Molson Coors Beverage Co (TAP) 2016 Q1 法說會逐字稿

Welcome to the Molson Coors Brewing Company first-quarter 2016 earnings follow-up session conference call. Now, I will turn the call over to Mr. Dave Dunnewald, Global Vice President of Investor Relations for Molson Coors. Please, go ahead, Mr. Dunnewald.

Thank you, Jonathan. Good morning, everyone. On behalf of Molson Coors Brewing Company, thank you for joining us today for our first-quarter 2016 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, David Heede, Mauricio Restrepo and our business unit CEOs earlier today. We will use a standard Q&A format. 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 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 our Company's executives in discussing the Company's performance, please visit our website, www.MolsonCoors.com and click on the Financial Reporting tab in the Investor Relations page, where 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 SABMiller PLC news releases and trading statements that include financial and other information relating to the MillerCoors joint venture.

So let's get started with an introduction of the team with me on this call. We have: Kevin Kim, Investor Relations Senior Manager; Ashley Dunlop, Finance Forecasting Senior Manager; Brian Tabolt, Controller; and Steve Mack, Director of Tax. Regarding quarterly results, as Mark Hunter mentioned on our regular earnings call earlier this morning, in the first quarter, we continued to focus on our first choice ambition and on building a stronger brand portfolio, delivering value-added innovation, strengthening our core brand positions through incremental marketing investments, and continuing to premiumize our portfolio.

We began to see the benefits flow to our top-line performance as we grew worldwide volume, improved core brand momentum in key markets, introduced fast growing innovations in all of our businesses, and achieved strong above premium growth globally, including in craft, flavored malt beverages and cider. We also continued to strengthen our business through improvements to our sales execution and revenue management capabilities, increased efficiency of our operations and implementation of global systems on a common basis.

As a result, Molson Coors reported significantly expanded gross, operating and pretax margins globally, along with growth of more than 28% in total Company underlying after-tax earnings and more than 15% growth in underlying EBITDA versus a year ago. At the same time, we completed a stock offering -- a common stock offering in January to fund about 20% of the pending MillerCoors transaction. We made solid progress in our planning for the integration of MillerCoors and the Miller global brand portfolio.

Completion of this game changing transaction is still expected in the second half of this year. We intend to be ready to go on day one following the close. In the balance of 2016, we will continue to focus on our first choice for consumers and customers ambition, all driven through our profit after capital charge lens and with the intent to drive total shareholder returns. So with that, Jonathan, we'd now like to open it up for questions. Over to you.

(Operator Instructions)

Vivien Azer, Cowen.

So I wanted to follow-up, please, on my question from the 9 AM call. Maybe it really is just better suited for this call, but I'm having a hard time, Dave, reconciling what I'm seeing in the Nielsen data for Miller Lite and Coors Light specifically. I recognize there's some disconnect between on-premise and off-premise, but I'm seeing on a trailing 12-week basis for instance Coors Light volumes up 1.1%, but Miller Lite down 2.6%. There's some really notable divergences in terms of price mix. So is there anything going on in terms of price back architecture or promotion in the off-premise that would drive some of that divergence in terms of the syndicated data.

Yes. Thanks for the clarity around the data that you're looking at. To be quite frank, I don't spend a lot of time on the scanner data. But I guess what I would say is, let's see, a few things come to mind. It's 12-week data, so in some cases you'll see what I would call sample error or, call it, divergence versus the population, if you're a statistician. So that's one thing, particularly -- for example, you can see differences between the Nielsen data and the IRI data for exactly the same periods. That could be explained by what I call sample error.

Also, as we talked about on the earlier call, there are channel differences, so you are missing the liquor store and on-premise. We already talked about that. Miller Lite does skew toward the on-premise. But I don't think that's -- I think those other factors are really important along with geography, which I think is probably a very important factor. For example, Miller Lite would skew more heavily toward the Midwest where there are divergent, call it, total industry volume trends. There's obviously brand trend differences by geography.

Whereas Coors Light would skew more toward, say, the northeast and the west. Then also, another difference between the scanner data and our sales to retail data in the first quarter would be an extra trading day, except we did -- for the number that we -- the numbers that we provided to, we did adjust for that trading day. So it would show up in the reported numbers but not in the ones we provided for you. So, there you go: sample error, geography, and channel primarily is the way I would look at it.

Okay. That's helpful. Thank you. I apologize if I missed this, but did you guys quantify the benefit of the launch of Henry's Hard either to your volumes or revenues for the first quarter?

No, we didn't. But that would be one instance where you could take a look at the scanner data and get a sense of how big the brand is. I do recall it was point something share, 0.2 or something like that in at least one of the scanner data sets that I saw. But I'd direct you to that because that's the only place you'll get a specific number.

Okay. Fair enough. We've run that math. Just -- can you remind us how to think about the margin profile on something like a Henry's Hard relative to the rest of your portfolio?

