Molson Coors Brewing Company
2018 Third Quarter Earnings Conference Call
October 31, 2018

[Slide 1]

Speakers:

  1. Mark Hunter, President and Chief Executive Officer
  2. Tracey Joubert, Chief Financial Officer

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[Slide 2]

[Operator:]

Good day and welcome to the Molson Coors Brewing Company 3rd quarter 2018 Earnings Conference Call.

Before we begin, I will paraphrase the company’s Safe Harbor language. Today’s discussion includes "forward-looking statements" within the meaning of applicable securities laws. Important factors that could cause actual results to differ materially from the expectations and projections contained in such statements are disclosed in the company’s filings with the SEC. The company does not undertake to update forward-looking statements, whether as a result of new information, future events or otherwise. Regarding any non-U.S. GAAP measures that may be discussed during the call, 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. Our call will open with some remarks from Mark Swartzberg, Vice President of Investor Relations at Molson Coors.

[Mark Swartzberg:]

Thank you, Chad, and hello everyone. I am delighted to be here at Molson Coors after being on the other side of this call for many years. Following the prepared remarks this morning, management will take your questions. In order to allow as many people to ask questions as possible, please limit yourself to one question and one follow up and if you have additional questions please return to the queue.   Now, I would like to turn the call over to our CEO, Mark Hunter.

[Slide 3]

[Mark Hunter:]

Thank you. Hello and welcome everybody to the Molson Coors earnings call....

With me on the call this morning are Tracey Joubert, our CFO, the CEO’s  of each of our four business units, Lee Reichert, our Chief Legal and Corporate Affairs Officer, and Brian Tabolt, our Global Controller.

Today, Tracey and I will take you through our plans to drive long-term total shareholder returns, highlighting our third quarter results, and also discuss our outlook for the business. As usual, we are offering related slides on the Investor Relations page of our website.

[Slide 4]

Before doing that, I would like to take a moment to recognize the passing of Bill Coors earlier this month. Our company stands on the shoulders of giants like Bill, the Chairman of Coors for over 40 years, and we honor his memory by rededicating ourselves to continuing the work he loved so much - brewing the highest quality beer to share with family and friends…one of life’s simple pleasures.

[Slide 5]

This quarter reflects progress on a number of fronts as we drive our consistent First Choice strategy of earning more, using less and investing wisely:

  • Brand volume grew in developed and developing markets outside of North America
  • NSR/HL grew globally
  • We announced incremental cost reductions in the U.S. to protect investment and counter inflation
  • We grew underlying EBITDA in constant currency in each of our four business units
  • We further paid down debt, as our teams across the business reduced working capital and cash taxes
  • And in early October, we completed the formation of Truss, our Canadian cannabis joint venture, naming Brett Vye as CEO. Brett is a long-standing commercial leader who most recently served as the Chief Commercial and Strategy Officer for our fast-growing International division.
  • In relation to debt paydown, we have generated $2.5 billion of underlying free cash flow since the end of 2016, are committed to $1.5 billion plus or minus 10% in free cash flow this year. Additionally, we remain committed to our plan for rating agency leverage of 3.75x by mid-2019, our current dividend payment,
  • and the dividend intentions we communicated in June of this year. Let me now turn to underlying business trends and our outlook:
  • The volume growth we are seeing outside North America is driven by consistency of our First Choice strategy, the breadth and depth of our global brand portfolio and a positive industry. Europe, our second largest business unit by volume, is growing consistently and accelerating the pace of portfolio premiumization while our International business unit, led by the Latin American markets, posted mid teens growth due to the strong performance of our global brands, led by Coors Light and the Miller Trademark brands of MGD, Miller Lite and Miller High Life.
  • Turning to North America:
  • In the U.S., brand volumes or STRs were below industry volumes. As we have indicated, improving our volume performance in the U.S. is a priority and the first step is to improve our share performance through Coors Light and accelerated premiumization of the portfolio. In the quarter:
  • Coors Light’s STRs declined at a moderating rate sequentially
  • Miller Lite continued to take share in premium lights and also declined at a moderating rate
  • Above premium trends improved sequentially, benefiting from Peroni and Sol, our regional craft brands, Arnold Palmer Spiked and Henry’s Hard Sparkling.
  • In Canada, brand volume trends improved sequentially, and the Miller trademark and Belgian Moon brand grew strongly in the quarter. We continue to make progress in relation to stabilizing and improving the volume and profitability of our Canadian business and returning this business to growth.

[Slide 6]

Turning to outlook, we remain committed to our performance guidance for 2018, and I will comment in more detail on each of our business units after passing the call to Tracey.   Before I do that, let me offer a few comments about how our organization is focused on earning more, using less and investing wisely by utilizing our profit after capital charge or PACC model:

  • We believe we have the right strategy to grow shareholder value over the medium to long term. That strategy has delivered consistent business performance improvements over the last three years and, as I mentioned, we remain committed to our 2018 guidance despite a more challenging inflationary environment.

