Molson Coors Beverage Co (TAP) 2015 Q1 法說會逐字稿

Good afternoon and welcome to the Molson Coors Brewery Company first quarter 2015 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 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.moulsonCoors.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 the Thad Miller PLC news release and trading statements that include financial and other information relating to the MillerCoors joint venture.

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

Thanks, Stephanie. Hello and welcome, everybody. On behalf of Molson Coors Brewing Company, thank you for joining us today for our first quarter 2015 follow-up earnings conference call. Our goal on this call is to address as many additional earnings- related questions as possible following our regular call with Mark Hunter, 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 an introduction of the team with me on the call today. We have Kevin Kim, Investor Relations Senior Manager; Spencer Schurr, Finance Forecasting Senior Manager; Katie Walter, Finance Forecasting Senior Analyst; Brian Tabolt, Controller; Mike Rumley, Treasurer; Mark Saks, VP of Tax; and Steve Mack, Director of Tax.

Regarding the quarterly results this morning, as Mark Hunter mentioned on our regular earnings call, our results for the first quarter reflect continued volume pressure in our largest markets and, as expected, a significant impact from foreign currency movements, a higher tax rate and terminations of business contracts, all of which we discussed on our last earnings call. Despite this backdrop, however, we remain resolute in our focus on building our brand strength, achieving positive pricing, transforming our portfolio to the above premium segment, improving commercial execution and embedding profit after capital charge throughout our organization.

Also in the first quarter, our Board approved a double-digit increase in our quarterly dividends and a new stock repurchase program and early in the second quarter we began to implement this new buy- back program with $50 million of cash used for Class B common stock repurchases.

And with that we'd now like to open it up for questions. So over to you, Stephanie.

(Operator Instructions)

Your first question comes from Ian Shackleton with Nomura. Please go ahead.

Yes, hi again, Dave and team. A few questions. Firstly, just thinking about the UK and the Alton situation, I am somewhat (inaudible) linked to the Heineken contract that's coming to an end. Just thinking about sort of the timing of how it works.

I mean, I am assuming the Heineken contract is still running. That will stop at some stage this year; you then close the brewery. Does that have a fairly dramatic impact on certain quarters or is it not that material in terms of the impact?

No. It's good that you asked about the granularity on that, Ian. The contract brewing arrangement ends at the end of April and then the brewery, in all likelihood, will be closed by the end of this month.

And will that affect volumes as reported in Europe then as we think forward post end of it -- well, from now on?

So the contract brew volume was never included in our reported volumes. So it won't affect that. What was included in our results, though, are the -- call it the British pound revenues from selling the beer to Heineken and also obviously the costs -- along with that, the costs to produce the beer. So those go away.

Okay. And when we think about the overall impact this year, obviously you will have cost savings to close the brewery. You are going to lose some income. Does that really sort of net through the bottom line for this year?

Yes. We haven't specified that. But the closure of the brewery is directly linked to the termination of the contract brewing arrangement. But we haven't specified how much the savings were on the -- for example, are expected to be on an annualized basis in the closing of the brewery. And we did say that in our filings that we received a EUR13 million payment.

So anyway, that's the only real number we put around this other than to say that the contract brewing arrangement was up to 3 million hectoliters per year. As you can tell by the closing date of, call it near end of May or something like that, that we will have about a half a year's -- or nearly a half a year's worth of costs associated with operating the Alton brewery this year.

Have you decided how you are going to treat that EUR13 million payment? Do you take that as a one-off or do you suppose, over a period of time, basically reflecting how the contract would have come in?

Yes. Well, actually, I think Brian Tabolt can provide a little bit more granularity around that closure to it.

Yes. Hello, Ian. We actually received a portion of the payment in 2014 and the remaining payment was received at the end of April at the end of the contract. The P&L impact of that will be recognized in the second quarter upon completion of the transition period of terminating the contract.

Okay, Brian. Thanks very much for that. And just --

That will be excluded from our underlying earnings as a special item.

Okay. Thank you. And one other thing I wanted to ask about. Buy back. When you asked the $1 billion target over four years, we certainly came up with a sense that that was (inaudible) fairly evenly. From what I understand what you announced today, you did $50 million in Q2, which is five weeks effectively, which is obviously a much faster run rate. Has something changed a little bit on that timing?

Yes. No, good question. When we came out with the buyback, Ian, on the last earnings calls in February, we mentioned that we expected it to be back-end loaded in the five -- excuse me, four-year period. At the same time, yes, we had $50 million of cash used early in the second quarter for buybacks.

