Molson Coors Beverage Company
Q3 2013 Earnings Call Transcript

Published: 6 Nov 2013

[Operator:]

Welcome to the Molson Coors Brewing Company Third 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 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-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 of 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 discusses 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 its MillerCoors joint venture. I will now turn the call over to Dave Dunnewald, Global Vice President of Investor Relations for Molson Coors.

[David Dunnewald:]

Thanks, Tracy. Hello, everybody, and welcome. On behalf of Molson Coors Brewing Company, thank you for joining us today for our third 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. We have Kevin Kim, Investor Relations Manager; Spencer Schurr, Finance Forecasting Manager; Katie Walter, Senior Forecasting Analyst; Erik Mickelson, Manager of Technical Accounting; Ashley Walker, Manager of SEC reporting; 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 third quarter, Molson Coors increased underlying after-tax earnings nearly 8%, expanded gross margins and underlying pretax margins and grew underlying EBITDA and free cash flow. As we anticipated on our earnings call last quarter, consumer demand was weak across our markets. Despite this, we have continued to invest in our core brands. Our innovation pipeline is delivering a mid-single-digit percent of sales and our owned above-premium brand portfolio is growing at a double-digit rate globally. We also made progress on our global cost savings and cash generation targets, paid down nearly $282 million worth of net debt in the quarter and continue to standardize processes to reduce complexity and improve efficiency. Across our markets, we continue to see weak consumer demand and shifts in consumer preferences that will impact our business for some time. In that environment, however, we will accelerate our commitment to transformational efforts to grow our brands and make Molson Coors more competitive and to drive total shareholder return going forward. So with that, we'd now like to open it up for your questions. Back over to you, Tracy.

[Operator:]

[Operator Instructions] Your first question comes from Mark Swartzberg with Stifel, Nicolaus.

[Mark D. Swartzberg:]

Dave, a couple of questions relating to Canada, trying to better understand the Modelo change there. And just looking through the Q, it sounds like you add those numbers that Stewart was referencing. In other words, the Q talks about a year-to-date number of $9 million in equity income and then a year-to-date number of, I believe, if I'm this reading this right here, $9 million in reimbursement for some costs. Is that the right way to think about what's going away? Obviously, we don't what the future number would be, but in terms of what the run rate numbers have been, is that right way to think about that?

[David Dunnewald:]

Yes, I think that's a good start, especially from a year-to-date basis. I think for your -- from your perspective, it's also useful to know that on an annualized basis, say, in recent years, the equity income from those brands in Canada has been in the range of $12 million to $15 million pretax per year, which flows through the cost of goods line. And then we had $5 million to $7 million worth of, what we call, administrative fee reimbursements, and those hit the MG&A line. And then in addition, we have some variable costs of $3 million to $5 million that have been reimbursed. Now those variable costs go away. So when the brands go away, those costs go away with the brand. But the other elements, the first 2 that I mentioned, that's equity income that we won't get. In a sense, we're getting paid for that through the $70 million payment from ABI for [indiscernible]

[Mark D. Swartzberg:]

Got it, got it, got it. So it's really those 2 -- those first 2 items that Stewart mentioned that are more of the go-forward loss?

[David Dunnewald:]

Yes, if you're looking for, call it, impact in the absence of any changes in the business, in other words, any additional brands we might drag through the business, through innovation or what have you, then yes. In other words, static steady state, that's the -- that's what the impact has been in recent years with those brands.

[Mark D. Swartzberg:]

That's great. Okay. And then kind of in that same vein, could you remind us where you stand in Canada with this lawsuit relating to the Miller brand?

[David Dunnewald:]

Yes, right now, there is no significant update, I guess. At this point, we have a temporary injunction, so that we continue to manage the brands. We think we're doing -- well, we're working hard to manage those brands in a way that's right for them in Canada. And at the same time, we have a court date in December.

[Mark D. Swartzberg:]

December, got it. And what's the -- do you have a rough market share figures for the Modelo portfolio and the brands that are subject to this suit in the case of SABMiller?

