Molson Coors Beverage Company
Q2 2013 Earnings Call Transcript

Published: 6 Aug 2013

[Operator:]

Welcome to the Molson Coors Brewing Company Second Quarter 2013 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 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 U.S -- non-U.S. 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 on the Investor Relations page for a reconciliation of these measures to the nearest U.S. GAAP results. Also, unless otherwise indicated, all financial results the company discuss are versus the comparable prior year period and in U.S. dollars. The company also encourages investors to read SABMiller plc news releases and trading statements that include financial and other information relating to MillerCoors joint venture. I'll now turn the call over to Dave Dunnewald, Global Vice President of Investor Relations for Molson Coors.

[David Dunnewald:]

Thanks, Kyle. I really appreciate it. Hello, and welcome, everybody. On behalf of Molson Coors Brewing Company, thank you for joining us today for our second quarter 2013 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 of the team with me on this call. First of all, a special welcome to Kevin Kim, who joined the company 3 months ago as our new Investor Relations Manager. Today, we also have Spencer Schurr, Finance Forecasting Manager; Brian Tabolt, Senior Director of Technical and SEC Accounting; and Mark Saks, VP of Tax. As Peter Swinburn mentioned on our regular earnings call earlier today, in the second quarter, our company delivered double-digit underlying profit growth, driven by earnings accretion from the Central Europe acquisition in June of last year, as well as improved financial performance in our Europe and International businesses, along with a lower tax rate. We also generated strong underlying EBITDA and free cash flow and reduced our net debt by $373 million in the quarter. We delivered these results despite weak consumer demand across all of our markets. As discussed 2 months ago during our New York Investor Day, we are focused on the drivers that matter most in our business. These are driving strong core brand performance; leveraging our value-added innovation pipeline; increasing our share of above-premium sales; capturing significant, sustainable cost savings; and allocating cash via our disciplined tax-centered process that builds long-term shareholder value. In the remainder of the year, we expect consumer demand to remain weak. Despite this, we plan to increase our marketing investments behind our core brands and innovation in order to drive long-term total returns for our shareholders. And with that, Kyle, we'd like to open it up for questions. Over to you.

[Operator:]

[Operator Instructions] Your first question comes from the line of Judy Hong from Goldman Sachs.

[Judy E. Hong:]

So I wanted to go back to pricing in Canada, and I apologize if you've given all these numbers. I don't know if I caught everything. But so the negative 0.5% revenue per barrel, how much of that was price versus mix?

[David Dunnewald:]

Yes. So price was positive 1% and then slightly more than offset by negative 1.5% mix. And mix includes, by the way, things like geographic mix, product mix, segment mix, that sort of thing.

[Judy E. Hong:]

And I know you talked about value growing faster. Can you give us the actual percentage numbers for value versus your premium?

[David Dunnewald:]

No, not a separate number. But we did see growth in the economy brands ahead of -- well, actually, no, we'll give you at least a broad brush. Our economy brands were roughly flat in the quarter. As you know, the [indiscernible].

[Judy E. Hong:]

Economy, right, okay. And within premium -- so in your portfolio, I think some of the brand performance you've cited were Molson Canadian, down 2%, 2.5%?

[David Dunnewald:]

Cited where?

[Judy E. Hong:]

I think in the press release, so sales volume for Molson Coors -- sorry, so you didn't give the -- do you have any other brand information, Coors Light, Molson Canadian?

[David Dunnewald:]

Not specific numbers, no. We did say that we were pleased with the performance of the Molson Canadian brands in the quarter. Coors Light performance was not quite as strong as we've seen earlier in the year, partially driven by overlapping the introduction of Coors Light Iced T a year ago, which we include in those numbers.

[Judy E. Hong:]

Okay, all right. And then on Canada, so the cost per hectoliter increased more than 6%. I'm just trying to also just go through the drivers and quantify some of the drivers. You talked about the asset write-down as a big factor. How much was mix versus some of the others, like input cost inflation and fixed cost deleveraging?

[David Dunnewald:]

Yes, there -- that's a good question, Judy. There are different ways, of course, to sort of bucket things. But what we mentioned was that asset writeoffs were about 1/3 of the increase, which was just over 6% per hectoliter in local currency in the quarter. So about 1/3 of it was asset writeoffs, things like equipment or obsolete inventory, that sort of thing. And then, beyond that, we had some incremental costs related to in-case promotions. That was about another 1/3 of the increase. And then, finally, you have fixed cost deleverage and a bit of mix as well as the last 1/3.

[Judy E. Hong:]

Okay. And so the full year guidance being kind of in the mid-single-digit level does imply the back half moderates. And is that primarily because of the asset writeoff being really more of a one-off?

[David Dunnewald:]

Yes. Certainly, asset writeoffs -- obsolete inventory can happen really any time. Equipment writeoffs are, I guess, less common. They can happen. But anyway, the 6% -- the main point around this is the 6% number is within the guidance, so I guess, we'll leave the forecast to you. But you're right, there are some aspects that are not -- sorry, some cost factors in the 6% in the second quarter that don't happen every quarter.