Yes. From a gross margin perspective, as with other FMBs like REDD'S and so forth, the margins would be, how do you say, above average or above our portfolio average from a gross margin standpoint. From an operating margin standpoint, it depends on what the investment curve against that brand looks like. We don't really get into that level of detail.

Fair enough. That's very helpful. Thank you so much.

Yes. Thanks, Vivien.

Brett Cooper, Consumer Edge Research.

The timing benefit you guys had in the first quarter in Canada -- does that reverse out over the balance of the year? Or is it just a lap issue in 2017?

Yes. It's more of a benefit in the first quarter that -- then we do not -- how do you say, benefit from in the balance of the year. But it's not a matter of giving it back, so-to-speak. Does that make sense?

Okay. Yes. So it's just a 2017 comp issue, not something you need to pull out.

Yes, in the first quarter.

Okay.

Then you have other factors with a similar effect like Easter and the extra trading day and so forth. But I assume you're just referring to Canada COGS.

Yes.

There's no benefit to -- no significant benefit to the balance of the year from those factors that we talked about in Canada.

Okay. Then, marketing up double-digits in the second quarter. Can you give us any sense as to sort of what we should expect in the back half of the year?

Yes. Well, actually, no. (laughter) We probably won't be able to provide a full sort of like a quarterly flow of things, but we did say that we -- we said it on the last call and we said it on this one as well. We expect our total global brand spending or investments to be up for the full year. At the same time, we wanted to emphasize that the second quarter is a significant piece of that in that we anticipate double-digit increase in brand investments, which that is an unusually large increase.

But no, we didn't put dimensions around the full year or the subsequent quarters. I can -- there was timing, how do you say, phasing of marketing that's worth remembering from last year, where MillerCoors was quite light on marketing and brand spend in the first half of the year for a variety of reasons and then really, how do you say, raised the bar in the sense that more than three-fourths of the increase in brand spend for MillerCoors last year was actually in the fourth quarter because we had ad properties and brand communications that we really wanted to invest behind.

Okay, Perfect. That's all. Thanks, Dave.

Sure. This year in the first half of the year, we also have the introduction of Henry's Hard Sodas and we have great ad creative behind Coors Light leading into peak season. I think great ad creative behind Miller Lite in the US as well. To the earlier question about Henry's margins, if you look on Nielsen, you'll see an index of -- this would be to consumers of 167 versus, call it, mainstream maybe Coors Light of 100. That was more to Vivien's question, though. Sorry, Brett. But I thought I'd throw it in while I was thinking of it.

No. We'll take whatever we can get.

Absolutely.

(Operator Instructions)

Bryan Spillane, Bank of America.

Just one quick one for you. On the front of the Q, if I add up all of the Class A, Class B, common and the Class A, Class B exchangeable shares, I get to like 214.7 million shares. Is that now the right sort of base to use for the share count going forward?

Yes. For basic shares, you should be in the range of 214 million to 215 million shares. Obviously, that reflects the 29.9 million shares that we issued with the equity offering that we initiated in January.

Okay. Then just, is there -- I guess it's worth thinking about modeling the share count out. I know it gets a little complicated when we start thinking about the transaction. But just options creep, you won't be in the market buying back stock for a while. Just anything that we should think about in terms of options creep? Maybe connected to that, as you -- in the scenario where the merger happens, is there compensation at MillerCoors that converts into stock? Just anything that might of move the share count up related to compensation?

Yes. Let me give you some headlines and then we'll see whether there's anything we need to add to that. As far as options creep goes, unlike past times, call it, 10 to 20 years ago, we give out relatively few options. They really only go to the top, say, eight or 10 people in the entire Company. So we've had -- some of those options, the last ones that were provided to a more broader employee group were actually 11 years ago. So if you look in more recent times, I think you'll see relatively modest option exercise.

Our comp plans tend to lean more towards performance shares and restricted shares at this point, which cause less, call it, dilution overhang, if you will. MillerCoors compensation, essentially we'd be adding -- we'd be doubling the size of the Company. We would be including those team members as appropriate or as the plans are designed on our compensation plan. So we'd have more people, but as far as bringing them over, that's the only thing I can think of, where we'd just be adding more team members to the --

All right. Okay. So nothing that you're aware of. I just don't know enough about SAB to know whether or not they use a lot of stock in the compensation and whether that stock would convert, I guess, to MillerCoors shares in their long-term compensation or in their unvested comp or not. But it doesn't sound like that's something that's been raised.

Yes. I'm not aware of any mechanism, if I understood the question right, any mechanism where SABMiller shares -- okay, so maybe some employees who were part of MillerCoors, and maybe originally part of the Miller business and got incentives related to the SABMiller stock. That would have to predate MillerCoors, though. I'm not aware of any mechanism whereby that would translate over into Molson Coors stock. Now as far as MillerCoors compensation programs go, none of those utilize parent Company stock. So for the last eight years, we have not -- MillerCoors has not had any incentives, long-term or short-term, that utilized either SABMiller stock or Molson Coors stock.