[David Dunnewald:]

Yes, the -- okay. Those are -- yes, the Modelo brands are low single-digit percent of our portfolio in Canada as a percent of our STRs. And then the Miller brands, same thing, low single-digit percent.

[Mark D. Swartzberg:]

So on a market share basis, also low single-digit?

[David Dunnewald:]

Yes. So lower single-digit. 39% market share in Canada.

[Mark D. Swartzberg:]

Great. And that's kind of my more business question. What do you think -- so next year, you're going to be competing, call it, 3 points lower than 39% because of the Modelo impact. And Labatt will be competing kind of 3 points higher. I think their shares is around 40%, 41%. What do you think that kind of end market, marketplace effect will be? Obviously, you have, of course, Banqueting introduced. But in terms of just getting the shelf space and being able to compete for attention at the shelf, how do you think that will affect you?

[David Dunnewald:]

Yes. In essence, in Canada, if you sort of stack up all the brands we have from top of the category to the bottom of the category, we believe we still have a very strong portfolio in Canada and we are working on an ongoing basis to enhance that portfolio. And we have evidence that with recent moves in that marketplace, we now have the largest-selling cider in the market. We, obviously, have the largest beer of any -- largest beer in the marketplace in Coors Light. Molson Canadian is doing well. We have strengthened our sub-premium or value offerings in that market. And so we feel good about the portfolio we have and we're just going to continue to drive it forward. You're right, though, this does have a share impact but it's relatively modest, at least in absolute numbers.

[Mark D. Swartzberg:]

That's great. That's very helpful. And finally, Coors Banquet. I think you have MillerCoors release at seventh consecutive years of growth in the U.S. Just trying to get some sense of dimension, potential of that brand in Canada, how you guys are thinking about? Obviously, it's new there. But can you give us anything to think about how you're thinking about its potential there?

[David Dunnewald:]

Yes, not a lot of specifics, but I would say right. Banquet has 7 years of growth in a declining segment in the U.S. And really has had done nicely in the face of not only that, but some very tough macroeconomic times. In Canada, there's a lot of spillover in brands, messaging -- anyway, a lot of spillover across border between -- when you have brands between the U.S. and Canada. It works both ways. And so we're really excited about the opportunity for Banquet in Canada because, obviously, it's doing well in the U.S. and has a long heritage. And we think that will ring true with a lot of Canadian beer drinkers.

[Mark D. Swartzberg:]

Do you know offhand portion of mix or market share in the U.S.?

[David Dunnewald:]

No, the easy answer is low single-digits. But I mean, really low. It's a relatively small brand. We just figured Coors Light's essentially high single-digits and Banquet would be, yes, low single-digits.

[Operator:]

Your next question comes from Ian Shackleton with Nomura.

[Ian Shackleton:]

Yes, Dave. I have a couple of areas I wanted to follow up on. First, there was quite a bit of talk around further cost-cutting moves in Canada. And if I wrote it down properly, there was some talk about completing the efficiency structure by mid-2015. And I wonder if I just got that right. And I guess, what I'm really trying to get as well here, is this all part of the programs announced in Investor Day in the summer? Or are we actually thinking about further programs on top of what was envisioned in that stage?

[David Dunnewald:]

Yes, this program is envisioned in the $40 million to $60 million of cost savings that were -- that we committed to in June or talked about in June. And as you may recall, we said it -- actually Gavin -- Gavin actually said it. At the high end of that range, for the next 2 to 3 years and the $40 million to $60 million overall for at least 5 years. So -- but really, the main point is we're looking at ways to make sure that our cost structure is competitive on an ongoing basis. So this isn't necessarily the end of the line on bad cost savings even within that $40 million to $60 million that we talked about.

[Ian Shackleton:]

And so the importance of the mid-2015 date, did I get that down correctly or...

[David Dunnewald:]

Sorry. Yes, you heard it exactly right. That's what Stewart said. And the reason is any time you have, what I would call, a broad-based benchmarking type of exercise in a business, then some changes can be done relatively quickly and some take quite a bit longer.

