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…

Thanks, Peter, and hello, everybody. Molson Coors' second quarter underlying after-tax earnings increased 7.9% to $292.7 million or $1.57 per share, driven by improved financial results in the U.S. and Europe, along with lower interest expenses. We also increased margins versus a year ago. Worldwide beer volume for Molson Coors decreased 0.9% due to lower volume in the U.S., Canada and Europe, partially offset by higher volume in International. More than half of the worldwide volume decline in the quarter was attributable to the loss of the Modelo brands in Canada this year. In the second quarter, our U.S. GAAP after-tax income from continuing operations increased 9.5% to $290.7 million due to positive business performance and lower special and other non-core net charges this year. Special and other non-core items are described in detail in this morning's earnings release. Now I'll provide an overview of our results with MillerCoors presented as if it were proportionately consolidated. This is a non-GAAP approach, but we believe it provides a useful view of some key performance metrics for our business. On this basis, total company net sales increased 1.5% from the prior year, driven by positive pricing and mix, which were partially offset by lower volume. On a per-hectoliter basis, net sales increased 2.1% due to higher pricing and mix in the U.S. and Canada, as well as positive geographic mix in Europe. Underlying cost of goods sold per hectoliter increased 1.1% due to higher costs in the U.S., largely due to mix impacts, and in Europe, due to foreign exchange, partially offset by lower costs in Canada and International. Total company underlying gross margin was 42.2%, 60 basis points higher than a year ago, primarily due to gross margin expansion in the U.S. and Europe. Underlying marketing, general and administrative expenses increased…

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…

[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.