Molson Coors Beverage Co (TAP) 2014 Q2 法說會逐字稿

Good afternoon and welcome to the Molson Coors Brewing Company's second-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 at 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 SABMiller 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. Please go ahead, sir.

Thanks, Sally. Hello and welcome, everybody. On behalf of Molson Coors Brewing, thank you for joining us today for our second-quarter 2014 follow-up earnings conference call.

Our goal in the 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 question-and-answer format and we anticipate that the call will last less than an hour.

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

As Peter Swinburn mentioned on our regular earnings call earlier today, in the second quarter we increased underlying after-tax income nearly 8%, grew underlying EBITDA 4%, and expanded gross operating and after-tax margin. Underlying earnings per share increased nearly 7% versus a year ago. We also achieved positive pricing and mix resulting in higher net sales in the quarter.

The fundamentals of our business are strong and improving. We have leading brand positions in the world's most profitable beer markets. We are improving the efficiency of our operations. We are successfully combining our distribution muscle with our proven ability to grow both large and small brands.

We have accomplished this through strong and consistent execution of our brand-led profit growth strategy and our continued commitment to profit after capital charge, both as drivers of total shareholder return. This strategy is generating steady, growing pretax profit, a strong and increasing EBITDA, and strong cash returns to shareholders, and will have an even greater impact as market conditions improve.

Before we start the Q&A, I'd like to offer some additional perspective regarding the 2013 benefit from the Modelo brands in Canada, the Canada business, which we are cycling this year. For those of you who listened to the earlier call today, Peter gave third- and fourth-quarter 2013 impacts in local currency.

Now, let me give you the full dataset, so you have it all in one place. As Peter mentioned, in the third quarter last year we benefited from CAD6 million from the Modelo brands in Canada. Its fourth quarter we benefited from CAD4.4 million. Then backing up a bit to the first quarter, we had CAD2 million and in the second quarter CAD6.8 million.

Then just to tie it all up, in the first quarter of this year, 2014, we did have two months of benefit from the Modelo brands and that was just over CAD1.5 million. Again, just in the first quarter of this year before our distribution of those brands terminated at the end of February. I just wanted to give you those numbers.

With that, Sally, I'd like to turn it over to you so you can open it up for questions.

Thank you.

(Operator Instructions)

Your first question comes from the line of Bryan Spillane with Bank of America. Your line is open.

Hey, Dave, good afternoon.

Good afternoon.

Couple of questions. First one, just capital spending, the CapEx guidance or the plan for capital spending was reduced. Could you give us some more color in terms of where that was and what's driving the lower CapEx?

We dropped the guidance from $330 million, again, excluding MillerCoors, down to $315 million. That was essentially driven by just adjustments in the CapEx projects that we plan to implement this year. The team is being very rigorous around CapEx. They're applying the PACC model, as we've said. They simply thought that we did not need to spend that other $15 million.

I guess nothing to read into that in terms of, I don't know, not adding as much capacity as you thought you were going to add? I was just trying to see if there was anything more to read into the lower CapEx, other than you're being more efficient with the spend?

Right. Nothing to read into it related to CapEx or ROI projects or any of that sort of thing.

Okay. Then in Europe, in the quarter or maybe for the year, given the disruption in Croatia and Bosnia, will there be any insurance proceeds to offset the profit loss? Was there any effect of that in this quarter?

Well, short answer is, yes. We do have insurance related to asset damage to assets. There's even some business interruption insurance that we have in certain geographies. What I would say is that second quarter really did not benefit from any of that of significance. We'll have to see how that plays out in balance of the year.

So in terms of your outlook for the balance of the year, it didn't include any potential benefit or any compensation from insurance?

Correct. That's enough of an unknown at this point that we've left that out.

Okay. Then just in terms of trying to help size the issue in Croatia and Bosnia, could you just give us some direction in terms of proportionally how large those two markets are as a percentage maybe of the entire Europe segment?

Broadly speaking, Croatia and Bosnia and Serbia would be, very broadly, about one-fifth of the total Europe business. One thing I would mention is, to the extent that we do get insurance proceeds, those are likely to be special items. Although, obviously, we have to determine that as we go.

Okay.

That's, generally speaking, how we will handle that.

In terms of the current situation and then a path to normalization, I guess my understanding was that, especially in Bosnia, a lot of the retail accounts have been washed away. I think these are also mainly returnable markets, so I'm not sure where you stand in terms of have you lost a lot of bottles. Could you talk a little about what steps have to be taken to put the business back on a normal footing?