[Ian Shackleton:]

Right. But was that particularly talking about the production infrastructure or is that the cost of the whole business?

[David Dunnewald:]

Well, he said ramp up mid-2015, he was really talking about the overall effort that he was referring to. In other words, across supply chain and G&A and so on. I would tell you, though, that generally speaking, the supply chain takes more time because you're dealing with processes in breweries and just figuring out how do we make things more efficient.

[Ian Shackleton:]

Understood. The second thing that I just wanted to talk about was, I think Gavin mentioned earlier on not quite a lot of debt repayments. And I'm just wondering what we should be thinking about for the average coupon for next year, really, for FY '14?

[David Dunnewald:]

Okay, let's see. There are 2 ways you could attack that. One would be just to look at the debt that we have outstanding in the 10-Q, and you can sort of tone up a coupon from that, which will get you -- it sounds pretty close to me. The other way to think about it is now that the -- I guess, piece of perspective I'd add is now that our convertible debt is substantially all paid off, then the cash coupon looks an awful lot like the booth coupon. So that will make the math a little easier.

[Ian Shackleton:]

Okay. But if we pick up the Q, that should give us really all the pieces that we need there?

[David Dunnewald:]

Yes, it's all right in there. Brian may even have a page number for you. Give him a second.

[Brian D. Goldner:]

Page 26, footnote 12.

[David Dunnewald:]

Here you go. He's not familiar with that document, is he?

[Operator:]

[Operator Instructions] Your next question is from Judy Hong with Goldman Sachs.

[Judy E. Hong:]

Dave, so first, just on Canada. So the gap between the sales volume and STR of about 2 points, I think you called out some inventory de-stocking. Can you just give us a little bit of color on what happened in the quarter? Is this something that will be ongoing? Or does this reverse next quarter?

[David Dunnewald:]

Yes, good question. No, actually, what happened was when we rolled into second quarter this year, we wanted to make sure that we had a little bit more robust inventories in some particular channels on certain particular brands this year versus what we had last year. So we ended the second quarter this year with a bit higher inventories and trade, so to speak. And that's wholesalers; in some cases, retailers; in some cases, in-transit; then, in other cases, actually governmental entities when you're talking about Canada. So we wanted a bit more inventory in the second quarter leading into peak season. We accomplished that, so we ended the second quarter with a bit higher inventories in those channels, so to speak. And then we, essentially, they brought them back down by the end of the third quarter. So at the end of the third quarter this year, on a year-to-date basis, we're essentially in line with the prior year.

[Judy E. Hong:]

Okay, got it. Okay. And then just on the volume performance in Canada, I think you had given some of the brand numbers, but I don't know if you've actually quantified how much Molson Canadian was up and Coors Light was down and others. So could you help us just kind of go through your key brands and the volume performance in the quarter in Canada?

[David Dunnewald:]

Yes, sure, I can give you a few headlines on that. It's, at least, somewhat general. Let's see, Spencer's got -- yes, we said that Molson Canadian performed relatively well, actually picked up some share in the quarter. So the market was down about 1% and Canadian was down less than the market. The Coors Light was down at a, call it, a high single-digit rate. And let's see, what other ones do you care about? Obviously, Coors Banquet was up strongly on a 0 base from the year before, which is particularly meaningful. But Keystone Light is a relatively important brand and that one grew at a double-digit rate. As you may know the value segment in Canada is a growth segment unlike in the U.S. And then the other important brands, we've got the Carling brand up in Canada, and that one declined slightly. Our Craft brands, importantly, at the top end of the category, such as Rickard's and Creemore and Granville Island, all grew at healthy rates and gained share. Does that give you a heads start?

[Judy E. Hong:]

Yes, yes, that's helpful. So just on Coors Light high single-digit decline, how much of that was the Iced T portion and -- versus kind of the underlying Coors Light?

[David Dunnewald:]

Yes, Iced T was a factor. It still would've -- that brand still would have been down at least mid-single digits without Coors Light Iced T.