But I don't think I would, how do you say, assign a time period to that and try to straightline that. We don't give granularity around exactly how we will implement this buyback. But, yes, I think applying a few weeks to the $50 million and trying to straightline that would probably not provide the view you need.

Understood. Thank you. Just one other quick thing. On the India deal, I think that completed in April. So it's not reflected in the cash flow for this quarter. That was the first question. And then the reduced CapEx comes to $300 million. Presumably, that doesn't include anything for the Indian deal? That would be on top of that?

Yes. The Indian deal was completed in April, so that's correct. Those numbers would show up in the second-quarter results. CapEx associated with India, let's just say that our current guidance for CapEx includes a point of view on our MCI business, including the India acquisition.

Yes. I know you have not wanted to disclose how much you paid for India. But presume the Q2 cash flow is going to give us some clue?

Yes. That's right. The cash flow statement will provide at least some broad perspective on that because you have a separate line item on there that -- unless we do some other kind of acquisition or whatever, then it will be sitting there by itself, right, Brian?

That's correct.

Yes. So watch for that. And let me hasten to add, however, what I have described is a small bolt-on acquisition. It's not radically dissimilar from some of the other bolt-on acquisitions we have done over time, such as Creemore Springs in Ontario, Granville Island in British Columbia, Dunbar in the UK. And actually the original Cobra acquisition -- Cobra, India, acquisition a few years ago.

Very useful, Dave. Thanks for that. Thank you.

Thanks, Ian.

Your next question comes from Vivian Azer with Cohen and Company. Please go ahead.

Hi. Good afternoon.

Hey, Vivian.

I apologize if these are repeat questions. I only was able to listen to a part of the 11.00 AM call. So in terms of the cost savings for cap, I know you guys disclosed it for the MillerCoors JV specifically, but I was just curious did you indicate what you generated in terms of dollar cost savings in the quarter?

No, we didn't provide a number. The sort of reporting cadence, if you will, with our cost savings has been reporting them at the end of each year, not quarter-by-quarter, which I realize is definitely different from MillerCoors. The good news is you still have the guidance of $40 million to $60 million per year for at least the next three years, and that would include this year.

Okay. Because I asked the question in the context of your US dollar SG&A expenses, which obviously benefit from adverse currency movements, but it was down fairly meaningfully. Is there any color, Dave, that you can offer at least in terms of the cadence of cost savings for 2015? Would it have been a little bit weighted to the first quarter? Is that just largely currency?

No. Just a really big dose of currency in there. We don't provide a lot of granularity about phasing of cost savings within a year by quarter. But generally speaking, we don't see a huge amount of lumpiness in those.

Okay. That's helpful. In terms of your European local currency COGS per hectoliter coming in a little bit higher than your full-year guidance, I recognize that the comp is incredibly tough from the first quarter of 2014, but is there anything else to call out that would bring your full-year local currency COGS per hectoliter at the less favorable end of the implied down mid-single-digit range.

Yes, probably the biggest single factor would be the contract brew arrangement in the UK ending. As we mentioned earlier, it ends at the end of April. So that was not -- how do you say? Those numbers were in the first quarter numbers. They will diminish -- well, completely part way through the second quarter. And so that would be one factor.

And then another factor, the Modelo brands in the UK, that contract also goes away this year now. It went away from January 1, but it's, I guess, worth mentioning that that's a relatively seasonal brand, which means you would see more of an impact that is decreased from a COGS standpoint in, say, peak season and toward the holidays at the end of the year.

Got it. And my last question, I think I heard Gavin reiterate the tax guidance of 18% to 22%. Any reason to think you won't come in at the lower end of that, given where you started the year?

You know, we had some discrete benefits in the first quarter, if I remember right. I'll look to Mark to correct me on any of this that I don't get right because tax certainly has its degree of complexity.

But essentially, A, we have some discrete benefits; B, the first quarter is a smaller quarter. And so you are more likely to have a little more volatility actually in lots of the numbers, given a certain movement in, call it business performance, if you would like. I don't think I would read anything in particular into it. We did reiterate our guidance of 18% to 22%.

The only thing that was new that I'll highlight for you is we did mention that we expect to be at the low -- or near the low end of our long-term range of 20% to 24% per year. We expect to be near the low end of that range for at least the next few years, assuming tax rates and other things don't change. So that was new this quarter.

Terrific. That's really helpful. Thanks a bunch.

Thanks, Vivian.

