Molson Coors Beverage Co (TAP) 2015 Q3 法說會逐字稿

Good morning, and welcome to Molson Coors Brewing Company's third-quarter 2015 earnings follow-up session conference call. Now, I will turn the call over to Dave Dunnewald, Global Vice President of Investor Relations for Molson Coors.

Thanks, Lee Ann, and good morning, everyone. On behalf of Molson Coors Brewing Company, thank you for joining us today for our third-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 earnings conference 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.

Before we begin, I will paraphrase the Company's Safe Harbor language. Some of what we discuss today may include forward-looking statements. Actual results could differ materially from what the Company projects today, so please refer to our 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 from time to time by the Company's executives in discussing our results, 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. We also encourage investors and analysts to read SAB Miller PLC news releases and trading statements that include financial and other information relating to the Miller Coors joint venture. As you know, Anheuser Busch InBev announced yesterday a further extension of its possible offer for all of the outstanding share capital of SAB Miller, and there has been some related press speculation that mentions Molson Coors. As a matter of policy, we do not comment on market rumors, and we will not be discussing the AB InBev SAB Miller situation on our call today, including during our Q&A session. We will devote our time today to our third-quarter financial results and the outlook for the balance of 2015.

So let's get started with an introduction of the team with me on the call. We have Kevin Kim, Investor Relations Senior Manager; Ashley Walker, Finance Forecasting Senior Manager; Brian Tabolt, VP Controller; Mike Rumley, VP Treasurer; and Mark Saks, VP of Tax. Now regarding quarterly results, as Mark Hunter mentioned on our regular earnings call this morning, in the third quarter, our worldwide volume increased 0.7%, driven by strong growth in Europe and international. Underlying earnings were lower due to unfavorable foreign currency, increased brand investments, and the termination of our Miller brands agreement in Canada, as well as the Modelo brands and Heineken brewing contracts in the UK earlier this year.

We increased gross margins on a consolidated basis, driven by the US and Europe, and we invested more in our brands in all of our businesses, except for international, where lower marketing was primarily due to a substantial restructuring of our China business this year. In the quarter, we continued to transform our portfolio toward above premium, craft, and cider. We expanded the depth and reach of our international brands in fast-growing markets, and we increased our commercial capability. We also continued to drive meaningful cash generation and disciplined cash and cash capital.

So with that, I'd like to turn it over to Lee Ann for your questions. Go ahead, Lee Ann.

(Operator Instructions)

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

This is good afternoon now for you Dave and team. I had a couple questions about the 10-Q, if I could just ask those. The first thing, obviously the 10-Q does cover the write-off from the Europe brands. There was also some commentary about the Molson brand, and I think there was some commentary there saying effectively it might be 9% under water and it's something you'll look at in Q4. What was quite interesting is why the different treatment. You've obviously taken the write-off, with the Molson brand, it sounds like it's something you're considering. It was a difference in treatment, I was quite interested in delving into.

Thanks, Ian. Let me take a run at some of the headlines, and then we'll see whether we need some additional detail from Brian Tabolt, who is extremely close to those particular questions. Right, we did take write-downs in some of our Europe brands, and then in the 10-Q, we do go through as well, the -- call it how close are other brands and intangibles are in other markets, how close they are to impairment consideration, would be the way I'd put it. And the Molson brands are actually 9% above impairment threshold, not below, but let me pass it over for anything Brian would add?

With regard to the impairments, the European brand impairments were actually outside of our normal annual impairment testing cycle, and that was based on a triggering event, which occurred relative to performance of select brands within the Europe business, specifically the Jelen brand, which as you know, we've had some challenges with most notably last year with some of the flooding that occurred in the Balkans. As it relates to the Molson Coors brands, that is the Molson Coors brand family, which is a number of brands, as Dave, mentioned it is 9% above carrying value, so it is not currently impaired and has not been impaired.

That one was not subject to a triggering event. We are monitoring it just as we disclosed in the 10-Q and the 10-K in prior year, but it is at risk given the fact that we consider it to be at risk at 9% above carrying value. That is one that we continue to monitor.

That brand has been at -- for how long?

The core brands have been at risk I think for the last two to three years.

So a little historical perspective there as well.

