Molson Coors Brewing Company
2019 First Quarter Earnings Conference Call
May 1, 2019

[Slide 1]

Title Slide

Speakers:

1) Mark Hunter, President and Chief Executive Officer

2) Tracey Joubert, Chief Financial Officer

3) Mark Swartzberg, Vice President of Investor Relations

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[Slide 2]

 [Operator:]

Good day and welcome to the Molson Coors Brewing Company first quarter 2019 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 remarks from Mark Swartzberg, VP of Investor Relations at Molson Coors.

[Mark Swartzberg:]

Thank you, Keith, and hello everyone, thank you for joining us this morning.  Following prepared remarks this morning, we will turn the call over for your questions. Please limit yourself to one question. If you have more than one question, please ask your most pressing question first and then re-enter the queue to follow-up. Now, I would like to turn the call over to our CEO, Mark Hunter.

[Slide 3]

[Mark Hunter:]

Thank you, Mark. Hello and welcome everybody.  With me on the call this morning are Tracey Joubert, our CFO, the CEOs of our business units, Lee Reichert, Chief Legal and Corporate Affairs Officer, and Brian Tabolt, Global Controller.

Today, Tracey and I will take you through our plans to drive long-term total shareholder returns, discussing our first quarter results and outlook.  As usual, related slides can be found on the Investor Relations page of our website.

 

[Slide 4]

Our first quarter was solid, delivering on our commitment to improving top-line performance while also protecting the bottom line.  Even with industry volume pressure in North America and the shift of Easter from Q1 to Q2, revenue was up on a constant currency basis, driven by strong and disciplined net sales revenue per hectoliter growth across our business, ongoing portfolio premiumization, and improving share trends in our largest market.

While only the first and the smallest of our quarters, I am encouraged by the meaningful growth of net sales revenue in the U.S., led by the increasingly strong performance of Miller Lite which held total beer industry share and an improved performance of Coors Light in our largest and most profitable market, as well as strong U.S. retailer placements for our upweighted innovation program. We also saw continuing strong net sales revenue growth in Europe, our second largest business unit. Across MolsonCoors I am pleased with the continuing acceleration of our portfolio premiumization efforts alongside our intensified innovation program, and the growth in our underlying EBITDA, which despite higher inflation, grew on a constant currency basis.

 

[Slide 5]

As you know, our First Choice strategy has three major components focused on top-line, bottom line and use of cash allowing us to improve our long- and short-term shareholder returns.

[Slide 6]

Earn More is focused on improving top-line growth, and we are advancing on multiple fronts.  We are realizing strong pricing across brands and regions, giving us more fuel to invest for growth.  Our two largest brands improved their volume trends in our largest market, resulting in better STRs for our U.S. business.  Global priority brands were a key driver of our consolidated net revenue increase as strong net sales per hectoliter gains more than offset volume softness.  Our above premium mix continued to improve with Peroni, Sol, Henry's Hard Sparkling and Arnold Palmer Spiked growing very rapidly in the U.S., Blue Moon growing rapidly outside of the U.S. and Staropramen continuing its strong growth across Europe.  We continue to win at retail with additional placements flowing through in Q1 and more significantly in Q2.  And we are advancing an upweighted innovation program from accelerating development of Clearly Kombucha and the full national launch of Cape Line and Sol Chelada in the U.S., to Coors Slice, Aquarelle and Bella Amari in Canada to Pravha in the U.K. plus multiple rapid incubation initiatives such as Saint Archer Gold, La Colombe Hard Coffee and Hydra, and the readiness for launch of more disruptive initiatives such as Truss, our Canada focused cannabis beverage JV.

[Slide 7]

Our Use Less discipline is demonstrated by more than $200 million of expected cost savings in 2019 and our expectation of another $450 million over the period 2020-2022.  Underlying these commitments are several enterprise productivity and capability driving initiatives, namely World Class Supply Chain 2.0, Global Business Services, which has now scaled to over 500 people in Romania, IT consolidation, and procurement savings from multiple sources.  All remain on track and include development of our two greenfield breweries in Canada, including our British Columbia brewery, which is on plan to begin brewing in the third quarter.

[Slide 8]

And we are Investing Wisely:

  • We have reduced our debt by more than $2 billion since closing the MillerCoors transaction.
  • Our board's intention remains to reinstitute a dividend pay-out ratio in the range of 20% to 25% of annual trailing underlying EBITDA for the second half of 2019 and ongoing thereafter...and...
  • We are taking advantage of opportunities to invest more behind our commercial agenda to drive our revenue performance while also increasing our commitment to attractive returns on every marketing dollar.

So with that context, over to you Tracey.

[Slide 9]

[Tracey Joubert]

...Thank you, Mark, and hello everybody....I will speak first to the quarter on a consolidated and regional basis, then to our cost savings and 2019 outlook, and finally to our capital allocation plans.