[Slide 7]

  • In terms of top line performance, characterized as Earning More, we continue to drive our First Choice approach, strengthening and premiumizing our brand portfolio, building powerful customer relationships and driving disruptive growth…..to this last point our new Truss cannabis joint venture is just one example of this. The combination of Molson Coors Canada and Hexo, the cannabis market leader in Quebec, offers a tremendous opportunity to shape the non-alcoholic cannabis-infused beverages category upon its planned legalization in Canada in the fall of 2019 and we believe we will secure a meaningful share of this potentially high value category and prepare ourselves for potential further international expansion.

[Slide 8]

  • Using Less is our second platform and is designed to fuel growth and protect our bottom line performance. We are over-delivering on our synergy plan and we continue to make great progress

on improving productivity through shared services, which is scaling rapidly, and world class supply chain improvements. We also decided to execute incremental cost reductions in the U.S. to protect our marketing investment and counter inflation and, as Tracey will cover, we expect to overdeliver on our current three-year total cost savings guidance.

  • Investing Wisely is our third platform and we remain resolute on our deleverage commitments, returning cash to shareholders- currently planned via our dividend increase in 2019, and strengthening our business through brand led growth opportunities.
  • Finally, I want to highlight our eighth year of recognition on the Dow Jones Sustainability Index, reflecting not only our performance to index standards but also a series of activities that are aiding revenue and margins and ensuring we leave a positive beer print wherever we operate.

So with that context, over to you Tracey.

[Slide 9]

[Tracey Joubert]

...Thank you, Mark, and hello everybody....

Before I share consolidated and regional financial highlights, I would like to remind you of the new revenue-recognition accounting standard, which we will refer to as "revenue recognition" for the remainder of the prepared remarks today. As outlined in our earnings release, this is expected to have no

significant impact to net income for the full year, but will cause some timing differences between quarters, impacting some year over year comparability for net sales and MG&A, primarily in the U.S. and Canada this quarter. For example, revenue recognition positively impacted EPS by 2 cents this quarter and negatively impacted EPS by 4 cents on a year to date basis, but this timing difference is expected to partially reverse and result in a benefit of approximately 3 cents in the fourth quarter.

I will speak first to the quarter on a consolidated and regional basis, then to anticipated savings, and finally to our capital allocation plans.

[Slide 10]

Turning to our performance for the quarter, as highlighted in our earnings release:

  • Net sales increased 2.5 percent in constant currency.
  • Net sales per hectoliter , on a brand-volume basis, increased 0.4 percent in constant currency.
  • Worldwide brand volume decreased 1.0 percent and financial volume increased 0.8 percent. Global priority brand volume decreased 1.4 percent.
  • Underlying EBITDA increased 11.1 percent on a constant currency basis.

Looking more closely at Q3, two specific positive performance drivers benefited EBITDA in the quarter.

  • First, shipments to support ordering system implementations at our U.S. breweries as indicated and forecast in both our Q1 and Q2 calls. These shipments increased distributor inventory to levels at

which they are expected to remain through the end of the year. This is in order to prepare for future implementations at our remaining breweries, which are expected to occur in 2019.

  • Second, the amicable resolution of a dispute with a U.S. vendor.

Financial highlights for the regions include the following:

[Slide 11]

In the U.S., underlying EBITDA increased 10.2 percent versus last year, driven by higher STWs from an increase in distributor inventories, higher net pricing and lower MG&A expenses, partially offset by higher COGS-particularly aluminum and freight. Top-line growth this quarter was driven by the planned increase in U.S. distributor inventories and NSR per hectoliter growth.

[Slide 12]

In Europe , underlying EBITDA increased 5.8 percent on a constant currency basis driven by topline results, with both volume and NSR per hectoliter growth.  Bottom line results also benefited from strong cost management and more efficient marketing investments.

As discussed on our prior calls this year, when modeling the results of Europe, remember that Q4 historically represents a small quarter for Europe and also faces the headwind of a low-single digit negative impact per quarter to NSR per hectoliter related to the adoption of recently revised industry guidelines for calculating excise tax.

[Slide 13]

Our Canada underlying EBITDA increased 3.5 percent on a constant currency basis. The top line

reflected a 1.4 percent decline in brand volume as a result of lower volumes in the West, partially offset by volume growth in Ontario and Quebec. When excluding the effect of revenue recognition, NSR per hectoliter would have increased 1.6 percent.

[Slide 14]

Regarding International , underlying EBITDA grew as the top-line benefited from an increase in brand volume as all three focus brands, Coors Light, MGD and Miller Lite, generated growth. The bottom-line also reflected gross profit expansion, in addition to lower MG&A spending levels.