Useful. Thanks for that. The other thing I wanted to ask about, you've got some commentary I think page 85, which printed out I think it's page 53 of the actual filing covering the new agreements in Ontario, which I think were signed in September. I read what's in there. But I'm trying to get to what is the potential impact in your business in Canada that you can see coming out of that?

The actual terms of the final agreement from the asset review panel and the province of Ontario, they're very similar to the framework that was released early this year. Broadly speaking, what it does is add some incremental access to -- well, more ownership participation in the beer stores by smaller brewers. It changes the fee structures a little bit around access to the beer stores. It's a very open system, and it made it even more open, is the headline on that one.

The province has said they want to collect some additional taxes. I think it was - that number is actually in the 10-Q, $100 million over four years? And I think that's across all beer -- across the beer stores completely. So it's not just for example our brands or ABI's brands or whatever, in Canada.

What else? Other provisions? Additional access, shelf space for small brewers. And a fee structure to give them reduced fees for listing of shelf space used in stores nearer to their breweries, those types of things.

Big picture, what does it mean for your business, additional taxes presumably might mean less pricing, that put a bit of pressure on margin. But it sounds like it's for your industry, so that could be good news for volume. Is that the simple way of looking at, this is positive for volume but perhaps less positive for margin, or is that too simplistic?

I guess what I would say is access -- consumer access is expanded, so one of the provisions, currently we have around 440 beer stores in Ontario, very carefully placed to give, how would you say, convenient access to consumers. And in addition to that, we will be adding over the next few years a few hundred grocery stores that are also allowed to sell beer in the province of Ontario. So definitely increased access to beer by consumers, right, might have volume implications we'll see how that plays out.

Seems like a good thing from standpoint of volume. The impact of the tax change on margins, that's really just a question of how that plays through the whole trade, and I would say it's too hard to tell at this point what will happen with that. Generally, you can only gauge that kind of thing in real-time.

Understood. Very helpful. Thanks, Dave.

Your next question comes from the line of Vivien Azer from Cowen and Company. Your line is open.

I wanted to follow up on the Vancouver brewery. Can you elaborate a little bit how do we think about the margin impact on the leaseback, what's the construction time line on the greenfield facility? Just any other details that you can offer around that manufacturing transition would be awfully helpful.

Yes, sure. So the Vancouver brewery sits on a really nice set of real estate in downtown Vancouver. We have an agreement to sell that land to someone, and then our intent is to recapitalize that brewery elsewhere in British Columbia. Perhaps in the Vancouver area, but the point is, we need a brewery in that area.

And the good news is that, as Stewart mentioned on the earlier call, the value of that land that we're selling is actually will fund somewhere between most and all of the cost of the new brewery, and obviously that depends on some details yet to be determined. But the point is, it's a pretty good trade across to be able to build a new, much more highly efficient, much more flexible brewery in the general area there. And so in the time frame, the leaseback component is three to five years, as I understand it. And so that gives you a sense of how long we anticipate it will take to build a brewery, and actually, that's usually how long it takes to build a brewery of that magnitude.

Are you thinking that this new brewery will have more, less, or the same amount of capacity as the brewery that you're selling?

I think Stewart mentioned on the earlier call --

Sorry.

It's a really good question. We're going to get a lot here. I think the point is we'll make sure that our capacity available to the operation in Canada will be suitable, depending on which brands, and which markets, and so forth we have. Whether it will be the same size as what we have now or a little bigger, little smaller, whatever, we know it will be a significant brewery but the exact amount of capacity is, again, yet to be determined. The main thing is, it will be flexible, and it will be efficient, and that's really what we need, because the existing brewery does not have those characteristics.

Understood. Thanks. And I apologize for the redundant question. I've been hopping on and off earnings calls all day. Thanks so much.

It's not just your life, Vivien, but many of your colleague as well. No harm done.

(Operator Instructions)

Our next question comes from the line of Rob Ottenstein from Evercore. Your line is open.

Thank you very much. So wonder if you could give us a little bit more color on business conditions in Canada, what the pricing environment's like, particularly on the mainstream and value side, and then also a little bit of color on how Six Pints is doing and what volume gains you've got there in the third quarter?

