interest, if you're thinking about debt pay-down, the debt that we have most available to pay down is actually commercial paper, which is, thanks to our Treasury team, very low rate. That tends to provide less change in interest if, in fact, we do pay some of that down. So anyway, I think those are the factors that are really best to focus on, not one-off things.

Okay that's useful. Thanks for that, Dave.

Sure.

And just to confirm, on the call, I think Peter, when he was talking about the SEB Miller brands in Canada, talked about them being less than 1% of profit. Just to be clear, is that the Canada profit or is that group profit?

Yes, that would be group profit that he was talking about, and yes -- not specifically Canada.

Okay, group here would exclude MillerCoors, but it will be the rest of the group?

Right.

Okay. And final question. Mark Hunter wasn't on the call today, was he? I don't think he answered any questions.

Mark Hunter was on the call. Apparently, the results were such that people had no questions.

(laughter) I think Peter took all of the questions on Europe this time; it was a good story.

Yes, it was.

Good. That's all for me, thank you.

Thanks, Ian.

(Operator Instructions)

Your next question comes from the line of Rob Ottenstein with ISI. Your line is open.

Thank you. Dave, let me bring up Europe. Can you give us some color on your great results in England? What's going on with Carling?

Is this -- are we still at the point where we're lapping some of the changes on the retailer side? Is that what's driving this?

Yes, okay, so I'll give you some of the headlines. The UK business -- Carling had another very good quarter, as you may recall. Some of the results in the UK really started to -- how would you say -- accelerate an improvement early last year, and I would say that we've cycled that.

This is -- how do you say -- this isn't easy comps that's driving the UK performance. So lead brand Carling is doing very well in the off-trade and on-trade relative to the market, and we've had relatively good weather, which -- that doesn't hurt.

The -- Coors Light, our second largest brand in the UK, is also doing quite well. It was up in the range of 30% in the first quarter, which is kind of a continuation of a very good trend.

We're also seeing, as Coors Light is the lead brand on that, but we're seeing a shift to above premium, where for example, Doom Bar is a cask ale. It's the equivalent of a craft beer in the UK, is doing exceedingly well. It's now the largest on-premise cask ale in the UK. We altered -- also are doing well with the Cobra brand, Coors Light, and I may think of one more. But the point --

If we can just -- can you -- it doesn't surprise me that Coors Light and Doom Bar are doing well. I am a little surprised about Carling. Any color in terms of what you're doing differently with that brand? Or why in particular that brand is so strong?

Yes, the -- according to the marketing and sales guys, it's amazing execution.

Of course.

Yes, no question about it. However, along with that, I think that the team there is more energized than it has been in a long time. We did go through some relatively rough times for a few years there, with essentially -- restructuring's and whatnot.

So I think energized team, good positioning behind the brand, working with retailers in a way that it's working for them, it's working for us. I think it's -- there are a lot of good things going on around our largest brand in the UK.

No it's fantastic. Switching over to the US, and my apologies if this was covered in the other call. But can you give us more color in terms of where things are with Coors Light? Were you disappointed in the first-quarter volumes for that? How do you see that playing out?

Yes, so Coors Light in the US, yes, we were disappointed with the performance in the quarter. I would say part of that was industry-driven. It was a tough quarter for the industry overall, and not just because of Easter. I'd say on-premise was particularly challenged, and Coors Light plays into that. Not as much as Miller Light, but Coors Light still is effected by the, call it, battle for tap handles and that sort of thing, which is a street corner to street corner battle.

As Tom Long mentioned on the earlier call, that's something the team is also on. It's also about chain -- work with the chains across the country, and I think we have a good program in play there. That's not something that turns on a dime, either. We have made good progress in the last several years since MillerCoors was formed, but there's more we can do in that area, as well.

On the Summer Brew, the press -- some of the press around that has it being marketed and developed very specifically for Hispanic Americans. Is that a fair characterization?

Yes, I would say that Summer Brew was designed and validated with consumer research to particularly appeal to Latino consumers, that's right.

Okay, thank you very much.

Thanks, Robert.

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

Hi Dave, how are you?