[Slide 15]

Our earnings release provides full details on our outlook for guidance.  I will comment on three of those items here:

  • To counter the heightened inflationary environment, especially in the US as it relates to aluminum and freight costs, we will over deliver on our cost savings targets and cost mitigation efforts in order to deliver on our cash flow commitments, both for 2018 and 2019. We will update our actual 2017-2019 cost savings targets and performance, as well as our next generation of cost savings for 2020-2022, in Q1 of 2019. However, as of now, with the additional cost savings initiatives in the US as well as other cost savings initiatives, our 2017-2019 program will deliver approximately $700 million vs the $600 million to which we guided previously.
  • We expect corporate net interest expense for 2018 to be near the low end of our $330 million, plus or minus 10 percent guidance range.
  • And, we have lowered our expected underlying effective tax rate for 2018 to 17% to 19% from 18% to 22%

We still expect free cash flow to be $1.5 billion, plus or minus 10 percent, this year.

As Mark said, we remain committed to our plan for rating agency leverage of 3.75x by mid-2019, our current dividend payment, and our dividend intentions are unchanged versus what we communicated in June.

As for business investment, we continue to use PACC to inform and guide all of our decisions. Delivering total shareholder returns will be driven by our balanced approach to earning more, using less and investing wisely as we position our portfolio and company for long term growth.

At this point, I'll turn it back over to Mark to talk about our commercial excellence around the world ….

[Slide 16]

[Mark Hunter:]

... Thanks, Tracey.

[Slide 17]

Earn more is one of the three platforms by which we drive PACC, and this pillar is built on commercial excellence.   I’d like to give you some evidence of commercial excellence, starting with our success premiumizing globally then touching on how we are doing so in our four business units.

[Slide 18]

Across all our markets, premiumization of our portfolio remains an important element of our strategy, and our above premium brands grew 3.6% in the quarter, driven by Europe and International, bringing their share of our total volume up to 21 percent of our portfolio, from 20 percent last year.

[Slide 19]

In the U.S., we believe we have the right strategy and commercial execution to drive improving performance in response to current topline challenges.

  • Premium light trends improved sequentially versus the first half, driven especially by strong performance from Miller Lite. Our plans are to continue gaining share of segment in the American Light Lager category, with the bold competitive position of Miller Lite and re-energizing Coors Light as the World's Most Refreshing Beer. The brand has just launched a new Blue Mountain, Cold Beer digital campaign in October as part of our push to capture the attention of 21- to 34-year-old drinkers. Ryan Reis, who led the Miller Lite turnaround, has recently become the leader of the Coors trademark and family of brands.
  • In above premium and craft, Peroni and Sol are posting the strongest percentage growth rates in their respective import segments, delivering highly profitable incremental cases to distributors and retailers. We will build on the success from Sol with the introduction of the best-selling Mexican ready-to-drink chelada next year. Our regional craft brands continue to grow strongly and build their regional footprint. One of our regional craft brands, Saint Archer, will test a new lower calorie and lower carb craft lager, Saint Archer Gold, early next year in four markets. In FMBs, our Q3 performance was an improvement sequentially, reflecting growing contribution from Henry’s Hard Sparkling, the only sugar free hard seltzer, and Arnold Palmer Spiked. We are also excited about the introduction of Cape Line next year, a new line of low calorie FMB’s to be supported by national advertising.
  • Finally, in terms of customer excellence, our U.S. sales teams were recognized as the number one chain team in the most recent Advantage Group survey among all branded beverages. This is a real testament to driving our First Choice for customer agenda.

[Slide 20]

  • In Europe
    • Core brands grew, and our above premium brands grew at high single-digit rates in the quarter. For example, global brands Coors Light, MGD, and Blue Moon collectively grew double-digits in the quarter, and Staropramen is nearing 2 million hectoliters in markets outside its home Czech market.
    • We believe we have the right strategy in Europe, defending share of national champion brands while premiumizing our portfolio and driving profitability through innovation, added strength for our global brands, and superior execution.

[Slide 21]

  • In Canada, our commercial performance improved sequentially.
    • We simplified our value segment offerings with the Pilsner and Black Label brands and lifted and shifted the Miller High Life brand into Canada, gaining additional segment share.
    • We saw sequentially improving segment share for Coors Light.
    • We are driving category development in the non-alcohol segment through Coors Edge, our newest non-alcoholic offering, along with our partner brand Heineken 0.0, which are both performing very strongly in their first year in market.
    • And we are investing wisely, expecting future operating efficiencies through our new highly efficient brewery in British Columbia, which remains on track for brewing in 2019, and the new brewery in Quebec, which had its ground breaking ceremony earlier this month.

[Slide 22]

  • Our International business is expected to continue to contribute meaningful volume and profitability to the company, with our commercial efforts centered on focus brands in focus markets.
    • Two of these high potential focus markets include Mexico, with our shift to local production reflecting increased profitability, and Paraguay, growing significantly this quarter with MGD now the top brand in the premium segment.
    • We remain focused on delivering underlying constant currency EBITDA of $20 to $25 million this year in our International business.

[Slide 23]

Across Molson Coors we are over delivering on our synergy and cost savings program to counter higher than anticipated commodity inflation and maintain our deleverage commitment and dividend plan.

Coming back to PACC and our efforts to drive shareholder value, we are pleased to be deleveraging at the pace we are and look forward to upping our cash returns to shareholders next year, while taking a more balanced approach to capital allocation.