Molson Coors Brewing Company
2018 Fourth Quarter Earnings Conference Call
February 12, 2019

[Slide 1]

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 4th quarter and full year 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 remarks from Mark Swartzberg, Vice President of Investor Relations.

[Mark Swartzberg:]

Thank you, Gary, and hello everyone. 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 follow up question, 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, Mark.  Hello and welcome everybody.  With me this morning are Tracey Joubert, the CEOs of each of our 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 fourth quarter and full year results and discussing our outlook for the business. You can also find related slides on the Investor Relations page of our website.

[Slide 4]

We accomplished much in 2018, we delivered strong free cash flow and we met our deleverage commitments, restoring underlying EBITDA growth in the quarter and second half, premiumizing our portfolio across our regions including launching Truss our Canadian cannabis beverage JV, scaling volume and profitability in our fast growing International business and continuing to strengthen our European business. Through the year we further scaled our cost saving program which insulated us in part from the effects of weaker industry demand in North America, higher than anticipated input inflationary pressures and challenges associated with the implementation of our US breweries' supply chain system.

We enter 2019 with a US commercial plan focused on mix and share improvement that is fully resourced and showing early signs of impact against Coors Light, a commercial strategy that is working in Europe and International and continually improving commercial trends in Canada.

We are focused on further strong free cash flow delivery and deleverage supported by more than $200 million of cost savings in 2019 and a further $450 million cost savings across 2020-2022. We remain committed to our plan to reinstitute a dividend payout ratio in the range of 20-25% of annual trailing underlying EBITDA upon achieving around 3.75x leverage, which we expect to occur around the middle of 2019.

[Slide 5]

Against this backdrop of progress and commitments, let me share more about what you can expect from our strategy of earning more, using less, and investing wisely before handing the call to Tracey to elaborate on the quarter, the year, and our outlook.

[Slide 6]

In terms of Earning More, we will continue to build even stronger commercial excellence capability with a focus on portfolio premiumization and disruptive growth to drive mix improvements.  Almost 20% of our volume is comprised of above premium brands, and this figure continues to grow, and we see considerable headroom for added growth in all of our markets.

In International, we enter 2019 with an optimum cost structure, improved brand profitability, and a portfolio of above premium brands, gaining strength in our focus markets.

In Europe, our strategy of strengthening our core national champion brands while premiumizing the portfolio is well developed and working.

In Canada, industry trends have been challenging, but our total share trend has improved three quarters in a row and pricing continued to show positive improvement. We will continue to improve Coors Light share trends while premiumizing the portfolio and preparing for the launch of our Truss portfolio.

In the U.S., while we were dissatisfied with the 2018 top-line and share performance, we also believe we have the strategy, people and commercial execution to drive improving performance in 2019 and the longer term. We anticipate further contraction of the U.S. beer industry volumes which we plan to offset by adding resources to accelerate our portfolio premiumization and improve our industry volume share trends.

[Slide 7]

Using Less is our second platform and is designed to fuel growth and protect our bottom line performance.  We are over-delivering on our original cost savings plans for 2017 through 2019, allowing us to offset inflation and protect marketing investment, and as Tracey will cover, we expect to unlock another $450 million of savings over the period 2020 through 2022. These savings are driven by our sustainable productivity driving initiatives such as World Class Supply Chain 2.0 and greenfield breweries in Canada, Global Business Services, new IT programs and our ongoing procurement efforts and more rigorous ZBB across the entirety of our business.

[Slide 8]

Investing Wisely is our third platform, and you know our commitment to deleverage and increase cash returns.  Similarly, we are committed to spending our marketing dollars more effectively than ever by scaling investment behind accelerated portfolio premiumization and through the full adoption of our ROMI approach and the increasing sophistication of our investment planning. I also want to highlight that our spending is often understated by third-party aggregators, reflecting our shift of increasing amounts to digital and experiential platforms.

So with that backdrop, 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, effective from the beginning of 2018, which we will refer to as "revenue recognition" for the remainder of the prepared remarks today.  As outlined in our earnings release, revenue recognition had no significant impact to net income for the full year but did cause some timing differences between quarters, positively impacting EPS by 4 cents this quarter and impacting some year over year comparability for net sales and MG&A, primarily in the U.S. and Canada this quarter. Please refer to our SEC filings for more detail.