Your next question comes from Bryan Spillane with Bank of America. Please go ahead.

Good morning, Dave, Kevin, team.

Hey, Bryan.

Dave, the first question just in Canada and market share in Canada, I think you, in the press release, said that market share in Canada excluding the Modelo brands was down, I guess, one point. So could you just talk a little bit about what's driving the share losses? Is it still the Coors Light kind of Coors franchise? Is Labatt slipping? Trying to understand a little bit more about what happened market share in the first quarter.

Yes. So you got the Modelo brand's piece which is not included in that 1% point of view. One thing that Spencer mentioned, is that in the first quarter the stronger markets were actually out west. And we have noticeably lower share in some of the Western provinces, particularly British Columbia.

And so that would tend to -- if those are the strongest markets in a given time period, then obviously that is going to make our overall share lag versus, for example, if we had really strong industry volume performance in Quebec where we have relatively high share. We are also lapping the Olympics from a year ago. And let's see. I guess those are the main things that I would bring up.

Just Molson Canadian and Coors, Coors Light, anything to call out there in terms of market share?

Yes. So we did see a sequential improvement versus full year last year, an improvement in Coors Light trends. We feel better about the marketing, call it ad creative and promotional activity around that brand. Clearly, we are not done yet in working on that brand.

We are also lapping the Olympics from last year. I thought I'd throw that out as well. And if you put -- there is some interplay between Coors Light and Coors Banquet, which is doing extremely well in Canada, even though it's in limited pack types and channels and those types of things, and even some geographic skew there. So that brand has been doing quite well. If you put Coors Light together with Coors Banquet and the new Coors Altitude brand, that brand set actually grew share in the quarter.

Okay. And then on cash flow or free cash flow, your cash flow was a little bit light relative to what I was expecting in the first quarter. So can you just -- anything that was, I don't know, timing related that would have knocked down both operating cash from operations and free cash flow in the first quarter?

Yes. Definitely. There is some timing on working capital. Those things like vendor payments, CapEx-related payments, things like that did have an affect on it.

Okay. So it was -- even though there is a seasonal element in terms of the way you generate -- TAP generates its cash flows, there were more outflows than normal for a first quarter? Is that the way to look at it?

Yes, that's fair. Yes. That's fair.

Okay. And then, Dave, last time we did this call we just did kind of a quick bridge in how we would go from last year's $904 million of pre-tax profits to this year. I just want to make sure that there hasn't been any major changes in the items on that list. I think we talked about the brands, losing the Modelo, the Corona brand in Canada, and losing in the UK, losing the Heineken business. The combination of those was about a $40 million hit. FX now is a $55 million hit.

You have got a favorable swing of interest expense of about $15 million. Pension expense is about a $5 million favorable swing. The cost savings range is still between $40 million to $60 million. It sounds like from the call right now we should think about the closing of the Alton brewery inside of that $40 million to $60 million range? Is there anything else that sort of needs to be either added or adjusted in terms of trying to just do that bridge?

Yes. The $30 million of CapEx reduction in guidance would be one item I think you didn't mention. The Alton brewery would be within the $40 million to $60 million. In other words, to sort of complete the story, so to speak, we did not contemplate closing Alton when we set up our cost savings.

But at the same time we have not adjusted our $40 million to $60 million of guidance for the year. It's not a huge brewery, I would add as well. So at this -- even though it wasn't in the original, call it, plan for 2015 cost savings, we also have not changed our guidance, which tells you something about where it sits now.

Okay. And then in terms of there is a slight benefit, I guess, as you are going to pick up the Heineken brands, the Heineken Mexican brands in Canada. Like how meaningful is that?

Yes, we call them -- I call them the FHIMSA brands in Canada. We have the Mexican imports up there now. They are a fourth the size of, say, like the Modelo brands that we terminated early or accelerated termination in February, at the end of February of last year.

So they are quite a bit smaller than either the Modelo brands that we no longer have and also smaller than the Miller brands which we now no longer have as well. But these brands are relatively underdeveloped and particularly if you look across the border at the kind of performance we have seen out of Dos Equis and Tecate. We see a lot of potential in these brands in Canada. And that's our intent.

Got it. Okay. That's all I've got, Dave. Thanks.

Yes. Thanks, Bryan. The only thing I would add is, in the UK we are also picking up the -- sorry, in the UK we no longer have the Modelo brands there, but we are actually picking up the Modelo brands in Central Europe. That's again a smaller base than the business that we had before, but a really good brand set to grow off of in Central Europe.