[Judy E. Hong:]

Okay. Okay. So the point there is you had sort of the benefit of the Iced T last year. On top of that, you probably had more activation on the underlying Coors Light, given the Iced T launch and other activities that you had implemented last year. So kind of lapping that, made the Coors Light a little bit more challenging?

[David Dunnewald:]

Yes, I would say, that's exactly right. We had some challenging comps around Coors Light, not only related to Iced T, but also related to weather. And I would say this year, we had fewer impact promotions than some of our competitors. And when you have the biggest brand in the market, that can have a greater impact than if you're a smaller brand. So these are things that, along with new ad copy and so forth, that Stewart talked about this morning, that we're working on around our largest brand in Canada.

[Judy E. Hong:]

And when you look at the October trends, Canada, up low single-digits in STR, are you seeing some moderation in terms of the decline in Coors Light in that context?

[David Dunnewald:]

I would say that we are seeing -- and I'm not going to drill into October, STRs for Coors Light. But, let's say, more broadly in October, you do have the return of hockey, which is a good thing. You also -- but then as Stewart mentioned earlier, this morning, that we're still going against a really relatively tough macroeconomic environment and, call it, weak consumer confidence and some promotional challenges in the Canadian market. So those things continue and it is nice to pick up hockey, but you can't lose sight of those other pieces as well.

[Judy E. Hong:]

Yes, okay. And then on the COGS line for Canada, so just the sequential moderation, I guess, we had always expected the back half to be a little bit more favorable. But it just seems like the drop in the third quarter versus the first half was a bit more dramatic, so -- and especially, given that volume was also negative, so you're still kind of suffering from the fixed cost de-leveraging. Anything to call out there? Was there any timing benefit? Or anything that kind of helped your third quarter COGS per unit in Canada more?

[David Dunnewald:]

In -- sorry, in the third quarter?

[Judy E. Hong:]

In the third quarter, yes.

[David Dunnewald:]

Yes. No, nothing comes to mind. Let's see, now I would say that there's very little hockey benefit that we would pick up in Canada. The increase in MG&A expense actually is more of a challenge in the fourth quarter than in the third quarter.

[Judy E. Hong:]

Well, a little bit more of a COGS comment. Your COGS were, in Canada, up in 1 -- was it 1.5% or so in the third quarter and it's been running 6%, 6.5% in the first half?

[David Dunnewald:]

Yes. So we did have a bit more cost reductions in the third quarter, but they can have a little bit of ebb and flow there. But I don't think that -- I wouldn't call that a major factor. No, I don't think there was anything in particular that comes to mind but -- and I mean, yes, we had normal sort of -- I mean, think about the cost of goods line in a business that size made up of thousands of different lines and entries that build up to the final COGS line. We've seen some favorability on some pieces of input inflation line, if you will. But I wouldn't call out a major driver and as I say, there's just a bit of an ebb and flow to that type of line within that kind of range is not uncommon.

[Judy E. Hong:]

Right, right. Okay, got it.

[David Dunnewald:]

Our guidance is maintained for the year, right?

[Judy E. Hong:]

Right. But you have a wide range in terms of mid-single digits, particularly?

[David Dunnewald:]

Yes, correct.

[Judy E. Hong:]

Okay. And then just in terms of the free cash flow. So the first, just the CapEx by coming down by, I think, $30 million or so. Can you talk about what's driving the decline? Is it more timing? Or are you just deciding that some of the projects are not worth spending in this year?

[David Dunnewald:]

Well, every year, we like to be very tight on capital. And so that's not new. But I would say if anything, we're raising the bar on that with the pack model that Gavin has talked about that we're pushing through the organization. And I would -- it's all about returns on capital.

[Judy E. Hong:]

Okay. And the free cash flow guidance coming up towards the upper end of that $700 million plus/minus 10%, is it mostly just CapEx?

[David Dunnewald:]

Mostly CapEx. Well, that would be one factor. But really, our free cash flow is built on a lot of different things and including working capital, obviously, financial performance and so it's not just CapEx.

[Judy E. Hong:]

Okay. And then can you remind me how much you have left in the cross-currency swap settlement?