Separately, you may have noticed that we filed an 8-K this morning indicating that we restated our 2016 and 2017 financial statements for a technical income tax accounting matter related to the acquisition of the remaining 58% of MillerCoors in 2016 and subsequent remeasurement of deferred taxes in 2017 resulting from the recent US Tax reform.  These restatements did not have an impact on our reported underlying pretax income, underlying earnings per share or underlying free cash flows for 2016 and 2017 as these issues related to items that we previously excluded. Further, such corrections do not impact our anticipated future cash tax benefits resulting from the acquisition, future effective tax rates or are otherwise indicative of the underlying performance of the business. Please refer to our SEC filings for more detail.

I will speak to the quarter and year on a consolidated and regional basis and also our outlook.

[Slide 10]

We continued to see some of the same pressures in the fourth quarter as we did during the first three quarters of the year, mainly industry declines in North America, as well as inflation in the U.S. Our fourth quarter results were also impacted by the timing of inventory levels in the U.S., which drove a further reduction in our financial volumes over brand volume, however, these metrics largely converged for the full year. While these negative factors had an unfavorable impact on our top line results for the quarter, we exercised flexibility and discipline in the P&L, and as a result, delivered underlying EBITDA growth of 3.9 percent on a constant currency basis. This was driven by positive global net pricing, brand volume growth and underlying business performance in Europe and International, cost savings and cost mitigations, as well as reductions in our M, G & A expenses.

[Slide 11]

The full year results were impacted by the same factors, and were further adversely impacted by cycling the indirect tax reserve reversal in Europe, which drove the decrease in underlying EBITDA of 1.5 percent on a constant currency basis.

[Slide 12]

In the U.S., we grew underlying EBITDA 6.4 percent in the quarter driven by lower MG&A expenses, higher net pricing and the favorable impact of the new revenue recognition standard, partially offset by lower volumes, cost inflation and negative sales mix. Lower MG&A expenses were due to spending optimization and efficiencies, as well as lower employee-related expenses including incremental cost reductions related to the restructuring initiated in the third quarter and lower employee incentive expenses. Overall, U.S. brand volumes declined 5.1 percent on a trading-day-adjusted basis for the quarter and domestic sales to wholesalers declined 8.9 percent, in part due to quarterly timing of wholesaler inventories which ended 2018 at normal levels of inventory.

In the quarter, our brand volumes remained below industry trends.  However, we made progress with our top priority, Coors Light, as the brand reversed its negative segment share trend and launched its new marketing campaign near the end of the quarter, re-introducing our cold activated packaging to a whole new generation of legal-aged drinkers. Miller Lite increased share of Premium Lights for the 17th consecutive quarter, while holding total beer industry share, according to Nielsen.  Above Premium performed below our expectations, but we are excited about our 2019 plans to accelerate premiumization of the portfolio.

[Slide 13]

Our full-year U.S. underlying EBITDA decreased 1.5 percent, driven by lower volumes, higher COGS as a result of higher transportation costs, aluminum inflation and volume deleverage, as well as negative sales mix, partially offset by lower MG&A expenses and higher net pricing.  However, we delivered high single-digit underlying EBITDA growth in the second half due to improved sales to wholesaler trends, our accelerated NSR per hectoliter growth in the fourth quarter, and the incremental cost reduction initiatives we executed.  On a full-year basis, brand volume and STWs largely converged as brand volume declined 3.9 percent and STWs declined 4.4 percent.

For the year, we gained market share within the Premium Light segment, while our Economy brands gained segment share and held share of total beer industry, according to Nielsen. In Above Premium, we established a foundation for growth by successfully introducing Arnold Palmer Spiked, established Peroni as the fastest growing European import, and re-launched the Sol brand, while our Regional Craft brand growth continued to far outpace that of the craft segment.

[Slide 14]

In Europe, underlying EBITDA decreased 7.8 percent in local currency in the quarter. This was due to lapping last year’s partial release of a bad-debt provision and the adoption of revised industry guidelines for calculating excise tax in one of our major European markets. We also continued to invest in our First Choice Agenda during the quarter, aiding further growth in our volume and brand mix.  Brand volume increased 3.3 percent, reflecting improved performance of our Global, Above Premium and National Champion Brand portfolios.  We have also continued to expand the reach of our business geographically through our European Export and License team, improving PACC and increasing our absolute volume, royalty income and profit, although this does dilute our NSR per hectoliter.  Our European export and license business now represents approximately 8 percent of our Europe brand volume, and we expect its strong growth to continue.

