Molson Coors Brewing Company (TAP)

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Molson Coors Brewing (TAP)

Q4 2010 Earnings Call

February 10, 2011 2:00 pm ET


Greg Snyder - Director, IR

David Dunnewald - Vice President of Global Investor Relations


Mark Swartzberg - Stifel, Nicolaus & Co., Inc.

James Watson - HSBC Holdings plc



Good day, ladies and gentlemen, and welcome to the Molson Coors Brewing Company 2010 Fourth Quarter and Year End Earnings Investor Relations Follow-up Conference Call. [Operator Instructions]

Before we get started, I want to 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,, 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. Now I'd like to turn the call over to David Dunnewald, VP of Investor Relations, Molson Coors.

David Dunnewald

Thanks, Devon. Hello, and welcome, everybody. On behalf of Molson Coors Brewing Company, thank you for joining us today for our Fourth Quarter 2010 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, Stewart Glendinning 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 me on the call are Leah Ramsey, Investor Relations Manager; Greg Snyder, Group Manager of Global Forecasting and Analysis; Spencer Shearer [ph], Finance Forecasting Manager; Steve Hills, Financial Reporting Manager; Mark Sacks [ph], Senior Director of Tax; and Bill Waters, Vice President and Global Controller.

As Peter Swinburn mentioned on our earlier regular earnings call earlier today, 2010 was a year of good progress for Molson Coors in building exceptional brand, driving value-enhancing innovation, reducing costs, strengthening our balance sheet and generating cash. As a result, we increased gross margins, operating income, pretax income and free cash flow despite continued input cost inflation and weak industry volume. In 2011, we will be more focused than ever on driving momentum on the top line and bottom line and growing substantial value for our shareholders.

Now before we get to the Q&A, I wanted to follow up on one question we had earlier this morning on the regular earnings call, and that was relating specifically to Corporate and International markets' MG&A.

In our call this morning, we provided guidance that we anticipate that MG&A expense for the Corporate and International segment will be approximately $200 million plus or minus 5%. That represents approximately a $28 million increase from 2010. And we said it was driven by higher brand investments in our International business and the addition of 100% of our China joint venture expenses. You remember, we closed the Si'hai Brewing joint venture in the fall.

And then the minority owner share of those increased expenses from the China joint venture, we're just layering them in, actually, will be subtracted from our consolidated results in the line, Noncontrolling Interests. What I wanted to emphasize is that this guidance is only for that segment. It is not total company, Molson Coors' MG&A. So it's just for that one segment, first of all.

And then second of all, it's not earnings guidance, because it does include operating businesses in places like China, Japan, Vietnam and Spain and so on. The operating performance of that segment will also be driven not only by MG&A expense but also by international market sales and cost of goods. So I just wanted to emphasize that point.

And with that, I'd like to open it up for your questions. Devon?

Question-and-Answer Session


[Operator Instructions] Our first question comes from Mark Swartzberg of Stifel, Nicolaus.

Mark Swartzberg - Stifel, Nicolaus & Co., Inc.

So I guess, two things here, but maybe as a follow-up to the conversation in the morning call, can you kind of update all of us on your COGS mix by region? And any color you can give us on how and to what extent contracts and market-based hedges are benefiting your COGS expectations for '11?

David Dunnewald

We did definitely want to follow up on that. I guess, I'd start with -- give you three pieces of information. One, the amount of information we give on hedges is somewhat limited, as it is from our competitors just for, call it, competitive reasons. But we do provide some general guidance around what our COGS -- the makeup of our cost of goods by business unit and then a little bit of perspective on our hedging. The route to market and the package mix drive substantial differences in our cost of goods base in each of the three major businesses that we have. For example, the U.S. market, U.S. business, about 40% of the cost of goods line there is packaging materials, because we have a lot of nonreturnable packaging and not very much draft as well, which I guess, that's a subset of the first point. In Canada, on the other hand, there's a lot more in the area of distribution. We have returnable bottles, there's over half the package mix in Canada, which reduces the packaging materials component, but a lot of distribution. And then in the U.K., you have a high component of draft beer, which reduces packaging materials even more. But you also, on the flip side, you have what we call factored brands, which are beverage brands that are owned by other companies that we take possession of and therefore, have to consolidate in our U.K. business, and we deliver those to pubs all over the U.K. So that's basically why you have differences between the business units. And I can go into whatever detail you need as far as the breakout of packaging materials versus brewing materials, but if we don't need that, I'm just going to give you the headline that, when it comes to hedging strategy, we believe in limiting volatility of those inputs where we have the opportunity to reduce risk and volatility. And the mix, call it as a percent of cost of goods of hedgeable commodities, really does vary quite a bit by geography. For example, in the U.S., if you distill it down, essentially about 1/5 of the cost of goods line is hedgeable commodities. So the other 4/5 are things like conversion costs and labor costs, depreciation, things like that, that are not hedgeable. And then if we move to Canada and the U.K., roughly 1/10 of the cost of goods lines there are hedgeable. Now this doesn't tell you that every year, we will hedge exactly 1/10 or exactly 1/5, depending on the geography, but it does tell you what the potential is by market. Beyond that, I would tell you that our strategy, because we do believe in volatility mitigation, we tend to hedge out a ways. Generally, it's rolling hedging over two to three years, where that's available. It's not available in all places, but as you can tell by the numbers in the U.S., more commodities are hedgeable than in some of the other markets, plus the fractions I gave you indicate the different makeup of the cost of goods line in those geographies.

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