Molson Coors Brewing Company Earnings Call Insights: European Market Dynamics and Quebec Excise Tax Increases

Molson Coors Brewing Company (NYSE:TAP) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

European Market Dynamics

Judy Hong – Goldman Sachs: I guess I just wanted to get a little bit more color on Central and Eastern Europe. I think you’ve talked about some of the competitive dynamics in some markets. But broadly speaking, kind of what are you seeing from a macro perspective for the category as a whole, a little bit more color in terms of the markets where you’re gaining share, what you are doing differently in those markets? And then, just the profit decline in the fourth quarter was also a little bit surprising to me in Central Europe, so kind of from a profitability perspective if you can help understand what drove the decline in the quarter?

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Peter Swinburn – President and CEO: Sure. So, Judy, I think I’ll take the first part of the question and I’ll pass the second part on to Mark to give you the sort of granularity. I think really we covered it off in the script. I mean, on a relative basis, this business is performing exceptionally well. As I said, we’ve taken market share in Bulgaria. You ask why, I mean, obviously, that’s down to execution and the strength of our brands. We’ve got the highest market share ever in Croatia when we got activity coming forward there that we’re very pleased about in terms of new bottles. Czech Republic, we’ve gained share in a difficult on-trade market and done well generally in that market. We’ve grown share in every single market apart from Romania and Mark can speak to that in a second, and we got double-digit growth in Staropramen which is our core brand in that. So, yeah, I’ll call above-premium brand in that market. So, overall, that’s a very strong set in a relatively difficult environment. So, overall very pleased with it. The quarterly results have some detailing which need explaining. So, I’ll pass that over to Mark – and Mark, maybe you can make reference to what’s going on in Romania as well.

Mark Hunter – President and CEO, Molson Coors Central Europe: Sure. Judy, just a couple of builds on Peter’s comments and I will talk specifically about the fourth quarter. I mean, I think on the Q3 call I was very clear about the fact that we’re seeing certainly from a GDP perspective lower growth rates and we’re anticipating that that’s having a direct impact on overall beer consumption, and in fact, on a full year basis, there were only really two markets that showed any volume growth; the Romanian market and the Bulgarian market and as Peter said, we’ve taken market leadership in Bulgaria, which is great news. In Romania I mentioned in Q3 that most of the growth in the market was coming in the very low margin value segment. We chose not to participate in Q3 and we’ve continued not participating through fourth quarter, with our focus really being on our core brands and our premium brands because we believe that will give the business long-term sustainability. If you actually look at the specific profit numbers in the fourth quarter, in local currency, we were down about 5%. So, we’ve been running the business now for two quarters. We posted strong growth in the third quarter. In the fourth quarter, we were down 5% in local currency and I took two decisions through the fourth quarter which impacted on that. It was clear as the business left 2011 significant stock had been pushed into the market in both Romania and Serbia and I took a decision to destock the distribution pipeline. That cost us in profit terms a couple of million euros. So, if you actually add that back on to our Q4 numbers then it gives us a much more solid position in the fourth quarter and it sets us up for I think all of the right behaviors and actions as we into 2013 building on the back of what has been sheer growth in every one of our major markets with the exception being the Romania market for the reason I’ve described. So, hopefully, that gives you a little bit more color to both the profit number and just some of the volume trends.

Judy Hong – Goldman Sachs: Then just in terms of Europe, so is the savings you could be getting from integration the U.K. Ireland and then I guess perhaps the further savings, Europe broadly consolidating between U.K. and the Central and Easter Europe. Can you quantify potential savings, how meaningful that could be over time?

Peter Swinburn – President and CEO: We will when we meet everybody the next time in this call, Judy, which is what we promised at the last quarter. We are still in consultation in Europe. We have to go through certain regulatory hoops in terms of doing restructuring. So, that consultation won’t be completed until the end of March, so we are not in a position to give final details. But you can see some of the specials that we’ve highlighted in our earnings results this morning. So that should give you some idea or some guidance, but not necessarily specific numbers.

Quebec Excise Tax Increases

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Dara Mohsenian – Morgan Stanley: I was hoping you could review the competitive environment in Canada, particularly in the west and the impact on your business potentially from the Quebec excise tax increases?

Stewart Glendinning – President and CEO, Molson Coors Canada: Sure. Dara, Stewart here. I’ll take those separately. I mean, certainly as we look at Quebec, 20% increase in taxes there will have a negative effect and certainly we saw it in the latter part of the fourth quarter. Difficult to say precisely what that impact is, but as price goes up, consumers will buy less. I think when you look at the west, the dynamic is different there. It’s a competitive dynamic. A couple of things in play. First, the smaller brewers have continued to extend in two markets there; one, in the value space where value has grown quite dramatically, and then particularly in the craft space. We are competing in both of those spaces with Keystone at the value end and with Granville Island to a lesser extent in the west with Creemore at the top end. There’s also, we’ve seen in the west perhaps some more aggressive innovation which came earlier in last year – from competitors which we saw coming early in last year which has sort of flowed through to the year. And as we look out to this year, we think we’ve got a very exciting innovation pipeline, and we’re well-positioned to play in the market.

Dara Mohsenian – Morgan Stanley: Then the mid-single-digit January growth in the STRs, that’s a very strong rebound in Canada, but you mentioned some timing benefit. So, can you give me a sense of kind of a more normalized underlying trend?

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Stewart Glendinning – President and CEO, Molson Coors Canada: Yeah, we can’t really give any guidance there, but I would say that the mid-single-digit rate that you see there is not reflective of the market fundamentals and it is largely down to the timing of promotional activities and customer buying. So, I would – that’s the best answer I can give you.