Peter S. Swinburn - Chief Executive Officer, President and Director Gavin D. Hattersley - Global Chief Financial Officer Stewart F. Glendinning - Chief Executive Officer and President Mark R. Hunter - Chief Executive Officer of Molson Coors Europe and President of Molson Coors Europe.

Judy E. Hong - Goldman Sachs Group Inc., Research Division Ian Shackleton - Nomura Securities Co. Ltd., Research Division Bryan D. Spillane - BofA Merrill Lynch, Research Division.

Welcome to the Molson Coors Brewing Company Second Quarter 2014 Earnings 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. Now I'd like to turn the call over to Peter Swinburn, President and CEO of Molson Coors..

Thank you, Chrissy. Hello, and welcome, everybody, to the Molson Coors earning call, and thank you for joining us today.

With me on the call this morning are Gavin Hattersley, Molson Coors' CFO; Tom Long, CEO of MillerCoors; Stewart Glendinning, CEO of Molson Coors Canada; Mark Hunter, CEO of Molson Coors Europe; Kandy Anand, CEO of Molson Coors International; Sam Walker, Molson Coors' Chief Legal and People Officer; Brian Tabolt, Molson Coors' Controller; and Dave Dunnewald, Molson Coors' VP of Investor Relations.

One quick note before we discuss the quarter. You'll all be aware of my intention to retire from Molson Coors at the end of this year. I'm delighted that Mark Hunter has been named as my successor. I've worked with Mark for over 20 years, and I cannot think of any one better qualified to take the business on to continued success.

Mark has played a key role in developing and implementing our company's strategy over the past 7 years as a member of our executive leadership team, and he and the team here plan to continue to execute the strategy that we have set for the company. Also, Mark will join Gavin and me at the Barclay's Back-to-School Conference in Boston in a few weeks.

But our time today is focused on earnings. So for the balance of the call today, Gavin and I will take you through the highlights of our second quarter 2014 results for Molson Coors Brewing Company, along with some perspective on the second half of 2014.

In the second quarter, Molson Coors increased underlying after-tax income nearly 8%, grew underlying EBITDA 4% and expanded gross operating and after-tax margins. Underlying earnings per share increased nearly 7%, and U.S. GAAP after-tax earnings increased 9.5% versus a year ago.

We continue to build a bigger and stronger brand portfolio that is delivering value-added innovation, continued investment in our core brands and increased our share in above-premium. As a result, we achieved positive pricing and mix, resulting in higher net sales in the quarter.

We also continue to improve our operations by reducing costs, implementing common processes and focusing on Profit After Capital Charge as the key driver for our cash and capital allocation strategy. In the second quarter, Coors Light global volume, including our proportional percentage of MillerCoors volume, increased nearly 5% versus a year ago.

Coors Light grew more than 30% in the United Kingdom and even faster in Mexico and Latin America, underscoring the increasingly important role of Molson Coors International to the business. The brand underperformed in the U.S. and in Canada, and we continue to implement plans to reverse these trends.

Molson Canadian volume in Canada was even with prior year, while Coors Banquet grew volume and share in both the U.S. and Canada. Carling, the #1 brand in the United Kingdom and the largest brand in our Europe business, continued to grow volume, and our Europe above-premium portfolio continued to grow strongly, led by Coors Light, Cobra and Doom Bar.

Staropramen volume decreased overall versus the second quarter of 2013 as a result of lower volumes in Russia and Ukraine related to political and economic turmoil. Despite the severe flooding in Central Europe this year, above-premium Staropramen, and that is the Staropramen we sell outside of the Czech Republic, maintained volume in the region.

In the quarter, U.S. pretax earnings increased more than 10%, driven by positive pricing, sales mix and cost savings. Premium and Premium Light beers continued to underperform the overall market, but Miller Lite sales in the Original Lite Can continued to grow as did Coors Banquet.

We also gained volume and market share with the above-premium Redd's, Leinenkugel Summer Shandy, Smith & Forge Hard Cider and Miller Fortune brands.

In Canada, our termination of the distribution rights from the Modelo brands early this year drove all of the sales-to-retail decline in the second quarter and more than all the earnings decrease in constant currency.

Coors Light trends improved sequentially from high single-digit decline in the first quarter to a low single-digit decline in the second quarter, but we have more work to do on our largest brand.