All right. Thanks again, Dave.

Thanks, Bryan.

Your next question comes from Robert Ottenstein with Evercore. Please go ahead.

Great. Thank you very much. Dave, you guided down the CapEx, and I know you didn't adjust the free cash flow for the year, which is in a band. Are there any other things on the free cash flow side that we should be thinking about, or perhaps maybe that pushes you towards the high end of that band?

Yes. We haven't sort of given, how do you say, granular distinctions within the band, so to speak. I think given the number of moving parts in the balance of the year, we're only one quarter in, it feels a bit early to be sort of trying to net things out within a range. So at this point it's $550 million of underlying free cash flow plus or minus 10%.

Got it. And the volume that you walked away from in the quarter, can you give us any sense of how much that was, what the impact was in terms of the reported volume in the quarter, and which markets, more specifically, that was in?

Yes. So our Europe sales volume was down 7% in the quarter. The loss of the Modelo brands was worth a fraction of that. About, I'd say, one-third of it or so, or a little more. And so that's, I guess, one important data point. Then if you sort of migrate from there over to some of the, I call it economy segment issues, and specifically not chasing volume -- actually, it varied not only by market, but also by channel and geography within countries.

I would say we saw those challenges particularly in certain channels in the UK and then also in those countries that were flooded last year. Doesn't mean we didn't see any issues in other markets, but those were the primary ones. I think Serbia, for example, and --

And maybe that was another 200 basis points roughly, or 100?

Yes. I can't get to that level of granularity. But certainly it was important. Thus, the reason we mentioned it.

Got it. Thank you very much.

Okay. Thanks, Robert.

Your next question comes from Brett Cooper with Consumer Edge Research. Please go ahead.

Just a couple quick ones on my side. You mentioned the higher severance costs in the UK. Is there any way you can give us a number so we can model it out for future years?

Low-single-digit million? Yes. A few million is probably the best -- at US dollars the best way to put it. I don't think we want to get more specific than that, since it was not a special item or what have you.

Okay. And that would be, again, something that was roughly zero the year before or is that something that is sort of there and we should think about going forward?

Call it insignificant in the prior period.

Okay. And then I know there were things that, I've tried to get this before, but is there any way that you can run through on line items the impact of the lost brands, whether that be the Miller brands in Canada or the Modelo brands, or the Modelo brands by themselves in the UK -- or Europe? Sorry.

Only in relatively general terms, I guess for competitive reasons. But let me give it a shot. So the Modelo brands are worth about 1% share in our UK business. I think you probably remember from old numbers, our share in the UK was generally around 20% -- 19% or 20%. So you can tell it's about 5% of our volume in that market.

Actually just saying 1% share, you can probably get a sense of the volume. Modelo you can make an estimate of the revenue per hectoliter. It's relatively high. Think somewhat thinner margins than we'd have in our own brands. And with the brand owners' profit stream embedded in the cost of goods for us. And I think with that you can get kind of a ballpark view.

Miller brands in Canada, mid-single-digit percent of Canada volume. And basically the same sorts of contexts or texture around that as in it's an import. It's primarily MGD. And it has high revenue per hectoliter. And the brand owner gets the lion's share of the profit stream and it's embedded in the cost of goods.

And in both cases who was responsible for marketing expenditures?

Sorry. Can you say that again?

I am just wondering who picked up the marketing tab? Was it within your P&L or was it, whatever, Modelo ABI for the Modelo brands or SAB on the Miller brands?

Who picked up the marketing? Oh, who is doing the brands now?

No, no, no, no. I am saying who was expensing the marketing that was going behind the brands? I am wondering if it comes out of your P&L or theirs, or I guess it stays in theirs. I'm trying to think about the impact on line items. Is it within MG&A? Are you also reducing the marketing, if you will, because you are no longer having those brands?

Yes, yes, okay. Thank you for clarifying. I get the question now. No. I can't talk a lot of specifics because these are confidential contracts and all that stuff.

But generally the way these contracts work is the brand owner pays some of the marketing and then the, how do you say, the distribution arrangement involves additional investments in the brand. Sometimes there are different set-ups like the joint venture for the Modelo brands in Canada. That's essentially the way we managed it out of the UK.

Perfect. Thanks, Dave.

Okay. Thanks, Brett.

(Operator Instructions)

There are no further questions at this time.

Okay. Great. Thanks, Stephanie. Really appreciate everyone's interest in our results today and thank you for joining us. 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.

Thank you. This concludes today's conference call. You may now disconnect.