Thanks, Rob. On the business conditions in Canada, I would say somewhat better in the third quarter. As you may know, this recession we've been in has hit Canada harder than the US, and particularly with them piling on not only things like consumer confidence and macroeconomic headwinds and whatnot, of climbing out of the recession, Canada has been faced by significant headwinds in the last year or so from raw materials, commodities, specifically oil and gold. And so that's been a real challenge.

Nonetheless, in the third quarter, the Canadian beer market overall did do better. Part of that was weather. Overall pricing in Canada actually has been pretty good. We got a little less pricing in the third quarter than we had in the first half of the year. That was primarily driven by the decision to make some reinvestments in the marketplace behind our brands, more of a -- call it a retail or tactical level. And also just the normal sort of flow of pricing that you can get differences between quarters and so on, related to that.

How's Six Pints doing? Doing really well. The trends on the Creemore and Granville, for example, brewing company brands, have been overall relatively good. Craft beer in Canada is very important. It's, if anything, a bit bigger.

The last time I did the math, relative to the size of the market, which is about 1/10 the US beer market, the craft segment in Canada's about 50% larger. So obviously a critical part of that market and of our business. And for example, Granville is running high single digit volume growth or SDR growth in the third quarter. So anyway, does that get you closer to what you need?

Let me try to get even closer. So for Six Pints, would you say overall up high single digit, and can you give us a sense of what percentage of your volume in Canada is from Six Pints?

Thanks. We don't provide a specific breakout of Six Pints as a unit, but I would tell you that the two primary brand sets in Six Pints, which would be Granville Island and Creemore Springs both grew at high single digits in the third quarter.

Okay. And just, so they're up high single digits. Six Pints overall is 5%, 10% of your volume? Just rough order of magnitude?

Let's see. I want to look at a few numbers here. I would say that the volume of the Six Pints group would be low to mid single digit percent of our Canadian volume, but I won't be more specific than that.

Thank you very much.

Your next question comes from the line of Mark Swartzberg from Stifel. Your line is open.

Hi, guys, this is Chris Sinnott for Mark. My first question --

Hello, Chris.

How are you doing, Dave? I'm sorry.

That's all right. Go ahead.

I know you guys are trying to get through this, here. Do you see a point where you'll start communicating STRs without the contract brewing, just on like an owned volumes basis?

So in the US, we already report STRs without the contract brew volume.

Okay.

And actually that's also true of our STRs in other -- in our other geographies. None of the STR numbers include contract brewing. What they do include though, is in Canada for example, last year, and in the first four months -- excuse me, three months of this year, you would have the Miller brands in there.

And what we've done is, most of the contracts we've been talking about are rolling off, or will have been cycled is a better way to put it, by either the end of this year or the first three or four months of next year. So what we try to do is give -- without giving specific numbers, we give a perspective on what the performance was, if you exclude those, call it discontinued business, if you like.

Got it, got it. And I don't know if you guys have said this number before. That's about a million barrels, that business?

Which business was that?

Contract brewing overall.

No, it varies by market. The contract brewer arrangement we had in the UK and that ended roughly at the end of April this year with Heineken, that was up to 3 million hectoliters per year. That's what's ending there. What the existing contract brewer arrangements that continue, in Canada for example with North American Breweries, we have a contract brewer arrangement that is up to 1.5 million hectoliters per year. And then in addition, Miller Coors has even more significant contract brewer arrangements in the US that are worth roughly 10% of their volume. So that would be in the range of 6 million US barrels.

Okay. Got it. And is there any way you can repeat what you were talking about on your earlier call about I think it was a $50 million increase in MG&A weighted towards the back half? Was that correct?

Yes, thanks for asking. Yes, so what -- so happy to, how do you say, repeat that, or give it to you again. Essentially what Gavin said at the fall distributor meeting and again on the call this morning was that Miller Coors intends to spend approximately $50 million more on marketing and sales activities in the back half of this year than they did in the back half of last year. Doesn't tell you what's going on with G&A for example in that business, or whatever, but it gives you the marketing and sales point of view, or perspective.

Right, right. Got it. Perfect. Thank you.

(Operator Instructions)

Our next question comes from the line of Bryan Spillane from Bank of America. Your line is open.

Hello, Dave. How are you?

Great, Bryan.