Okay. Then on the call, I think, there was a reference to $45 million to $60 million of cash contribution to pensions. I just wasn't sure, had you -- is that the same figure that you had outlined or talked about previously?

That's correct. It did not change from last quarter.

Okay. Then, I just -- on pensions, again, just thinking about the merger. Is there anything from an accounting perspective that we should be thinking about in terms of like pensions being mark-to-market? Or maybe a change in the way that you're expensing pensions versus the way they were done with MillerCoors? Again, as we're sort of just mashing the two together, is there something that we should be thinking about in terms of pensions that might be higher or lower in terms of ongoing expenses.

Yes, good question. One thing to clarify, the cash contributions we anticipate this year were $45 million to $65 million.

$65?

Yes, just to make sure we got that number. Pension expense of approximately $17 million. That includes 42% of our -- our 42% ownership interest in MillerCoors. Upon close of the transaction, it would be like a -- well, anyway, we would essentially revalue the plan as if we'd had a curtailment. Sometimes when you have a plan change -- a pension plan change, depending on how much changes, you can have a curtailment. Therefore, you do a revaluation. On the close of the transaction, Brian informs me that, yes, we would revalue the pension plans. But it wouldn't change -- well, anyway, let's leave it at that.

Okay.

We feel good about where our pensions are at this point. Some of them are even actually fully funded at this point, particularly in the UK and in Canada overall on an US GAAP basis. I don't know, you've probably seen that come through the filings, where the funded status has improved from being down like a little, let's call it, 1.5 years ago, being close to $0.5 billion short. At the end of this last year, we were only at $162 million short, as far as funded status for the overall plans, including 42% of MillerCoors.

Okay. I think that was all I had on my end, Dave. Thanks for the follow-up.

Yes. Thanks, Bryan. Good questions. I really appreciate it.

Take care.

You too.

Robert Ottenstein, Evercore.

After the call, I got a number of, I guess I'd call it, semi-concerned questions from folks worried about a significant pickup in marketing. I think probably based on some of the comments in terms of Europe. I was just wondering if you could frame this a little bit more in terms of what you're doing in Europe?

Is it like particular opportunities that you see that obviously are passing your PACC model and look very exciting and is somewhat tactical? Or is it a large concerted effort, you're going to gain market share and just increase spending and keep on taking it up? How should we get a sense and comfort in terms of the higher marketing spend that you're budgeting this year and going forward?

Sure. I guess what I would do is point you back to the commentary, we said on the earlier call, where we said that we anticipate higher brand investments this year, which is actually no different from what we said on the last call. In this case, though, we did want to help people a little bit with their, call it, phasing, if you will. So we actually said including a double-digit increase globally in the second quarter.

Particularly, that's because we see great opportunities leading into peak season in not only the US and Canada, but also in Europe. We just wanted to make sure that people modeled that in. As far as specifics on balance of the year, I don't think I'd provide anything at this point. But it is about having more opportunities this year leading into peak season than we had last year, as far as what we could invest behind to really drive our brands and drive value for our shareholders.

Okay. Can you talk just maybe just a little bit -- I understand the timing and the strategy behind the timing, but is there anything else you can give us just in terms of what's driving the overall spend levels?

What's driving?

I mean, are you trying to say, hey, look, we have a bold-ish increased share of [VOYS]. We're -- there's a lot more that our competitors are doing. Or -- just a little bit more color around how you're thinking about the absolute levels?

Yes. No, that's fair. So we think about brand investment similarly to all of our other, call it, cash uses, capital allocation or what have you and that means PACC model, so profit after capital charge. Where do we think we can get a great return on our investment dollars? We do have a bias to invest behind our brands. But that's actually nothing new. We've had that for over a decade at least, in that range.

So, PACC model matters. Mark Hunter said a number of times, it's the quality of the spend, not the amount or tonnage. It's not about tonnage. In other words, we could have spent more behind our brands last year in Canada and actually in the US, when we had in, say, the first and second quarter when we had some pretty rough trends behind the Coors Light brand. But that would not have been high value use of our shareholders' cash, so we did not do that, because we frankly didn't have the ad creative or the promotional properties to invest behind to get a great return. So we didn't do that.

This year we've got Henry's Hard Soda. We've got great ad opportunities and, call it, consumer communication in Mark Hunter's words around Coors Light and Miller Lite. We've got the English premier league in Europe now; although, I would hasten to add that's something we would -- generally when we pick up new promotional properties, we fund them with sort of within an existing sort of reasonable budget, if you will.

Terrific. Thank you, David.

Thanks, Robert. Good question.

(Operator Instructions)

Mr. Dunnewald, there are no further questions at this time.

Okay. Great. Thank you, Jonathan. So in closing, I'd like to thank you all for your interest in Molson Coors and for joining us today. If you have 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. Have a great day.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.