[David Dunnewald:]

Yes, we'll see if Brian or Spencer can come up with a specific number. But we -- my recollection is we have -- well, I don't have to recall, Brian is finding it.

[Brian D. Goldner:]

Yes, at the -- as noted in the 10-Q, we have $134 million outstanding as of the end of September. However, we settled an additional amount early in the fourth quarter of an additional $51.4 million.

[David Dunnewald:]

Well, does that leave us with a net out of the money of about $80 million then?

[Brian D. Goldner:]

Approximately, it does move with...

[David Dunnewald:]

That's cool. It will move with FX and other column adjustments. But that's been -- well, primarily FX. But around $80 million left, Judy, at current FX rates. I should say end of quarter FX rates, shouldn't I?

[Judy E. Hong:]

Okay. And is the plan just to settle all of that this year or some of that gets spilled over into 2014?

[David Dunnewald:]

We'll see. It's due in 2014, but as you can tell because actually, the stuff that we just settled was due in 2014. We make decisions on -- in that area kind of an ongoing basis depending on how much cash generation we have and what the pros and cons are from an organizational stand or I shouldn't say organization -- from a shareholder value standpoint. In other words, what makes the most sense.

[Operator:]

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

[Bryan D. Spillane:]

Dave, a couple of questions. I guess, the first one, if you look at the MillerCoors JV, I think the savings, cost savings identified in the quarter was $33 million and I know we were modeling something more like $25 million. And so was there any benefit at all from the headcount reduction that was just recently announced? Or was there any other sort of unusual thing that occurred in the quarter just to cause that to be as high as it was?

[David Dunnewald:]

The short answer is no, not related to the announcement. That announcement was certainly not implemented before the end of the quarter. But as with some of the other things we've discussed about cost of goods, for example, there can be a bit of an ebb and flow to cost savings as well when they come in, so to speak. So we had a lot of supply chain savings in MillerCoors in the third quarter, but also some logistics, some productivity, brewing process. I mean, it's the usual types of savings but just the mixture and magnitude was a bit different in the third quarter.

[Bryan D. Spillane:]

Okay. And then just say on MillerCoors again, the price mix was helped a lot by mix, and that's a function of some of the new products. And it sounds -- I guess, just trying to get a sense because the cost per COGS, per hectoliter is also up. So I'm just -- as we try to model out just how to think about how a higher mix of those products like Redd's, for instance, affect the P&L, it's -- is it somewhat neutral in terms of what happens on the gross profit line, meaning there are higher revenue per unit, but not necessarily a higher gross margin per unit?

[David Dunnewald:]

Well, let's see. So you're thinking about it in the right way. NSR per hectoliter, net sales revenue per hectoliter, is higher on brands like Redd's. And the cost of goods are higher as well, generally speaking, on the above-premium brands. But these are good margin brands. I mean, I'm not going to be too specific. But if we have above-premium brands, unless it's a situation where we're giving the lion's share of the profit stream to the brand owner and we've seen that in, for example, in the Modelo brands in some markets and that sort of thing, then above premium generally means healthy margins.

[Bryan D. Spillane:]

Okay, so -- because I was -- so it's -- theoretically, they would be higher gross margin. And then, the comments that, I guess, Tom made on the call about there being the payback period being or the breakeven period, maybe being some on these new ones 3 years is more just a function of what's being spent on marketing and SG&A as opposed to there being a real gross margin differential?

[David Dunnewald:]

Yes, I think -- yes, Tom's comments, I think, are right. They go largely toward -- talk about the or essentially towards the flow of the MG&A investment in the brands. The gross margins don't change significantly as you move through the introduction. But I think again, you're thinking about it the right day. Above-premium brands tend to have more robust gross margins than value brands, for example. Sometimes, you have scale differences that you need to take into account. But for the same-sized brand, that generally holds true. I would add -- there's one other thing I'd add. Some other -- so we talk about innovations and how we're spending more behind them. It's also throw into the mix packaging innovations can add cost and generally also revenue. So that's another, call it, mixed components. But not, I would say, not as important as the new brands like Redd's and the Third Shift that we've talked about previously.