[Slide 15]

Full-year underlying EBITDA in Europe decreased 8.2 percent in local currency primarily due to the reversal of the indirect tax provision in 2017 but was up 4.3 percent excluding the effect of this reversal. Our European business grew brand volume 2.2 percent as well as improved its brand mix.  Global Brands, Above Premium and National Champion brand portfolios all grew and more than offset losses in the value category as we executed our strategy to premiumize our portfolio.  We also expanded our portfolio through the acquisition of the Aspall Cider brand portfolio and are currently performing ahead of our acquisition business case.  We also continued our disciplined approach toward optimizing marketing investment and cost control.

[Slide 16]

In Q4, our Canada underlying EBITDA decreased 12.0 percent in local currency, driven by lower volumes, negative sales mix, one-time supply chain inventory write-offs, and inflation, partially offset by cost savings and a 2.7 percent increase in net sales per HL in local currency before revenue recognition.  MG&A excluding the impact of revenue recognition was flat in local currency.

Brand volume decreased 2.0 percent as a result of lower volumes in the West and Ontario, partially offset by growth in Quebec.  The introduction of Miller High Life early in the year and growth from Coors Banquet and Belgian Moon was more than offset by declines from other brands including Coors Light and Molson Canadian.

[Slide 17]

Full-year underlying EBITDA in Canada decreased 4.1 percent in local currency, driven by lower volumes, negative sales mix, one-time supply chain inventory write-offs, and inflation partially offset by cost savings and a 0.9 percent increase in net sales per HL in local currency before revenue recognition.  MG&A excluding the impact of revenue recognition was up 2.3 percent in local currency.

Brand volume decreased 2.2 percent driven by industry declines in the West.  The introduction of Miller High Life and growth from Belgian Moon were more than offset by declines from other brands, including Coors Light and Molson Canadian.  Our total share trend has improved three quarters in a row, and Coors Light share of segment also improved three quarters in a row improving to flat in the fourth quarter.

[Slide 18]

In International, underlying EBITDA on a constant currency basis improved by $3.1 million in the quarter driven by increased profitability through a shift to local production in Mexico, higher brand volume in our focus markets, and lower MG&A. This was partially offset by unfavorable sales mix.

Brand volume increased 1.1 percent driven by organic growth in our focus markets, led by Miller Lite, Blue Moon, and Miller High Life.

Net sales per HL decreased 18.0 percent in constant currency driven by the shift to local production in Mexico in favor of a license model, resulting in higher margins.

[Slide 19]

Our International business has increased its profitability substantially over the past year as we improved underlying EBITDA by approximately $19 million on a constant currency basis to $22.5 million, driven by the same factors as in the fourth quarter as well as improved profitability of our International focus brands, Coors Light, MGD and Miller Lite.

Brand volume increased 2.2 percent driven by organic growth in our focus markets, led by Miller High Life, Miller Lite, and Blue Moon.

Net sales per HL decreased 6.0 percent in constant currency as the shift to local production in Mexico occurred as planned during the second half of the year.

[Slide 20]

Moving to outlook, our earnings release provides full details of our guidance.

  • As Mark said, we remain committed to our plan for rating agency leverage of approximately 3.75x EBITDA around the middle of 2019, and the dividend intentions and EBITDA margin expansion guidance we communicated in June are unchanged.
  • In terms of cost savings, we remain confident in the $700 million of savings for the three years ending 2019 and now also plan an added $450 million for the period 2020 through 2022.Procurement and supply chain, including brewery optimization, constitute the majority of these new savings, with IT and global business services also contributing to the $450 million.We expect these savings to help fund our internal investment plans and the costs of achieving the savings, as well as offset input inflation, spread evenly over the period 2020 through 2022.
  • We expect our International business to deliver a strong double digit percentage increase to underlying EBITDA in constant currency for full year 2019.
  • We estimate underlying free cash flow of $1.4 billion plus or minus 10% this year.We believe the main components of the difference between the midpoint of our estimate and consensus are lower estimates of capital spending - remember we are still optimizing our brewery footprint in Canada - and higher estimates of cash taxes paid - as a result of one-time opportunities realized with tax reform in 2018.
  • We are no longer communicating guidance on cost of goods sold per HL by business unit in favor of estimated cost of goods sold trends on a total company basis.Of course, the U.S. remains the biggest driver of our cost of goods sold, and in 2019, we expect U.S. costs of goods sold per HL to increase at a similar rate to our estimated consolidated percentage increase of up mid-single digits.This amount reflects hedges on aluminum and other key inputs, is per hectoliter, and is on a constant currency basis vs 2018.