In above-premium, Coors Banquet continued to deliver strong volume growth, and the combined Coors Light and Banquet brand family grew volume low single-digits from a year ago. And our Craft brands, Creemore and Granville Island, increased volume and share.

Canada income also benefited from lower marketing spending and higher net pricing versus a year ago. Our Europe business improved its financial performance through positive geographic mix and cost reductions, which more than offset increased marketing investment and drove improved margins.

This positive financial result was delivered against a backdrop of devastating floods in Serbia, Croatia and Bosnia in May and Bulgaria in June.

Our Europe market share declined 0.7 of a percentage point as floods primarily impacted our highest share areas in these countries, and we did not participate in value-destructive off-premise promotional activity over the World Cup period in the United Kingdom. We grew share in Czech Republic, Romania and Hungary in the quarter.

On a year-to-date basis, our overall market share in Europe was even with a year ago. Our International business continues improving its top line performance by growing volume and net sales at double-digit rates. Coors Light more than doubled in Mexico and Latin America on top of strong growth last year, and volume grew significantly in India.

Now I'll turn it over to Gavin to give second quarter financial highlights and a perspective on the balance of 2014. Gavin, over to you..

$576 million of operating cash flow and $50 million of net deductions, mainly $63 million of cash received for the accelerated termination of the Modelo joint venture in Canada, which was partially offset by cash used for restructuring activities. Investing cash flows included $126 million of capital spending.

Our underlying free cash flow included $692 million of cash distributions and $764 million of cash invested in MillerCoors, along with $4 million of positive adjustments for special charges and investments in businesses.

Total debt at the end of the second quarter was $3.66 billion, and cash and cash equivalents totaled $506 million, resulting in net debt of $3.15 billion, which is $301 million lower than at the beginning of the second quarter and $612 million lower than a year ago.

In 2014 guidance, we are raising our full year guidance for underlying free cash flow and lowering our guidance for capital spending and consolidated interest expense.

We are increasing our 2014 underlying free cash flow target to $775 million plus or minus 10%, up from $700 million, largely due to lower expected cash taxes, capital spending and cash interest. We are reducing our capital spending guidance to approximately $315 million, which is $15 million lower than our previous outlook.

This is the result of continued focus on the effective use of our cash, including ingraining the pack model in all meaningful capital allocation decisions.

We also anticipate 2014 consolidated net interest expense of approximately $135 million, down from $145 million previously, as we reduced our cost of borrowing more than planned, coupled with our improved cash flow outlook.

All other full year forward guidance is unchanged from last quarter, such that we expect to fund benefit pension expense of approximately $35 million and cash contributions of $60 million to $90 million, including our 42% share of MillerCoors expense in cash, Corporate MG&A expense of approximately $110 million, and we anticipate our 2014 underlying effective tax rate to be in the range of 12% to 16% and near the low end of our long-term range of 20% to 24% next year, assuming no further changes in tax laws, settlements of tax audits or adjustments to our uncertain tax positions.

In 2014 cost outlook in local currency, we continue to expect MillerCoors Canada and International cost of goods sold per hectoliter to increase at a low single-digit rate for the full year and Europe to decrease at a low single-digit rate. At this point, I'll turn it back over to Peter for outlook, wrap-up and the Q&A.

Peter?.

Thanks, Gavin. Overall, our strategy of building our core and above-premium brands and driving sales through our innovation pipeline continues to deliver results.

In the U.S., we are executing our strategy to migrate our portfolio to the high end, bringing consumers exciting new innovations and Craft brands that satisfy consumers' thirst for authenticity, new flavors and styles.

We will be developing new creative for Coors Light and changing all the Miller Lite packaging and signage to the original white design that has worked so well on the can. We will also launch and support Redd's Wicked Ale. We will continue with our business transformation initiative, which will provide the strong foundation for growth in future years.

As a result, we expect MG&A expenses to be higher in the second half and the full year 2014 versus 2013. In Canada, we have more retail channel and in-case promotional activity for Coors Light this summer, and our latest Molson Canadian advertising is working well, with the beer-fridge campaign continuing to exceed expectations.

We have a strong innovation pipeline led by the expansion of Coors Banquet, which was introduced into the Québec market at the end of July, along with recent rollouts of Mad Jack Apple Ale, Molson Canadian Cider and Molson Canadian 67 Tangerine to new markets.