[Judy E. Hong:]

Okay. And are you assuming similar level of fixed cost deleveraging? Or is it your anticipation that certainly, in the fourth quarter, you do have much easier comps that, that component of the negative drag actually moderates?

[David Dunnewald:]

Yes. Since fixed cost deleverage has a heavy component of volume in it, I'll leave that forecast to you.

[Judy E. Hong:]

Okay, all right. And then just on MCI, so I understand some of the drivers on the year-over-year impacting the percent changes. But if I look at just the absolute level of MG&A expenses for that division, it's been running kind of $50 million for the last couple of quarters. And so on an absolute basis, is there any reason to think that, that steps up in the back half?

[David Dunnewald:]

Let's see. In the second quarter, we had benefit of some reduced costs in the MCI business, in other words, timing of marketing spend and particularly comparisons versus last year. For example, in the second quarter last year, we have the joint venture and we also were spending a lot more last year in the China -- the non-joint venture part of China. And so from a JV standpoint, we will have cycled the, call it, elimination of those costs midyear this year. From the standpoint of not spending as much on some of the, call it, low-margin accounts in the rest of China, not related to the joint venture, I'm not sure exactly when in the year we cycled that, but call it roughly around midyear.

[Judy E. Hong:]

Okay. But that's a year-over-year change, though. I mean I'm just looking at the absolute level of expenses in the first half. And so is this just partly timing of the spending that gets shifted into the back half as well so the absolute spending does indeed go up in the back half?

[David Dunnewald:]

I'm not going to -- well, yes, I'm not going to forecast, again, the MG&A spend in the back half in MCI. I would say that there is -- the comparisons do -- well, we do have changing comparisons in the back half versus the first half of the year, which aided the second quarter.

[Operator:]

Your next question comes from the line of Tom Mullarkey from Morningstar.

[Thomas Mullarkey:]

I guess I have a question to combine a couple of points made on this morning's call that was dealing with, I believe, MillerCoors. First, there was the objective that, over the next several years, the above-premium segment would go from about 9% of MillerCoors' volume to mid-teens. And then second, there was the comment that a barrel of Third Shift uses 3x the capacity of Miller Lite. Assuming that pretty much all your craft beers are probably more capacity-intensive than your Premium Lights, if you go ahead 2015, 2016, if MillerCoors, will they have enough slack capacity during the peak summer months given that Premium Light volumes will probably start rebounding and then the demand for the craft-like brews will be much stronger than as compared to now?

[David Dunnewald:]

No -- yes, it's a good question. The 9% to mid-teens was something that we talked about in June in some MillerCoors meetings, which I'm sure you can listen to those on the web if you want. And then capacity utilization by brand, actually that varies quite a bit. There are actually some craft brands that, in some ways, don't use as much capacity as some of the Premium Light brands. So you're going to see a lot of variability around that. And the bottom line is we're confident that we're going to have the capacity to meet the needs of consumers for our products.

[Operator:]

Your next question comes from the line of Ian Shackleton from Nomura.

[Ian Shackleton:]

Dave, Ian Shackleton. A couple of questions. I mean, I asked Gavin a question around timing of cost savings during the year. And he made the comment, "what's happening, we're reducing some of our guidance on COGS per hectoliter" which seemed to imply that this is something that does become more of a factor in the second half. I just want to get some idea about that sort of $40 million to $60 million. How does that phase in during the year? Is it going to be fairly back-end loaded?

[David Dunnewald:]

Well, we haven't provided granularity around the phasing of cost savings. I would say that the comments around changes in cost of goods, I'd say, the guidance around cost of goods per hectoliter is not necessarily indicative of changes in the timing of cost savings. I'd say -- if I were you, I'd go with the guidance that we gave or the goal, I guess, of $40 million to $60 million per year, the upper end of the range for the next 2 to 3 years. And that $40 million to $60 million is we expect to be able to achieve that over the next -- at least, the next 5 years.

[Ian Shackleton:]

And will you report on an annual basis what you've achieved each year? Will we get that number?

[David Dunnewald:]

That's our intent, is to tell you what we've achieved at the end of each year and by the same token, to report on earnings accretion and how we're doing with the StarBev or Central Europe results and returns to shareholders.

[Ian Shackleton:]

Okay. So you'd actually pull out the elements that relate to Central Europe and the U.K. and Central Europe merger as well?

[David Dunnewald:]

Yes, that's right. That's kind of one of the commitments around the acquisition so that investors could, you could say, scorecard us on that deal. And that's -- and so that's the sort of approach that we took when we gave you the numbers. Well, I would just tell you the accretion in the second quarter from Central Europe was approximately $30 million on a pretax basis. On a full year basis, it was about $55 million, and that'd be since the end of June of last year. And if you throw in the 2 weeks before that when we owned the business, it'd actually be closer. So adding 2 more weeks, which are peak season, right, it actually gets to around $70 million pretax accretion from that acquisition. That would be on an underlying basis, so you're excluding some of the deal costs and financing-related costs.

