Molson Coors Brewing Earnings Call Insights: Insights into Canada’s Market and Marketing Outlook

On Wednesday, Molson Coors Brewing Company (NYSE:TAP) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Insights into Canada’s Market

Judy Hong – Goldman Sachs: The first question is just really trying to understand better what’s going on in Canada both from an industry perspective and from your market share perspective. So just some color around the industry-wide softness that you are seeing and then your volume softness, how much is that industry-wide driven as opposed to maybe competitive environment getting worse, especially for some of the value brands?

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Peter Swinburn – President and CEO: I’ll pass that on to Dave. There were number of moving parts, so I think it’s better that Dave gives you the detail on that. Dave?

Dave Perkins – President and CEO Molson Coors Canada: In Molson volume for quarter three, nonetheless, we did see underlying softness in the industry, hand-in-hand with that, we saw pretty competitive pricing environment, so more beer being sold on promotion across the country. The other thing that we saw that was very significant for us was a strong shift to cans that has been unfolding through the year. Just to give you a sense of the significance in a market like Quebec where it was most pronounced, we saw cans increased about 30%, so very significant shift. Within that context, we maintain positive pricing. I think you you’ve seen in our NSR per hec numbers that we’ve led the industry there, so I’m, pleased on the pricing front. We lost about a share point. We estimate half of that share loss is related to can shortages that we ran through the quarter. So, we had difficulty meeting that unexpectedly large shift to cans. We’re at very high capacity utilization. Our first season of ramping up our major new can line in Montreal, and so we did run them reasonably extensive shortages of the product, so that would account for about a half the share loss as I said. The remainder of the share loss is really what I talked about in prior quarters. You’ve seen it in recent quarters and it’s the segment shifting that we continue to experience. So, we’re very well developed in the mainstream. We are less well developed in about premium, but we’re growing our share their and that’s really a focus for us, and then we’re quite underdeveloped in value where we see growth and through Keystone and the use of regional brands we continue to attempt to strengthen our position there, and so the segment shifting is really the key factor in the underlying longer-term trend that you’re seeing and in this quarter as I say amplified by can shortage. Just to give you a sense on the regional front, we did moderate our share decline in the west. We were more price competitive in the quarter, and we saw a response to that that gives us confidence as we continue to play with the price and volume balance that we do have responsiveness in our portfolio. Unfortunately, the gains we made in the west were more than offset by lost sales in the east with the can shortage.

Judy Hong – Goldman Sachs: Dave, the can shortage situation, is that pretty much done and now you’re back into meeting demand on the can side?

Dave Perkins – President and CEO Molson Coors Canada: Yeah, that is behind us and as we look to next year, with the can line in year two and with advanced planning, we are confident in our ability to meet what seems to be a pretty strong trend in the market. As far as October is concerned, just to give you a sense there and what we’re seeing, there is probably two key factors. We are cycling the strongest quarter from an industry perspective that we saw last year, so the industry even taking out the 53rd week effect was up 1.8%. So it was strong results and that was behind very good weather that we’re not benefiting from this year and the NHL lockout is a major – NHL is a major property for us. Hockey generates a lot of beer occasions in Canada, whether it’s in bars, in home or in the venues, and it’s a really important part of how we activate behind our power brands, Coors Light and Canadian, so we’re obviously working to replace the hockey programming, but hockey would be the premier property, and on top we lose the direct volume in the hockey venues that are ours.

Judy Hong – Goldman Sachs: And then just secondly in Central Europe, just again sort of the demand falloff that you saw in September because you talked about July being high single-digit, so clearly the late quarter trends were much weaker than we saw earlier in the quarter. So can you just give us some sense of what’s happening both from a macro perspective as well as from a competitive perspective? And then sort of in terms of what’s happening with the macro being tougher in those markets how are you thinking about the ability to maybe even extract more cost savings, particularly as you integrate the U.K. business into Central Europe and have a wholly integrated European division?

Peter Swinburn – President and CEO: So Judy, I’ll take the second part of that question first and then let Mark address the first part. For the moment we’ve put $50 million out as a synergy number for Central Europe and that’s the number we’re sticking to. As I alluded to in the script, we’re starting with the reorganization in Central Europe and the UK, but obviously we need to make more cost moves within the business and that will be something that we can talk about at a later date. So Mark, you want to talk specifically about consumer demand and market share in Central Europe?