Two questions. The first one is just on the -- I think Gavin had guided for the FY15 cost savings to be at the upper end of the $40 million to $60 million range. Is that currency neutral, or is that at all affected by currency?

Most things in our business are affected by currency somehow, if it's happening outside the US. But anyway, we did not put an FX qualifier on that particular piece of guidance.

Given that most of those savings would have -- are coming from Canada, there should be a benefit, I guess, if that were what we were thinking. I was just trying to understand if that range is at all different, if there was no change in currencies, if that range had changed on a currency neutral basis.

So the value of cost reductions, once they're converted back to US dollars, would actually be lower if the Canadian dollar is weaker. I think the point is, our guidance -- the Canadian dollar has been relatively steady for many months, and so, main thing I'd focus on is the actual US dollar value.

Okay. That's helpful. And then on -- there was a question on the call that I think was focused on the ongoing discrete tax items, and I guess trying to understand how much more potential impact there could be. Aside from Kaiser, right, where I think they're still if I remember this right like $70 million of tax credits that are unclaimed, if you will, right? What are the other areas where there's still like major tax disputes or unresolved tax issues? Or is it mainly in Brazil with Kaiser?

Let me tee up some thoughts on that, and then we'll see whether Mark Saks or Brian Tabolt have anything to add. One thing -- so let me give you the overall idea. Sorry, two main points to start.

One, Kaiser, that's the Brazilian business that we sold in 2006. All of the indemnities and other tax questions, anything related to Kaiser is in disc ops, sorry, discontinued operations. So what we mean by that is that is not in our tax rate or really anywhere else in the P&L, except for the discontinued operations line. And actually, the amount of, or the value of those liabilities, or their impact on our income statement really has moved relatively little, basically just with FX in recent years. They've been relatively stable, is what I mean by that.

And then, as far as discrete tax items go, those are a variety of things, the things that you cannot generally anticipate. For example, we like to talk about FIN 48, which is the uncertain tax positions, essentially this includes audits of our tax returns, which a Company like ours, it happens every year, in every jurisdiction. You just don't know generally exactly when or how each audit will be wrapped up.

So some of those types of things, FIN 48 reserves will resolve favorably. Uncertain tax positions will resolve favorably in the third quarter. They're very difficult to predict ahead of time, though. That's why we provide guidance for you, but it does not include these types of things, because we can't anticipate them either, because we're working with the taxing authorities and so on.

Okay.

Anything, Mark or Brian, that you would add to that?

I think that was a great explanation, Dave.

The FIN 48 footnote is which one, Brian?

It's in the 10-K.

In the 10-K there's a footnote that specifically talks about tax and the uncertain tax position. You can get an idea of how much we have set aside for uncertain tax positions, and we have amounts being added to that call it a bucket if you like, added, and then some coming off periodically, and what you saw in the third quarter was some coming off.

Sorry.

One clarifying point. There was new some guidance that came out last year where the gross uncertain tax position balance gets netted on the balance sheet against our net operating losses. So that balance probably looks like it materially came down, but that's really just a presentational point as a result of some new guidance that came out from a US GAAP perspective last year.

And then Dave, just with the write-downs that you've taken this year, does that contribute to -- you make an assessment of what you think the tax impact is, but that goes into a addition to things that might have to be resolved later. What I'm trying to get at is, do we bank more of these potential tax credits because you're closing a brewery in Vancouver, and you've written down some brands in Europe, does that at all change the balance there, in terms of potential tax credits and liabilities?

Very interesting topic. So we do have a few write-downs, some related to operating assets, for example, in Canada. We got the brands in Europe. Those items, generally special items, do tend to affect the -- or sorry, they can affect the tax rate in this quarter on the GAAP number.

So just because -- oftentimes it's because of its effect on the pretax income in the period, where the effective tax or -- sorry the amount of tax, stays the same. A lot of time it's a denominator change is my understanding. These guys can speak to it, if we need additional help on that. Also as far as future years, not in any significant way. Anything you -- remarks you would add.

I think you hit it. The underlying ETR is not impacted by these write-downs and the book tax expense that's being recorded, and specifically in the Europe brand impairment, that is purely a book tax presentation, cash tax associated with the brand impairment.