Hello, how are you, Brett?

Good. Can I just -- I need a clarification. I think that you guys gave on the call that you still expect COGS per hectoliter in Europe to be up low single digits?

No, that was down.

Down, okay. And the other piece of it that you guys had pricing was broken out as -- front line pricing was down too? Is that broadly speaking? Or is there someplace where that's more evident within Europe?

Yes, I would say that -- really, it's primarily mix of customers and channel mix, customer mix, brand mix. It does vary a lot by market. So yes, Romania is going to be different from Czech, which is going to be different from the UK.

It's not -- we're not really talking about widespread discounting here. What we're talking about is, for example, a mix shift in Czech toward the multiple off-premise channel. And that there is lower revenue per hectoliter in that channel. So that would be an example.

Okay. Then, I don't know if you'd be willing to talk about this, but can you talk about what your either profit per hectoliter or margins are in those channels? I'm just trying to understand -- we can clearly see the negative revenue per hectoliter mix, and I'm trying to figure out, are we also likely to see lower profit per unit sold as a result?

If you do the math and look at the margins, at least in the first quarter, we made more money on the hectolitre's that we sold in -- you're talking about -- specifically about Europe, right?

Yes, I'm just -- and look, the first quarter is obviously a small quarter, and when volumes are up 5% in a small quarter, you get a lot of fixed cost leverage. I'm trying to understand, as we go out for the rest of the year, is this -- I guess if you'll call it a phenomenon -- of channel shift, is that -- how does that play out on the margin side? Any help you can offer would be great.

Yes, can't provide forward margin guidance, of course, or profit. But you do have a view of cost of goods expectation for the full year. And -- yes. I think that's probably where I'd leave it.

Okay. Then the last one is, can you -- or have you guys given the size of Corona, in terms of volume and profits in the UK?

Profit, no. Volumes, we've said -- sorry, in the UK?

Yes.

The answer is still no. (laughter) Volumes in -- I was thinking of Canada (laughter), because it's all revolved around that. Yes, so in the UK, let's see. Spencer will see whether it's low or mid single digit percent of Europe, total STRs.

So low single digit percent of Europe. Obviously, the UK would be a bit higher, but UK is by far the biggest-volume country in Europe for us.

Okay. And if you're not giving profits, it's fair to assume that's a relatively low-margin brand, right? There's no reason to believe that, that's a different relationship than you would typically see for a partner brand?

Yes, the way we talk about that is -- right. We share the profit stream with the brand owner. Generally speaking, the brand owner gets the lion's share of the profit. So yes, it will be generally lower than our owned brands, whatever market you're talking about.

Okay, perfect. Thanks, Dave.

Thanks, Brett.

(Operator Instructions)

Your next question comes from the line of Bryan Spillane with Bank of America.

Hello, Dave.

Hello, Bryan.

My first question, just related back to the questioning around Europe. So the price being down to, as I get from listening to it, is more a function of geographic mix and channel mix. Is that -- was there anything anomalous about the first quarter that made it unusually low? Or is there something we can infer about the mix in the first quarter that might flow through for the balance of the year?

No. I'd say that there were a number of different factors, but none of them are really new. So when we talk about the shift to the off-trade in the UK, that has been going on for a lifetime and beyond.

Really, the pace of change -- there's a little bit of ebb and flow to it, but -- for all of these trends. But I would say there's nothing significant that's really new in that.

Okay. And then in terms of what happens this year versus -- I'm just trying to -- maybe put it this way. You've got cost of goods per hectoliter down in Europe pretty significantly, and -- but we've also got rate down a little bit, so that's affecting the gross margin.

Is that -- as we look forward beyond this year -- and I guess you've got some productivity also coming through. But if we start looking forward beyond this year, 2015, 2016, is there a point where we would actually expect to see maybe more gross margin expansion in Europe over the next couple of years?

Yes, I can't provide a forward view with any clarity. I would say that's one of our goals. We strive for driving the main factors or inputs to gross margins.

Are the -- is -- are you still seeing benefits from the -- is gross margin being benefited year over year from any of the synergist's from putting -- from consolidating European business? Or is that pretty much phased through?