As shared earlier, our US distributors ended 2018 with typical levels of inventory.  This was below what we expected on our last earnings call due to lower than anticipated inventories outside of the Milwaukee Brewery orbit. Milwaukee did see the expected build in preparation for the February go-live. We expect to complete implementation of our new ordering system across our U.S. brewery network over the course of this year and foresee shipments converging with STRs for the year. Keep this in mind as you consider quarterly phasing in 2019.

In November, we announced that we reached a settlement, amicably resolving all outstanding issues in the Pabst case, and as you know, these terms are confidential.  The original contract still has a number of years to run and, for the near term, has not changed.

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

[Slide 21]

[Mark Hunter:]

...  Thanks, Tracey.

[Slide 22]

Earn more is one of the three platforms by which we drive PACC, and this pillar is built on our First Choice commercial excellence approach.  I’d like to give you some evidence of that by region, followed by a few comments on the increasing potential of our enterprise growth actions.

[Slide 23]

In the US, Miller Lite continues its strong segment trend while Coors Light’s relative performance improved with the brand holding share of segment in Q4.

In 2019 we have plans to accelerate our Above Premium portfolio through higher investment. We plan to double our media spend on Blue Moon, the number one national craft brand, air national advertising for Peroni for the first time, build on a very successful year-one for both Arnold Palmer Spiked and Sol, we’ll also increase Henry's Sparkling's presence in the fast growing hard seltzer category, focusing on the brand's clear product differentiators of zero sugar and only 88 calories and introduce a number of innovations, including Cape Line, Saint Archer Gold, Crispin extensions and Sol Chelada - all before this summer.

Our US business enters 2019 having further strengthened its position as the trusted category captain across chain accounts in both the off and on premise and more broadly our customer excellence performance is market leading and improving further, as evidenced by the Advantage Survey results.…and allied to this we have ramped up our ecommerce approach within joint business plans and continue to build competitive advantage through our technology enabled field sales teams with tools such as BeerMate, which we are rolling out globally.

We are also thrilled to welcome Michelle St. Jacques as the new Chief Marketing Officer and Brian Erhardt, as our new Chief Integrated Supply Chain Officer for the U.S. business.

[Slide 24]

Our new Coors Light advertising is now on air, and we know we are moving in the right direction with the brand, allowing us to take even more share in premium lights.

Coors Light will continue to emphasize its cold, Rocky Mountain positioning as the World's Most Refreshing Beer.  It will also invest more than ever on digital and social channels to engage and recruit 21-34 year old drinkers.

Miller Lite, the original light beer with less carbs and calories, will further enhance its competitive messaging to drive greater consumer affinity and brand switching from its major competitor.

[Slide 25]

In Europe, we continue to move in the right direction. Our brand volumes are growing and premiumizing.  Our National Champion portfolio inflected to positive volume growth last year, our Global Brands continued to grow well in excess of the industry, and our above premium and craft portfolio also contributed to growth and mix.

Our First Choice for Customer focus is also strengthening our customer relationships. For example, according to the Advantage survey of UK retailers, we rate number one in the Multiple On-Trade across all beverage suppliers.

[Slide 26]

We are delighted our National Champion brands in Europe had such a solid year, and we still aim for more.  Our largest brand, Carling, has just begun a major new 360 degree campaign, “Made Local”, which started this month, and will continue throughout 2019 and continue to strengthen the brand's market leading position.

Finally, in Europe, we are exporting and licensing our brands to multiple new markets.  We are generating increasing profit from this business and are excited about its future because it is low capital intensity and offers considerable room for growth.

[Slide 27]

Our First Choice Commercial excellence approach and capability is building in Canada too.