[Slide 10]

As highlighted in our earnings release:

  • Net sales revenue increased 0.6 percent in constant currency reflecting strong pricing in each business unit and improving mix in Europe.
  • Net sales per hectoliter, on a brand-volume basis, increased 3.7 percent in constant currency.
  • Worldwide brand volume decreased 4.7 percent and financial volume decreased 3.4 percent.Global priority brand volume decreased 3.6 percent.
  • Underlying COGS per hectoliter increased 5.3 percent on a constant currency basis driven by commodity inflation, transportation costs, increased packaging costs associated with our U.S. bottle furnace rebuild, and volume deleverage, partially offset by cost savings.
  • Underlying MG&A decreased 1.5 percent on a constant currency basis, driven by lower G&A.
  • As a result, underlying EBITDA increased 0.2 percent on a constant currency basis.
  • Underlying free cash flow was a use of $270.1 million, an increase in cash used of $75.0 million from the prior year's first quarter, primarily due to unfavorable timing of working capital, partially offset by lower cash paid for interest and capital expenditures.

Moving to our business units...

[Slide 11]

In the U.S., net sales revenue increased 0.7%, driven by price increases, partially offset by a 2.7% decline in sales to wholesalers, excluding contract brewing.  COGS per hectoliter increased 5.9%, driven by higher commodity and transportation costs, increased packaging costs associated with our U.S. bottle furnace rebuild, and volume deleverage, partially offset by cost savings.   MG&A decreased 4.5%, reflecting lower employee-related costs and quarterly timing of innovation spend, partially offset by higher marketing investment behind our premium light brands.   As a result, underlying EBITDA increased 3.4%.

 

Brand volume trends improved versus last quarter and last year, declining 3.8% on a trading-day-adjusted basis, which is an improvement versus both the fourth quarter and last year.  Miller Lite held share of industry and increased share of premium lights for the 18th consecutive quarter, according to Nielsen.  Coors Light volume trends improved, while holding share of segment.  As the company’s top priority, Coors Light continued its progress following its roll out of new creative late in Q4, with new on-premise content and partnerships.  We posted significant growth in a number of brands within the above premium segment, including Henry’s Hard Sparkling, Peroni, Sol and Arnold Palmer Spiked, and we are confident we can scale this segment more rapidly going forward.

[Slide 12]

In Europe, net sales revenue increased 4.4% on a constant currency basis, driven by price increases and favorable mix, partially offset by a 2.3% brand volume decline.  COGS per hectoliter increased 3.7% in constant currency, driven by commodity inflation.  MG&A increased 9.5% in constant currency, reflecting higher investment on our national champion brands and premiumization initiatives.  As a result, underlying EBITDA increased 2.0% in constant currency.

Continued momentum in 2019 was evidenced by top-line growth, driven by an 8.2% increase in net sales per hectoliter on a constant currency basis, more than offsetting the volume which was impacted by a planned decline in our low-margin value brands as we increase our focus on our national champion brands and above premium portfolio.

[Slide 13]

In Canada, net sales revenue decreased 3.4% in constant currency, driven by a 6.0% decline in brand volume due to soft Canadian industry volume, which we estimate declined approximately 5%, partially offset by price increases.   COGS per hectoliter increased 6.3% in constant currency, driven by volume deleverage, increased distribution costs, and cost inflation, partially offset by cost savings.  MG&A decreased 1.1% in constant currency, driven by timing of employee related expenses, partially offset by higher investment to support the rebranding of our Molson brands and Truss related costs.  As a result, underlying EBITDA decreased 22.4% in constant currency.

Volume was impacted by industry weakness.  In terms of brands, strong growth from Belgian Moon and Miller High Life partially offset softness in our core brands.  Share trends for the Molson Trademark also improved during the quarter, following initiation of the brand relaunch.

Also note, we estimate Truss related start-up costs of $10-$15 million Canadian dollars in 2019.

 

[Slide 14]

In International, net sales revenue decreased 14.4% on a constant currency basis driven by a 6.7% decline in brand volume, unfavorable geographic mix and the shift to local production in Mexico, partially offset by price increases.  COGS per hectoliter increased 2.0% in constant currency, driven by geographic mix and inflation.  MG&A increased 11.9% in constant currency, driven by cycling the $2.0 million of settlement proceeds related to our Colombia business in the first quarter of last year, partially offset by lower marketing investments.  As a result, underlying EBITDA decreased to $2.7 million.

Brand volume declined as a result of balancing higher pricing with lower volume in Mexico, the shift of Easter to Q2 and cycling of a strong post-hurricane result in Puerto Rico, and this was partially offset by growth in several of our focus markets such as Chile, Paraguay, and Honduras.  Coors Light volume was down principally because of the ongoing focus on brand equity growth versus promotional volume growth in Mexico, partially offset by a strong double-digit increase for Miller Lite.

[Slide 15]

 

Moving to outlook, our earnings release details our guidance.