[Ian Shackleton:]

Okay, understood. One of the things I wanted to ask about, I think Mark Hunter was talking about including in -- I think this was, in the European markets you're in, where you talked about Q1 being minus 0.5% in Q2, minus 6%. Did I understand that correctly?

[David Dunnewald:]

On a -- yes, okay.

[Ian Shackleton:]

This is right toward the back end of the call.

[David Dunnewald:]

Yes, 6% -- is that 6% volume we're talking about? Ian, was that 6% volume in the European segment?

[Ian Shackleton:]

Well, my understanding was that those were market volumes for your markets in Europe, saying, it's a minus 6% for the industry in Q2 and a minus 0.5% for Q1. But I may have misunderstood that, I just wanted to check what he was actually referring to.

[David Dunnewald:]

No, I appreciate the clarity. Yes, he was referring to industry trends, and he was trying to make the point that the industry really had faced a lot more challenges in the second quarter than it did in the first quarter. So that's right, those will be industry retail volume trends.

[Ian Shackleton:]

And this is U.K. and Central Europe combined? These are your markets?

[David Dunnewald:]

Yes, it would be. That's right, all of Europe. So in our case -- exactly, it'd be our market. So it would be the Central Europe markets plus the U.K. and Ireland. Yes, all in, that's right.

[Ian Shackleton:]

And just to be clear, these are volumes, not value figures? These are volume figures?

[David Dunnewald:]

Precisely, those are volume figures.

[Ian Shackleton:]

Great. One final question around Canada. Again, Stewart earlier on made some reference to shipments from Europe. And I wasn't quite sure what the reference there was. I mean, it does look -- given the STWs were weaker than STRs, but you've seen some stocking up at the end of the quarter. Is that what he was confirming?

[David Dunnewald:]

Yes, essentially, he was giving you some details in the process. Essentially, let's call it the difference between STWs and STRs in Canada includes some trade inventories and even some in-transit from places like Europe. So because, as you know, we run 3 of the largest import brands in Canada, we manage those brands. Now just broadly speaking, that just means that there's a bit of a difference in inventories in the quarter. And yes, we expect over time that, that should even out.

[Operator:]

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

[Brett Cooper:]

A couple of quick ones. Can you give us -- when you guys said that the International business COGS per hectoliter are expected to be down low-single digits, I assume that's, I guess, an underlying or currency-neutral number. Is that correct?

[David Dunnewald:]

That particular one is in U.S. dollars partly because we have so many currencies flowing through that International business. Think about businesses in China, Mexico, India, different parts in Europe, Asia, whatever. So that one is in U.S. dollars.

[Brett Cooper:]

Okay, perfect. And then there was a point on the conference call, and I don't think I caught all of it. And I think, there was a -- if I remember correctly, there was a comment that, in Canada, volumes are down 100,000 hectoliters. And was it that half of that was attributable to the year-over-year comp on Coors Light Iced T?

[David Dunnewald:]

Yes, that's what Stewart mentioned on the earlier call, that's right.

[Brett Cooper:]

But is -- so does -- I mean, if I have my numbers right, I mean, Canadian history is about 5 million hectoliters in a quarter. So that'd be -- basically, I mean, is Coors Light Iced T market share down 100 basis points year-over-year?

[David Dunnewald:]

Well, I couldn't tell you what the industry is. Well, okay, around 6 million hectoliters. Remember, it's -- this is peak season, so the first quarter will be a lot lower. But I'll let you do the math, but I think you have the right numbers to work with.

[Brett Cooper:]

Okay. Can you tell me -- I mean, what was the peak market share for Coors Light Iced T in Canada last year?

[David Dunnewald:]

Off the top of my head, I don't recall what the market share was. My sense was it was around 1% round numbers. But that's kind of a distant memory, if you will.

[Operator:]

[Operator Instructions] Your next question comes from line of Jesse Reinherz from Stifel, Nicolaus.

[Jesse Reinherz:]

A quick one on working capital savings. I know you guys mentioned that you had a target of $300 million from 2012 to 2014. Is that end of 2012 through 2014, so 2013 and 2014 comment? Or is it a 3-year comment?

[David Dunnewald:]

It's a 3-year comment that included 2012, all of -- call it, all of 2012, if you want.

[Jesse Reinherz:]

Okay. And any idea -- have you guys said anything on phasing? Or what was achieved in 2012 and thus is kind of leftover? Is it relatively even? Or...

[David Dunnewald:]

Yes, we've mentioned. I don't remember if it was New York or one of the earnings calls, but it was around $70 million achieved last year in 2012.

[Operator:]

There are no further questions at this time.

[David Dunnewald:]

Okay, great. Thanks, Kyle. 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.

[Operator:]

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