I would say that there are continuing cost benefits from consolidating European, especially UK in with Central Europe, yes.

Okay.

Then typically -- sorry, these aren't specifically the synergies that we talked about when we made the Central Europe acquisition. I just mean broadly speaking, the Europe business continues to go after significant cost savings.

Okay. Then -- and I might have missed this from before. But just the changing in the cost curve accounting, what's the effect again year over year? Was it a benefit to this quarter?

It was a -- let's see. Yes, I've got it right here. Yes, it was a $0.04 hit to EPS, a negative impact to EPS.

Okay.

To the prior-year number, which helps, obviously, it makes an easier comparison for this year. But it's apples-to-apples, right?

Just if you can refresh me. Last year's first quarter was also hit disproportionately with some other items, right? Weren't there some other -- especially in Europe, there were more negative items that affected the first quarter that were somewhat unusual. Is that right?

That seems like a distant memory at this point. I guess what I'd do is refer back to the conference call remarks and the release for that time period.

The reason I'm asking is, if I go back and I look at the last four or five years, with the exception of last year -- and again, given you've got seasonality in this business. The first-quarter earnings have been roughly similar, between 11% and 12% of the earnings for the full year. So we're at $0.55 in the first quarter this year, which -- and that's now absorbing the phasing for the marketing sales cost curve accounting.

So is there anything else that we should think about for the first quarter that was so -- would have so unusually brought earnings into the first quarter? Or if the seasonality were to hold, and it ends up being at 11%, 12% of the year, it would give us some indication about where the year is going to go.

Yes, you've got -- it's always difficult to straight line things. You do have a relatively low tax rate in the first quarter. You also have timing of marketing and sales spend, which we mentioned on the earlier call. Let's see -- anything else, Spencer, you can think of? No?

But you've had that kind of noise in other quarters, so I guess it's -- I'll be the last one to say that I would be able to predict your tax rate. It was a very -- kind of struck out to me as I looked at the seasonality over the last couple years. With the exception of last year, which the first quarter was abnormally low, it's been pretty consistent in that range.

I was just trying to get a sense, aside from the tax rate, is there anything else that might we should think about, in terms of this -- how it might have affected the seasonality more disproportionately?

Yes, don't -- I'm not aware of any other significant factors that we've discussed.

Okay. All right. That's all I have. Thanks, Dave.

Yes, we did have a little less interest in the first quarter than prior year, but that's not a one-off, so to speak. Thanks, Brian.

Okay. Yes, thanks.

(Operator Instructions)

Your next question comes from the line of Jesse Reinherz with Stifel Nicolaus.

Hello, Dave how's it going?

Hello, Jesse.

Just a quick question on marketing. I know you guys mentioned there was a benefit there. I'm just curious, are you guys -- is this basically you guys putting more emphasis on marketing during summer months than in previous years? Or was it just a one-time thing? Or can you give a little more color around that?

Yes, so definitely in the US and Canada, which is the primary driver of that timing difference versus prior year, yes, essentially, we're putting more of our advertising -- marketing advertising dollars behind peak season programs. Some of that's driven by innovation.

Some of it's driven by opportunities that we see available in sales and marketing -- or especially marketing properties, advertising properties. So I think the answer -- broadly speaking, the answer is yes.

Great. Okay, that's it for me. Appreciate it.

Okay. Thanks, Jesse.

(Operator Instructions)

I am currently showing no further questions at this time. I'll turn the call back over to Mr. Dunnewald.

Great. Thanks, Stephanie. Just wanted to clarify one thing from my earlier statements regarding the sales curve accounting. The actual EPS numbers, once you make the adjustments that I gave you, you would end up -- the numbers I give you earlier are the previously reported numbers.

That's what we reported last year. So if you make the adjustments of $0.04, $0.04, $0.06 and $0.02 in the direction that I mentioned earlier, you will end up with underlying earnings per share for 2013, with the recast MG&A numbers at quarters one through four of $0.26, $1.47, $1.51, and $0.70. Again, no impact on the full-year numbers. So wanted to clarify that.

So 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 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.