Looking to the second half of this year, we anticipate that the termination of our arrangement with Modelo brands will continue to significantly impact our comparative STR and profit performance as we will be cycling equity earnings and administrative cost recoveries totaling CAD 6 million in the third quarter of 2013 and CAD 4.4 million in the fourth quarter.

Other expected headwinds in the second half include the August 1 Québec excise tax increase, the impact of cycling unusually low incentive compensation expense in the third quarter of 2013 and unfavorable foreign currency versus last year.

Our Europe business was disproportionately affected by the flooding in the region in the second quarter, and based on what we see today, we expect the aftermarket of the floods to impact our volume and profit for at least the balance of the year. We also anticipate less benefit from overhead cost reductions in the second half.

Despite weather challenges and weak consumer demand in Central Europe, our team continues to improve our brand health and sales execution across Europe, and we anticipate a return to positive market share performance in the second half.

For the remainder of 2014, our International business plans to continue to drive strong growth in Coors Light, expand key brands in selected markets and make additional progress towards its goal of achieving profitability by 2016. Across all of our businesses, we anticipate higher brand investment in the second half of 2014 versus last year.

Finally, here are the most recent volume trends for each of our businesses early in the third quarter. In the U.S. for July, STRs decreased mid-single-digits -- at a mid-single-digit rate. In Canada, they were down low single-digits in July. Excluding the Modelo brands last year, our Canada STRs in July increased at a low single-digit rate.

Our July sales volume in Europe decreased at a mid-single-digit rate, and our International sales volume, including royalty volume, increased at a double-digit rate. As ever, please keep in mind that these numbers represent only a portion of the current quarter, and trends could change in the weeks ahead.

So to summarize our discussion today, in the second quarter, we increased underlying after-tax income nearly 8%, grew underlying EBITDA 4% and expanded gross operating and after-tax margins. Underlying earnings per share increased nearly 7% versus a year ago. We also achieved positive pricing and mix resulting in higher net sales in the quarter.

The fundamentals of our business are strong and improving. We have leading brand positions in the world's most profitable beer markets. We are improving the efficiency of our operations. We are successfully combining our distribution missile [ph] with our proven ability to grow both large and small brands.

We have accomplished this through strong and consistent execution of our brand-led profit growth strategy and our continued commitment to Profit After Capital Charge as drivers of total shareholder return.

This strategy is generating steady growing pre-tax profit, a strong and increasing EBITDA and strong cash returns to shareholders and will have an even greater impact as market conditions continue to improve. Now before we start the Q&A portion of the call, a few quick comments.

As usual, our prepared remarks will be on our website for your reference within a couple of hours this afternoon. Also at 2 p.m. Eastern Time today, Dave Dunnewald will host a follow-up conference call, which is an opportunity for you to ask additional questions regarding our quarterly results.

This call will also be available for you to hear via webcast on our website. Additionally, in the next few months, we hope to see many of you at 2 events. First, as I mentioned at the start, Gavin, Mark and I will attend the Barclay's Back-To-School Consumer Conference on Thursday, September 4, 2014, in Boston.

Second, our company will host -- will cohost a MillerCoors regional seminar with SABMiller in New York on December 3, and in London on December 5. And we will share additional details when we are closer to these events.

So at this point, Chrissy, could we please open it up to questions?.

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

And best of luck to you, Peter, and congratulations, Mark..

Thank you, Judy..

So first, just maybe looking at the Canada trends. It looks like the underlying volume performance has been improving if you look at the second quarter and maybe through July.

So maybe if you could talk about the industry conditions, what you're seeing in the marketplace, the competitive dynamics, as well as the -- if you can talk about the Québec excise tax and any of -- if any pricing has been taken in that market?.

Okay. Thanks, Judy. Yes, I will let Stewart answer on the detail of that. Don't forget, we do have the benefit of Easter in the second quarter this year as a comparison to last year, so that does help some of the sequential benefit. But overall, yes, things are going in the right direction.

But Stewart, can you pick up the detail?.

Yes, absolutely. I mean, Judy, in truth, I don't think we've seen anything dramatic change in the Canadian environment. We did see the benefit of Easter, as Peter said, just from a timing perspective, and we saw volumes, particularly strong in the West, which enjoyed some better weather.

So I can't say that I have seen anything that is dramatically different in the environment. Having said that, to pick up on your question about Québec, that tax increase went into effect this week. It's a fairly sizable increase of about 26% increase in tax, similar to what we saw in -- at the end of 2012.