[Bryan D. Spillane:]

Okay. And then I guess, just following back on Ian Shackleton's question earlier, I was just trying to think about the shape of net interest expense next year, I guess I've got 2 components that are going to affect it, right? It looks like from -- I inferred from what you said earlier and although I admit I haven't looked at Page 26 in the Q yet, is that interest -- did the interest rate, the coupon rate is going to be lower next year and then the other thing I'm factoring in is some -- if you're sort of targeting what your leverage ratios are going to be by the end of next year, you're going to have some debt reduction as well. So I should have some leverage, positive leverage on the net interest line next year just based on those 2 components, is that right?

[David Dunnewald:]

Debt pay down? Yes, that is priority cash use. So I'll let you decide how you want to actually model that out, but that makes a lot of sense. When you say the coupon's lower, actually, I'm not sure I -- I mean, depends on how you define coupon. If you really mean the average percent...

[Bryan D. Spillane:]

It's the average rate, yes, you'd pay on your debt.

[David Dunnewald:]

Yes, actually the debt that we'd paid off, well, this year it was a mixture. On a book basis, the $575 million convertible was actually somewhat on the high side for coupon. Obviously, it was paid off end of July. And then the -- however, the 0 coupon euro convertible on a book basis, that was extremely low coupon. I think you might actually be more successful modeling it out, just take the debt outstanding, go to the Page 29 or 26 that Brian mentioned and then you can get kind of an average coupon for an amount of debt. And then at the same time, think about what you think we might be able to accomplish as far as debt paydown goes. That will get you closer. But having said all that stuff about the coupon, I mean, yes, we have less debt outstanding. So lower total interest expense, we'll see what rates do a some of the debt that is outstanding, revolvers or what have you. But I'd say you'd got to be able to get an estimate off of that.

[Bryan D. Spillane:]

Okay. Okay. And then just on the tax rate, so can you just -- so now we've got this sort of hypothetical factor in the future where the tax rate would go back up, migrate back up to kind of more normal tax rate, but we're not really sure where that is in the future. You may be, but we don't. So I'm just trying to understand. I mean, from this year's sort of tax rate coming in kind of lower than what was originally thought, if I understood everything that was said, it's largely a function of some changes in statutory rates in Canada and some other -- those types of things and not necessarily settlements that happen to come up and take your tax rate down. So a, is that true? And then b, just as we think about the ramp to a more normal tax rate, how much is left still that of tax matters that are unsettled that have to be settled? And as we start to think about modeling the tax rate next year and over the next couple of years, how steep do you think that curve is? Or is that -- did the slope of that curve change at all?

[David Dunnewald:]

Yes, okay. So in Canada, it was actually tax law changes. The rates didn't actually change. We've got some FIN 48 roll-offs that also had an effect. But that's just detail. What I would want to know if I were you, okay 13% to 15% tax rate for the year, about 4 percentage points of benefit from onetime tax stuff, including the things I just mentioned. So that gets you to more of, call it, a normalized rate, if you will. And then we said that we expect to move toward that 20% to 24% long-term tax rate over the next few years, which I define that as 3 to 5 years. That stuff could change. So obviously, all that is caveated by assuming no changes in tax laws and those types of things.

[Bryan D. Spillane:]

It just feels like it's been 3 to 5 years for the last 10. So I'm just trying to understand if we're closer to the...

[David Dunnewald:]

Yes, and that's a fair question. And of course, the reason is we've actually seen corporate income tax rates coming down around the world. Except, of course, in the U.S. That's been really significant in Canada, the U.K. We've added the Central Europe business that has relatively low tax rates, average of 10% to 20%, depending on which country you're in. So I'd say if you put that all that together, you're right, it's -- that progression has been delayed for those reasons.

[Bryan D. Spillane:]

Okay. And then just one last question. Just related to the asset write-downs in StarBev. Is there a -- so if you've changed the cash flow expectations for those brands, does it change the cash flow expectations in total for what you thought StarBev in aggregate was going to generate?