  • The EBITDA margin expansion guidance we communicated in June is unchanged.
  • We expect 2019 consolidated underlying COGS per hectoliter to increase at a mid single digit rate on a constant currency basis.
  • In terms of cost savings, we continue to expect a total of $700 million of savings for the three years ending 2019 and plan an added $450 million for the period 2020 through 2022.We expect procurement and supply chain, including brewery optimization to constitute the majority of these new savings, with IT and global business services also contributing to the $450 million.We expect these savings, to be spread evenly over the period 2020 through 2022, to help fund our internal investment plans, the costs of achieving the savings, and offset input inflation.
  • We expect our International business to deliver underlying EBITDA growth of strong double digits in constant currency for full year 2019 versus 2018.
  • We estimate underlying free cash flow of $1.4 billion plus or minus 10% this year.

[brief pause to draw attention:]

As you contemplate full year 2019, keep in mind that we recently rescheduled our Albany brewery system implementation from Q1 to post-peak selling season, which will impact STW phasing, we expect increased packaging costs associated with our U.S. bottle furnace rebuild to moderate this fall, and we intend to incrementally support our brand building initiatives for the rest of the year.

At this point, I'll turn it back over to Mark….

[Slide 16]

[Mark Hunter:]

...  Thanks, Tracey.

[Slide 17]

Our revenue focus, or "Earn More", is one of the three vehicles by which we drive total shareholder returns, and this depends upon extraordinary brands, customer excellence, and disruptive growth.

[Slide 18]

Looking at our brands...

...Our commitment to energizing our core brands is paying off.  As I mentioned, in our largest market, Coors Light trends improved with the brand regaining positive segment share momentum, and Miller Lite continues taking segment share while also holding share of the total U.S. beer market.

...We are also further intensifying our focus on premiumization.  Highlights of the quarter include strong double-digit or even stronger brand volume growth for Arnold Palmer Spiked, Sol, Henry's Hard Sparkling and Peroni in the U.S., and upper single digit growth for Coors Light in the U.K. while we drive the national rollout of Pravha from Staropramen....and...

...Our global brands remain a priority.  Miller Genuine Draft, Miller Lite, Coors Light, Coors Banquet, Blue Moon, Staropramen.  Each is a household name in its home market, and each can become bigger, thanks to our multinational reach.  Miller Lite, Staropramen, and Blue Moon are great examples.

  • ◦ Brand volume of Miller Lite grew strong double-digits in our International business in the quarter...
  • ◦ Staropramen brand volume grew 15.8%, including growth in the Czech Republic...and...
  • ◦ Blue Moon and Belgian Moon brand volume grew strong double-digits in each of International, Europe, and Canada in the quarter.

 

[Slide 19]

Continuous development of our customer excellence capability also remains a focus and is evident across our business.

  • We continue to be a leader in category management in the U.S., as evidenced by a first place result overall in the most recent annual Advantage survey and a first place on-premise result in the most recent annual CM Profit Group survey.Retailers trust us to grow the size and value of their beer category and we consistently outperform our competition in this area.
  • In Europe, customers rate us with a leading net promoter score of 60+ in a majority of the countries in which we operate, and our UK business was again ranked number one by on-premise chain accounts.
  • In Canada, we continue to help customers drive category growth. For example, a major retailer has seen improving beer category growth in stores where we reset beer shelves, and joint brewer-retailer teams are applying our success to other major chains.

[Slide 20]

We are also improving our intensity behind innovation and disruptive growth.

  • ◦ Our stepped-up innovation approach is demonstrated by the introduction of Cape Line, Saint Archer Gold and Sol Chelada in the U.S., contributing to more than 180,000 expected placements for our new and year-two products in 2019.
  • ◦ In Canada, Coors Slice, Aquarelle Hard Seltzer, and Bella Amari are rolling out, and Truss remains on track to be a first mover when cannabis infused beverages are planned to be legalized in October.
  • ◦ In International, our portfolio is benefiting not only from Miller Lite's strength but also from continued expansion of Blue Moon which is now available in 20 International markets...and finally...
  • ◦ We are delivering new services and revenue streams, through upgrading our digital and e-commerce capabilities in Europe and beyond.

[Slide 21]

Concluding on PACC and driving shareholder value, we plan to increase cash returns through an increased dividend later this year, we remain committed to our investment grade status and a balanced approach to capital allocation, and look forward to intensifying our top-line revenue opportunities in front of us through our First Choice for consumer and customer agenda.

Thank you for your time and attention, and with that, I'll turn it back to Mark.

 

[Slide 22]

[Mark Swartzberg]

Thanks, Mark.

We look forward to meeting with many of you over the course of the year.  In terms of upcoming events, I want to highlight several:

  • Barclays will be hosting a meeting in Milwaukee with Tracey and members of our U.S. leadership team next week.
  • Later in the month, on May 22nd, we will hold our Annual Meeting of Stockholders in Montreal, followed by investor meetings hosted by BMO with Mark and Tracey.
  • And in June, Evercore ISI will be hosting investor meetings in New York with Mark, Tracey, and our global treasurer, Mike Rumley, followed by investor meetings in Paris at the Deutsche Bank Conference with Tracey.

With that, Keith, let's go to Q&A...