Okay. Actually just one last one. Just you've got -- there was some questions about capacity, and whether or not capacity's coming out or being added in Canada. And I guess, can you just distinguish between -- there's the capacity to actually package, and then there's the capacity to actually brew beer. And I guess my understanding in Vancouver was you've got like a bottling line there, and you were doing kegs, and you were doing cans, but maybe the bottling line wasn't as efficient.

So I guess my question is, when you're thinking about a new brewery that's going to be more flexible, does it maybe necessarily brew the same amount of beer, but in smaller batches? Is the capacity at all affected by maybe not total amount of beer being brewed or being packaged, might not change that much, but you can more effectively package smaller production runs? I think the notion of capacity sometimes gets a little bit complicated, because the business is fragmented so much. I don't know if that's clear or not, but --

Yes, it is. I don't think investors tend to think too much about that kind of stuff, but it is important. Let me give you some headlines on that. You're exactly right. When you look at capacity in a very complex, how do you say, setup like a brewery, it's not just gee, how many brew kettles do you have, or even how many packaging lines do you have? Because actually what you have to do is look at every single pinch point, as we call it, in the process of brewing beer, and it's everything from stuff coming in the back door to each of the different pieces of the brewing process, to things like filtration, to then packaging, piping, line changeovers, all of those types of things actually do affect or determine the effective capacity of a brewery.

And actually it's kind of like a lowest common denominator thing. Whichever of those several hundred or thousands, however you define them, pinch points in the process, whichever one is the smallest, that's your maximum capacity. Right? So I think you're exactly right. You can't look at it very simplistically.

I think what we've seen in our business is not only in Canada but also in the US and in Europe is that as we have some really great innovations coming through our system, some great ideas, that consumers are enjoying, a lot of those things create more complexity in the brewery, not just in brewing, but also in packaging, filtration, shipping, call it whatever you like, but all through the process, and that reduces the effectives capacity of the overall supply chain network.

That's really what we're trying to adjust to, and so whatever the rated capacity of this new brewery in Vancouver is, that's probably not as important as how flexible is it. How efficient is it. And in other words, how effectively can we get that new facility to deliver the product that we need in the marketplace.

The last point I'd make is the bottling line is another good point because the consumer trends in Canada are away from returnable bottles and have been for many years, that's a more mature process in the Western part of Canada, where actually it looks quite a bit like the US from a package mix standpoint, where roughly half the market is in cans, and some places even higher than that. In the east of Canada, there's still quite a few returnable bottles, but the consumer and the market is migrating away from that, and so that has required some adjustment on our part to actually reduce our bottle line capacity in various places, various breweries, not only in Canada, but in other markets as well.

And as far as the last point, flexibility, product changeovers are really important in a brewery, because it's a very long process, and every time you change over, you have to shut everything down, clean all the lines and everything else, and so that's a very not only time and labor, but also cost-intensive process. And so having a more nimble facility that can do that faster cuts your costs and increases the effective capacity in today's beer world, where you have so many different products and package types.

Very helpful. Thank you, Dave.

Thanks, Bryan.

(Operator Instructions)

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

Just a quick one on when you guys gave quarter-to-date trends, you said that Canada was impacted by less one less sales day. The US number is adjusted. Is the Europe number adjusted for selling days or not?

I haven't asked that question. Does anybody around here know the answer? I honestly don't know. Generally speaking, we do not adjust our Europe reporting for sale days. You've got different holidays there, and everything. Just in the US and Canada where we look at that.

I can tell you that the difference, actually went and looked at a calendar between calls, and in 2015 we had 22 sale days. That means 31 days in October minus Saturdays and Sundays. So we had 22 this year, and 23 last year. The difference is 4.3%.

Assuming you ignore all other differences, because actually the timing of holidays within the month, and is Halloween on a Saturday versus, I don't know, Thursday or something, that can make a difference as well. But if you're just trying to keep it simple, it's 4.3%.

Okay. Thanks, Dave.

Okay. Thanks, Brett.

We have no further questions at this time.

Okay. Great. Thank you Lee Ann, and thank you everyone for joining our call, and we appreciate your interest in Molson Coors. If you have any additional questions that we did not cover during our time today 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. You may now disconnect.