And we do expect that to be negative, but we'll have to see what happens over the rest of the quarter. Just, you asked also I guess about industry conditions or competitive dynamics across Canada. I would say that overall, the market continues to be very competitive.

Discounting was most pronounced in Québec, where we saw aggressive discounting in the independent off-premise and in the value segment. And in BC, the mainstream segment moved pricing closer to value. As a result, we saw a slowdown in value in that market.

Responding to those market conditions year-to-date, we've carefully managed our portfolio to drive revenue ahead of cost and to ensure appropriate returns for our promotional investments. Sometimes, that has led to some choice of share versus profit..

Okay. And maybe just -- if I can just follow up on the more of the profitability part of the question on Canada. So in second quarter, FX neutral profit was down 1.6%.

Can you just parse out for us how much was the impact on the -- from the loss of Modelo brands? Maybe quantify how much marketing was down? And I'm just really trying to gauge the underlying lower [ph] profit performance?.

Okay. So a couple of things there. So first of all, we called out the Modelo impact as $18 million for the year, which is roughly $12 million through COGS and about $6 million through G&A. Specific to the second quarter, that was roughly around $7 million with the same kind of split, so that just helped you parse that number.

Obviously, the impact in Q1 was much less. We haven't given any specific numbers to marketing, but what I would do is pick up on Peter's comments last quarter where he was clear that we are going to continue to invest behind our brands, continue to spend no less than we have spent.

And I think if you looked at Canada on that basis, we called out that we've underspent in the first half of the year and therefore, there will be some catch-up in the second half, with most of that coming in the third quarter..

Okay. That's helpful. And then lastly, just Gavin, maybe I can ask you about capital allocation in the context of your free cash flow coming in better-than-expected this year. You're continuing to delever the balance sheet.

So any thoughts in terms of perhaps accelerating the timing of maybe increasing the cash returned to shareholders?.

Judy, thanks. I mean, we obviously are targeting to reduce our stock -- leverage ratios to the sort of StarBev pre-acquisition levels. And as I said, Judy, in New York in June, we do plan to get there by early next year.

And when we get there, obviously, share buybacks comes back on to the table in terms of our capital allocation strategy, which as you know, we've been very consistent about for a long time now, returning this cash to the shareholders through the dividends. We did increase our dividend 16%, as you know, at the beginning of the year.

And share buybacks continue to strengthen our balance sheet and growth opportunities, either investing behind the brands we have got or bolt-on M&A. More than that, I really can't add at this point..

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

A few questions on Europe. You obviously flagged the weather effect previously.

I just want to know whether you were able to quantify what that meant in this quarter and how much it might mean in the rest of the year in terms of negative impact? Secondly, in terms of pricing across Central Europe, I know that [ph] the positive pricing you have got in Q2 seems to be more around mix.

What's happening to underlying pricing within the Central Europe markets? Is that deteriorating as a result of softer volumes? And the third question was I noticed that there are some one-offs, I think $1.8 million related to some one-offs, related to the flooding.

What are those? And though, again, do we expect more in the second half there?.

Yes, thanks, Ian.

Mark, I think you might as well just jump in and take all of those, if that's okay?.

Quite a number of questions in there. Let's -- so let me try and work my way through them. Obviously, from a weather impact perspective, what we've seen is really a split in Europe with Serbia, Bulgaria and Romania, in particular, plus Bosnia, really having a tough time as we've gone through the second quarter.

And we've seen pretty much high single-digit to low double-digit industry declines as measured by Nielsen. So a real just kind of softness from a consumer demand perspective, whereas, the Western part of our business, so Czech, Hungary and the U.K. has been more buoyant.

So some of the floods have a pretty material impact in overall demand across a number of our markets, and that has continued as you've seen from our July volume numbers into the first few weeks of the third quarter.

How that's going to play out through the balance of this year? My perspective on the weather is not something I have a high degree of confidence in, but I think it's fair to say that certainly, the countries that were badly impacted by flooding were Bosnia and Serbia, in particular.

We'll continue to see a real drag on consumer demand, and I think the response from the governments there will really be the tell-tale in terms of how quickly those countries recover as we leave 2014 and go into 2015. And I have to say I think our recovery plans and the response in those countries has been first class.