That's a good question. By the way, to get to one-fifth of Europe, you would have to include Serbia there as well. That was another area that was flooded in the May timeframe.

Okay.

Anyway, returnable bottles were definitely an area of challenge for us, because that's an important asset in those markets. If you add up all the assets that appear to need replacement, then that could be in the range of $6 million to $8 million of replacement value in those assets. As I say, some of that, or who knows what percent, it could be a high percent or not, but we have to determine how much of that will be reimbursable under insurance, and we'll sort that out. We're hoping to sort most or all of that out this year. At this point we can't tell with certainty.

As you're planning the business over the balance of the year, if sales are going to be negatively impaired, how much of it is that the consumer isn't there? How much of it is that the trade is still somewhat disrupted? How much of it is just simply you just don't have enough bottles?

The bottles, that kind of issue, that can be measured in weeks and months. Consumer, and call it infrastructure, if you will, that's a lot tougher to gauge. I would say at this point we don't know how long it will take those markets to, in essence, completely rebuild. It was pretty significant or very significant devastation in key areas of, particularly Bosnia and Serbia, and their governments are working on it. This is a multi-year project for them.

Okay. Then just one last one. I think on the conference call there was a reference made to the tax rate in 2015 being near the long-term expected range of 20% to 25%. Near implies maybe less, right? Is that versus being inside the range? Is that the correct interpretation of near?

Actually, what we said is we have a tax rate range of 12% to 16% this year. Then, our long-term tax range is 20% to 24%, and for 2015, assuming no change and additional change in tax laws and things like roll off of audits and stuff like that, we would expect to be at the low end of that long-term range next year.

Okay. Alright. Thanks, Dave.

Thanks, Bryan.

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

Thank you. Hey, guys, how are you?

Hey, Judy. Great. How are you?

Good. Just on the Modelo impact, understand the profit impact, but I'm still trying to reconcile the volume impact, because there's the FPR impact, the market share impact on an underlying basis. What was the exact impact on the volume from the Modelo loss?

Essentially all of our decline in the second quarter in STRs could be or is attributable to the not having the Modelo brand. That's around 3 percentage points in the second quarter.

Okay. Then the shipments of SPW being down 2%, what's the difference between the two then, STR versus SPW?

I'll get to that in a second. Just to be sure about the STR number, we only count half of the Modelo STRs in our results because it's a 50/50 partnership that we used to run up in Canada. So, that 3 percentage points would be half of the Modelo volume in the second quarter of 2013. Does that make sense?

Yes, because it's like 6% or 7% benefit to AmBev, on a total basis?

Okay. That sounds right. If we only claimed half and that was 3%, then essentially they're looking at 6 percentage points -- or they had 3% last year and now that they own the whole thing, I'd guess you'd say in the revisionist history, that's worth 6 percentage points of our total volume. The shipment number is -- the difference between that -- let me back up. If you take out Modelo brands from the STR number, we were essentially flat year over year. The shipment number's down 2 percentage points. The difference between those two is virtually all explained by in-transit shipments of import brands, basically Heineken last year. By the way, we expect that difference to reverse out in the third quarter. By expect that to reverse out, though, what I mean is last year it did reverse out in the third quarter. in other words, we had extra beer in transit in the second quarter and then that was normalized in the third quarter last year.

So reverse in terms of taking the underlying STR and now having a positive spread to SPW in the second half.

Right. We had a negative shipment, relative shipment number in the second quarter and you'd expect that to flip in the third.

The Quebec excise tax increase, I think Stuart gave us the percent changes in terms of the excise tax component. Just in terms of framing that in the context of what retail pricing might reflect in Quebec with the tax increases?

As with the last excise tax increase, I don't think at this point we can tell what the -- we know what the excise tax increase is, but I don't think we can tell how much of that will show up at retail. I would say, historically, excise tax increases in Canada have been passed on to the consumer, but I'm not going to, how you say, give forward guidance on that one at this point because we just don't know.

Assuming that it's fully passed on, can you just give us the number, just in terms of what that would imply in terms of the price to consumers, assuming full pass through?

I don't have that off the top of my head. I'll see whether somebody else here has it, and then tie it up by the end of the call.

Okay. Going back to Europe, with Croatia and Serbia coming in weaker from a volume perspective, it sounds like you got positive net pricing benefit because of the geographic mix impact in the second quarter. Was there anything else just in terms of pricing or mix that would have benefited 2Q? As we think about the balance of the year, should we be expecting the similar benefit on the mix side as those markets are going to be weaker than the UK?