[David Dunnewald:]

So yes, the value of the brands are lower, the way that they are valued is discount of cash flows. I guess, the best answer is we reiterated our guidance that we expect to be driving, what we call, shareholder value or ROIC over WACC in the 3- to 5-year time frame. And I would also emphasize that the while those 2 brands warrant that they're write-down based on impairment testing and DCF valuations and those types of things, we had other, really, substantial brands that actually grew in value. And Gavin mentioned earlier today, Staropramen and Nikšicko and some others in that market. And the overall Europe segment valuation is certainly above carrying value.

[Bryan D. Spillane:]

Okay. And then do those -- does the write-down at all affect, I guess, what your ongoing depreciation and amortization would be? And also does it have any effect on your tax rate, like is there a loss or some other benefit that you'd get at some point down the road because of that as a credit, I should say?

[David Dunnewald:]

Yes. So the -- let's see. Yes, the brand in Czech Republic, that one actually is moving to a definite live, Ostravar, a definite live depreciation schedule. But that does not have a significant impact on our overall depreciation, call it, flow, if you will. So I'd say, in that case, not particularly. I don't think I want to front-run the tax folks on what the implications are for tax around the brand write-downs, but if we have anything significant there, we'll update you at the right time.

[Operator:]

Your next question comes from Pat Palozzi with Beutel Goodman.

[Pat Palozzi:]

Dave, questions for you just with respect to Canada again. I just want to get a better handle on the volume and the mix. So if you look at it over the last few years, has the volume decline been larger in bottles versus cans? And has that been one of the negative factors when you call out mix?

[David Dunnewald:]

Generally speaking, absolutely. The volume challenges do lean much more toward bottles, especially in the East. And that does create a cost challenge because you have to continually adjust your cost structure around returnable bottles. Saying that that's a driver, a specific driver of mix in any given period, I'd say it doesn't pop up that way. But over a longer period of time, it is a mix challenge for us. Now if you mean on the -- now, I'm talking specifically about the cost of goods line there.

[Pat Palozzi:]

Yes, yes. Yes, that's exactly what I wanted to get at, that's right.

[David Dunnewald:]

Yes, if you're talking about revenue then that's a different question, and I'd say kind of minimal impact.

[Pat Palozzi:]

So then that's been one of the challenges with you not being able to lower your COGS faster or control your costs better?

[David Dunnewald:]

Well, it's one of many challenges, along with input inflation and pension costs and all kinds of other things, fixed-cost deleverage, yes. So it's one challenge.

[Operator:]

Your next question is from Jesse Reinherz with Stifel, Nicolaus.

[Jesse Reinherz:]

Dave, a quick one for you on marketing spend. Just trying to get a sense of the size in the uptick. First in Canada, I know you guys after the second quarter had talked to a $12 million benefit from the timing of marketing. And I'm trying to figure out, it looks like this, obviously, hasn't been recorded in the third quarter. Is there anything you can kind of give us on what size of an uptick we should be looking for in the fourth quarter?

[David Dunnewald:]

Well, yes -- no. Very good -- very observant of view. We did say that in the second quarter. And that is correct, we did not see a significant uptick in the third quarter. And so yes, it's primarily -- it's, how do you say, largely to be resolved in the fourth quarter.

[Jesse Reinherz:]

Got you. So all of that $12 million is going to be the fourth. And then is there -- I mean, can we assume, obviously, it was down again in the third. Is there -- do you think it will be in addition to $12 million? Or should we view that as kind of the run rate, I guess?

[David Dunnewald:]

I would say we had a benefit in the second quarter and we anticipate that, that benefit will largely reverse in the fourth quarter. So I don't think I'll isolate on the third quarter for you. And I'd reiterate that that's partially driven by NHL, activation and related stuff, related expense.

[Jesse Reinherz:]

Okay, great. And then quickly on Europe, you guys said on the call that you're expecting a higher MG&A in the fourth quarter. Is that relative to the third quarter? Is that relative to the year? I mean, obviously, you guys are up mid-teens in the third quarter, so are we supposed to expect an uptick beyond that?