And we're back up and operating, but clearly, it's had a pretty significant consumer impact. In terms of overall pricing, we [indiscernible] our pricing by country or by groups of country within European. So I mean, you've seen the pricing numbers that we've talked to. Just overall, we've seen pricing up by just under a couple of percent, excluding FX.

And mix has driven, I think, part of that, up nearly 3%, and the net pricing after discounting was down by 0.8%. So as we've seen softer demand, certainly some of the promotional pressure in some of the markets has increased. And clearly, we're trying to protect our position.

So we would be far more reactive than proactive in relation to promotional pressure in the markets [ph]. In terms of the one-off, that's principally accelerated depreciation of some of the assets that were destroyed in the flood.

So hopefully, there will be no more of that to come as we go through the third quarter, and that really won't affect underlying earnings going forward. I think those where the 3 buckets of questions that you referred to, but forgive me if I've missed anything..

No, that's a great answer. Just one quick follow-up.

Is there any update on the dispute with SAB on the distribution in Canada?.

[indiscernible] we have -- we -- there is a court date set for the end of the autumn, and that's really where we are..

[Operator Instructions] Our next question comes from the line of Bryan Spillane from Bank of America..

And Peter, I want to offer my congratulations as well on your retirement. So I guess, first question, just related to your forward outlook and some of the comments you made, I just want to make sure I tie them together.

What's truly, I guess, incremental to the way what we would have been thinking or the way we would have been modeling, I think, is that interest expense is down and that we're looking at the tax rate being at the lower end. Free cash flow is also going to be a little bit better because the CapEx is down.

But the comment in terms of brand investments in the second half, comping the loss of the Modelo brands, those things are all sort of -- would have been known to you and to us before the quarter. So maybe the only thing that was really incrementally more negative is just the disruption in Croatia and Bosnia.

Am I my thinking about that correctly?.

Yes, I think you probably summed it up. I'm sure there are some other -- some things at the margin. But generally, if I try and encapsulate where we are, Bryan, you're right. We've taken specific actions through the treasury function to improve our interest expense that certain positions in tax have changed and therefore, we're at the lower end.

Free cash, obviously, is looking good, and there's a direct link between those 2 and then a reduction in our capital expenditure. Our marketing investment, as you outlined, it's always difficult to get the precise timing on this depending on how creative comes through. We will be skewed much more towards the third quarter this year.

So that will impact our earnings then, and you are fully aware with the Modelo impact and the benefit that we got in terms of the cash for that.

So I think overall, the business is very much on a steady even keel and has been -- as has been highlighted, I think, by the mix element of our NSR, we're very comfortable with the way the portfolio is moving to above-premium, which gives us a buffer against having to take pricing and also gives us a real buffer against discounting in markets where things get difficult..

And then just as a follow-up on -- just on Coors Light in Canada, and maybe Stewart, could you just talk a bit about the efforts or the actions that are going to be -- are being taken to turn the brand around, so in terms of the new copy? And I guess, maybe some more merchandising or promotional activity, just has -- was any of that in effect in the second quarter, or is that something that we'll really see more pronounced in the third quarter? And I'm just trying to get a sense for whether we should look at the Coors Light performance so far year-to-date as having had any real -- having been affected at all by some of the changes you're making?.

Yes, look, Bryan, I think we did see some benefit in the second quarter. I mean, Coors Light had a better quarter. We increased news. We had more offers. We had better in-store execution. And as a result, we saw Coors Light volume decrease low single-digits. Having said that, the performance is still not satisfactory. It's still losing share of beer.

So there's more work to be done. And as I shared at our Investor Day, the elements of focus for us are more brand news, better in-store execution and better marketing execution. And so it's that last piece, I think, where a lot of our effort is focused for the moment on, the next round of copy that we hope to make even better than the last..

Bryan, sorry, just -- if I can just add to that. While I don't let Stewart off the hook on this one, we do need to get Coors Light where he said.

If you -- I mean, Coors Banquet does have a cannibalization effect on Coors Light to some extent, and if you put both of those brands together, we are actually -- the volume actually is growing at mid-single -- sorry, low single-digits..

[Operator Instructions] There are no further questions in queue at this time. I'll turn the call back over to our presenters..

Okay. Thank you very much, Chrissy, and thank you, everybody, for joining us today. I look forward to seeing those of you who are going to be there at -- in Boston at the beginning of September. Thank you very much..

And ladies and gentlemen, this does conclude today's conference call. You may now disconnect..