Mark Hunter – President and CEO, Molson Coors Central Europe: Sure. Judy, just to your very specifics (indiscernible) macro level, I think what we saw as went through the third quarter, really through the second half of August and then in September a real kind of slowdown in consumer demand. Now clearly, we’re currently investigating what we think is driving that. Probably at the highest level, what we are seeing is the GDP forecast for mostly all of the markets that we operate in turning in a negative direction that we’re seeing through the 2011 numbers and certainly Serbs, Croatia, Hungary and Czech, we expect GDP to be actually negative by end of 2012 on a full year basis. So, there is clearly a market sluggishness from the demand perspective, not manifested itself in an industry volumes. I’ll just look at a couple markets to give you an example. So, to the end of August the Hungarian market was up by about 2.5 points and volume in September was around 5 points. The Czech market was up just under a couple points to the end of August and the September was down 7.5 points, so clearly in September consumers tightened their belts. Clearly, to your second question what does that means competitively, all those pressures are felt by us and all of our competitors. The good news is that in five of our seven markets, we actually grew share in our biggest markets and we continue to grow our business which was good news and grow our pricing, and obviously that manifested itself in a double-digit increase in our earnings which is very, very positive. I think the one thing just to call out and flag to you is probably the Romanian market, so if you look at industry volume in Central Europe for the third quarter, our headwind level looks reasonably buoyant, it’s up about 4%, so 90% of that growth came in Romania, and it came in Romania at a very, very low margin segment, the value segment and I think one of competitors had already flagged the fact that they saw very, very high growth, but it’s actually been margin dilutive from a Pan European basis, we chose not to compete there, so we actually gave up some share in Romania as one of the two markets where we gave up some share. If you strip out Romania, industry was up by less than 1%. If your strip out Romania in our business, our volume was actually up by about 3%, so excluding the Romanian market whether it’s that volatility and the value segment, I feel very, very pleased with our performance as I say strong earnings growth and share growth in five of the seven markets and we continue to manage our costs very effectively, both from an investment perspective and G&A perspective, so I think the business is feeling very solid and competitively performing very strongly.

Marketing Outlook

Dara Mohsenian – Morgan Stanley: Peter, given some of the volume struggles around the world really across you geographies as well as the market share issues in the difficult macro environment you cited. Do you think you need to boost marketing spending going forward to drive the volume pick up in 2013 and also how do you protect profit in that difficult environment. I’d love some clarity just on prioritizing volume growth versus profit in your key markets at this point given the environment?

Peter Swinburn – President and CEO: As we flagged in the earnings, we’re actually increasing our G&A marketing spend in the U.S. by a figure of a roundabout $20 million, so the short answer is, yes, we’re taking some action. We did increase our marketing spend this year which we flagged at the beginning of the year. In terms of how we’re addressing it, I think Dave alluded to the fact and I think Tom did in the U.S. earnings call this morning that most of our portfolios are skewed towards mainstream premium and we suffered from not having enough exposure towards the premium and what you will see is both from in all of our innovation activity that we’ve undertaken over the last couple of years and going forward, we’re very much skewed towards premiumizing the portfolio. And so we’re looking to mix as being a big driver for us over two-to-three year period. So if you look at, again, U.S. was talked about this morning, but if you looked at that we did in the U.K. this year with Carling Zest, that was very much a premium play. The Coors Light Iced T was a premium play, Aluminum Pints is selling at an index of (110 to 120) was a premium play, and so on. And so really that’s the way that we’re dealing with it.

Dara Mohsenian – Morgan Stanley: Okay. And when do you think you’ll give us more clarity on the potential level of cost savings from the combination of the U.K. and Ireland business with Central Europe? And also, just can you give us a sense of the overall cost-cutting potential or productivity potential at your company as we look going forward versus recent trend, and if at some point you’ll outline new longer-term cost savings goals across the company?

Peter Swinburn – President and CEO: Yes, we’ll be in a position to give you much more detail, I would suspect, when we have our analyst call next year in New York, and so we can be much more definitive then. In terms of the overall approach, I mean, we’ve consistently said that we see cost saving is something that’s an ongoing task within the business. We believe there is more cost to take out of the business, and we’re actively seeking to do that at the moment.