As I mentioned earlier, in terms of commercial performance, there are multiple highlights.  Our total share trend has improved three quarters in a row and Coors Light’s segment share also improved three quarters in a row, improving to flat in the fourth quarter. Craft volume grew driven by Belgian Moon and Creemore and our non-alcoholic portfolio of Coors Edge and Heineken 0.0 is delivering strong volume and segment share growth. In the value segment, we delivered strong share growth driven by our simplified portfolio strategy and the launch of Miller High Life.  As we look at 2019 and beyond, we are excited by the potential we see from our innovation pipeline.  Coors Slice, for example, is an innovation that strengthens the Coors trademark, and we are encouraged by the tests behind our pending introduction of Aqua-Relle, our hard sparkling water.

Our commitment to customer excellence includes the adoption of BeerMate to strengthen field sales management and promising joint business plan pilots with key customers.  For example, a pilot with Ontario’s LCBO is producing beer category growth well in excess of the total industry performance.

[Slide 28]

Our two largest brands will benefit from new advertising, brand redesign, and innovation in 2019.

For Coors Light, we launch our new “The Mountains Are Calling” campaign and introduce new packages, including a new chill pack in time for summer and the Molson trademark enters 2019 with a new brand redesign and communication platform expected to unlock latent passion for the brand.

[Slide 29]

The Miller trademark returned to our portfolio in 2016, and we plan to build on a very successful 2018:  building awareness and distribution of Miller High Life since its launch early last year and adding to the success of MGD in other non-U.S. markets by expanding the brand’s availability and above premium positioning.

 [Slide 30]

As you know, the MillerCoors transaction also gave us the opportunity to get bigger internationally.  In 2017, we began executing plans for improving our portfolio, route to market, and profitability simultaneous with undertaking the structural changes adding approximately $100 million in revenue to this business.

[Slide 31]

Last year was year-one of our new International strategy, targeting focus markets and implementing the many actions that have dramatically improved profitability.  These include our shift to local production in Mexico, favorable changes in the pricing of Coors Light, MGD, and Miller Lite and accelerated growth of Blue Moon and Miller High Life, and standout performance at retail.

[Slide 32]

International’s recent wins include MGD capturing leadership of Paraguay’s premium segment, our new Blue Moon Tap House in Panama-the first of many, and strong growth across our portfolio in Latin America and India.

Looking forward, our International business will remain committed to top- and bottom-line growth driven by continued focus on portfolio mix improvements, building capabilities to expand within our priority markets and potential strategic entry into new markets.

[Slide 33]

Clearly we are more than the sum of our regions, and our Enterprise Growth team is helping our business unlock that value through our global brands, customer excellence, and disruptive growth.

Our Global Brands span many markets and still have enormous potential.

Coors Light continues to show very strong volume growth in Europe, and is contributing to an improvement in region profits in Mexico, where we reduced promotional intensity .

Miller Lite is responding positively to the change to its original white packaging in over 20 markets, MGD and Miller High Life are showing significant growth outside of their home markets from LatAm to Europe to India.

Staropramen outside of Czech Republic continues to grow strongly across Europe, responding positively to its new visual identity with consistent messaging, and finally

Blue Moon continues to grow in multiple markets, and we expect it to return to growth in the U.S. this year.

[Slide 34]

There are many examples of our success delivering customer excellence-from the roll out of BeerMate to the introduction of our B2B online platform to the use of advanced analytics to drive category growth, to embedding our ecommerce approach into joint customer business plans. This approach has been recognized through multiple customer surveys across North America and Europe.

[Slide 35]

Innovation and disruptive growth represents approximately 7% of our net sales. We continue to reenergize our core brands expanding to new occasions including low and no alcohol. We also continue to expand the footprint of our portfolio into new and emerging segments such as sparkling cocktails and hard sparkling water. Additionally, we have a range of initiatives such as Truss, which we expect to launch its nonalcoholic cannabis infused beverages portfolio in the fall of 2019 following legalization in Canada, the expansion of Blue Moon tap rooms and our entry into markets such as kombucha. All of these initiatives are underpinned by continuous investment in our brewing capability and R&D.

[Slide 36]

Finishing on PACC and our efforts to drive shareholder value, we are pleased to be deleveraging at the pace we committed to and we look forward to upping our cash returns to shareholders later this year, continuing our balanced approach to capital allocation, and unlocking the topline 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 37]

 

[Mark Swartzberg]

Thanks, Mark.

A bit of housekeeping, we look forward to meeting with many of you over the course of the year and also want you to know we plan to host an investor event similar to the one held historically in June every two to three years.  Between such meetings, we plan to continue our many other forms of corporate access, including headquarter visits, field trips, non-deal roadshows, and broker conferences.

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