Essentially what we saw was positive geographic mix. That is driven by more sales in places like the UK and Czech Republic and lower sales in places like Romania and Serbia and that sort of thing. The factors driving that shift, at least on the whole, they don't feel isolated to the second quarter so-to-speak. They're longer term trends.

Got it. Okay. Then on the CapEx guidance, so the $75 million increase in free cash flow, sorry, it's free cash flow number going back to the $775 million guidance now, the difference between $700 million to $775 million, I think CapEx was $15 million?

Right.

And interest was $15 million, also?

No, $10 million.

$10 million. Okay, where's the rest? $25 million including CapEx and interest.

Gavin mentioned cash taxes, which would be the bulk of what's left in the adjustment or in the change.

Okay. Basically, in terms of really the operating items, it's really the interest and then the CapEx and then the cash taxes coming in lower. And is that something that benefits going forward or something that is pulling forward from out years in terms of the cash tax benefit?

Closing out the cross-currency swaps, we don't have any more of those left. That doesn't feel as though it's something that would go forward. The other cash tax effects, -- let's see, I'm struggling to remember what the other cash tax -- Mark, do you remember? It was cross-currency swaps and there was one other?

We were just expecting some refunds from the IRS for some amended returns.

We also had some refunds from both Fed and state that we realized this year. I can't give you guidance around that sort of thing.

Got it. Okay. Alright. Thank you.

Thanks, Judy.

(Operator Instructions)

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

Great. Thank you very much. Dave, I can't recall if you mentioned, but could you give us a sense of your volume results and market share results in the UK?

We didn't break out the UK, specifically. Generally, we don't talk specifically by country. We did grow volume in the UK in the second quarter. We did say that.

Okay. No more detail on that?

We also mentioned that, overall, Europe share declined 0.7%. Some of that was related to value destructive off-premise promotional activity around the World Cup period in the UK. You can tell that there was some activity that went on there that we did not participate in, which did have share implications.

Has that value destructive discounting gone now?

World Cup's over, so I hope so. I will admit that I don't have an update from the UK team, how it's gone in the last couple of weeks, but --

Sure. Can you just step back philosophically speaking in terms of the timing of your marketing spend. The first half of the year, the second quarter is down, it's going to be up substantially in the third quarter and the fourth quarter, or at least in the third quarter. A lot of other companies have been emphasizing more early summer marketing. I'm just trying to get a sense of if there's any particular strategy or thought pattern going on in terms of the timing of your major marketing programs?

I would not say that we have, call it, a strategic change in how we think about brand spend or specifically advertising. We invest heavily every year behind our brands. There are moderate changes in that, in phasing of that relatively large base between quarters. Actually, not all that infrequently in various business units, and we're seeing some of that this year. You know that Canada's going to be spending more in the back half this year than they spent a year ago, that sort of thing. It's really around what kinds of innovation opportunities do we have? When are we introducing new brands? What opportunities do we have around our advertising, creative and promotional properties that we can put money behind?

Okay. Thank you very much, Dave.

Thanks, Robert.

(Operator Instructions)

Your next question comes from the line of Lucas Kline with Putnam. Your line is open.

Hey, Dave.

Hey, Luke.

How are you?

Great. Thanks.

Couple quick questions. First, just on the marketing spending, can you give us any sense of how much the marketing spending was down in the first half?

Not specifically marketing, but we can give you some sense of what the trend in MG&A was. For example, local currency in Canada, we were running down average of mid single digits on MG&A. Part of that's cost savings; part of it's timing of marketing spend. Then, looking at local currency in Europe, our MG&A was down. Actually, marketing spend as I recall was up in Europe the first half, if I remember right. Looking at US dollars, the decrease was 3.5%. Then if you bridge from that the local currency I just gave you, maybe that would help out.

Reasonable to assume that in Canada the marketing decline was about in line with the MG&A decline?

I don't think I want to slice up the MG&A line quite that finely.

Fair enough. Just one other question. In Canada you mentioned in the third quarter you're lapping I think lower incentive comp accrual. What was the benefit in last year's third quarter?

Last year I'd call it mid single digit percents of the MG&A line, so I think that's as specific as we want to get.

Perfect. Thanks a lot.

Thanks, Lucas.

There are no further questions at this time. Mr. Dunnewald, I'll turn the call back over to you.

Great. Thank you, Sally. 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 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.