[David Dunnewald:]

Right. I didn't say specifically how much, so I'm not going to narrow it down much. But the statement was that we expect higher Europe MG&A expense in the fourth quarter. That sounds like a percentage increase year-over-year in local currency.

[Jesse Reinherz:]

Okay. So year-over-year. Okay. Great, that's helpful.

[Operator:]

[Operator Instructions] Your next question is from Rob Ottenstein with ISI.

[Robert E. Ottenstein:]

Dave, a couple of follow-up questions to some of the prior questions. In terms of the brands where you had the write-downs, roughly what percentage of your volumes did they represent in Serbia and Czech Republic?

[David Dunnewald:]

Yes. So I'm not going to break it out by country. But the Ostravar brand in Czech, it's our third largest brand in the Czech Republic. And as you may know, we have somewhere in the teens share, between 10% and 20% share in that marketplace. So as you can tell, the third largest brand is not all that big. Staropramen is a decent sized brand in Czech Republic, but not Ostravar. Yellen is our largest brand in Serbia, so it is a significant brand in that market. And so, let's see, so I would say of the total Europe segment, we'd be in the mid-single-digit range for those 2 brands as a percent of Europe. So obviously, globally, it'd be much lower than that.

[Robert E. Ottenstein:]

Okay. And would it be fair to say that the brand in Serbia was more of an issue with Serbia, whereas the one in the Czech Republic was more competitive?

[David Dunnewald:]

Actually, I'd flip that around. The Czech brand, the issue was really local economics. The region where Ostravar is strong in the Czech Republic, they've had a number of factory shutdown, the economy there. If you think the eurozone has got challenges, the region where Ostravar sells is -- has really had a tough stretch economically. And so the consumer base is particularly suffering there. We're not suffering disproportionately in that market. It's just that particular region of the Czech Republic. The Yellen brand is a combination of eurozone challenges, Serbian economy, consumer confidence, some extra competitive activity, including at the value end of the category. So it's really a range of things in Serbia. And also, the -- which by the way, are reflected in the discount rates that we mentioned on the earlier call, as well as having a higher income tax rate, the 50% increase in Serbia this year, that's been a little tough on consumers, too. So I'd say Yellen is a combination of macroeconomics, market challenges and, call it, some competitive activity as well.

[Robert E. Ottenstein:]

Okay. I guess, it was just kind of news to me that you'd write down the value of brands based on local economics rather than brand health considerations, so that's interesting.

[David Dunnewald:]

Sorry, when we look at brand impairments, we have to look at a variety of factors. And one thing that goes into the discounted cash flows that are the primary driver of brand valuations is what's going on in the economy, what do we think sales will look like over a longer period of time or I should say a very long period of time. And the economy is part of that calculation.

[Robert E. Ottenstein:]

Okay, well, obviously, a lot of forecasting there.

[David Dunnewald:]

It's fun stuff. One note, Bryan mentioned if you want details on those asset impairments, you can look at Page 23, footnote 11 in the 10-Q.

[Robert E. Ottenstein:]

All right. In terms of the $70 million you're getting for Corona in Canada, is that a pretax or after-tax amount? And any sense of how that gets taxed? And will that be used to pay down debt? Or to be reinvested in the market?

[David Dunnewald:]

Yes, it's $70 million is the pretax number, call it, payment for the acceleration of the contract. We accelerated it 3 years and 10 months is the agreement. How that will be used, I guess the short answer is we're going to use it in -- along with all of our other cash uses, we're just going to look for the highest return for our shareholders.

[Operator:]

Since there are no further questions at this time, I turn the call back over to Mr. Dunnewald.

[David Dunnewald:]

Great. Thanks, Tracy. I wanted to thank everybody for joining us on the call today. We -- 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, and have a great day.

[Operator:]

Thank you, ladies and gentlemen, for joining the Molson Coors Brewing Company 2013 Earnings Follow-up Session Conference Call. You may now disconnect.