Molson Coors Brewing Company

2019 Third Quarter Earnings Conference Call

October 30, 2019

 

 

[Slide 1]

Title Slide

Speakers:

1) Gavin Hattersley, President and Chief Executive Officer

2) Tracey Joubert, Chief Financial Officer

3) Mark Swartzberg, Vice President of Investor Relations

 

[Operator:]

Good day, and welcome to the Molson Coors third quarter 2019 Earnings Conference Call.  Participants can find related slides on the investor relations page of the Molson Coors website.  Our speakers today are Gavin Hattersley, President and Chief Executive Officer, and Tracey Joubert, Chief Financial Officer. With that, I’ll hand it over to Mark Swartzberg, Vice President of Investor Relations.

[Slide 2]

Safe Harbor Slide

 

[Mark Swartzberg:]

Thank you, ___, and hello everyone.

Following prepared remarks from Gavin and Tracey, we will take 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.  We expect you will have various questions on the revitalization plan we announced this morning.  To the extent that you have technical questions on the quarter, we ask that you pick them up with me in the days and weeks that follow.

 

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. GAAP reconciliations for any non-U.S. GAAP measures are included in our news release or otherwise available on the company's website at www.molsoncoors.com. Also, unless otherwise indicated, all financial results the company discusses are versus the comparable prior-year period and in U.S. Dollars.

With that, over to you, Gavin...

 

[Slide 3: Introduction]

[Gavin]

Thank you, Mark.

Hello and welcome everybody.

I’d like to frame the revitalization plan we included in the slides we filed with the SEC and announced to our employees earlier this morning, and which I will review in more depth after Tracey’s remarks.

 

We are one of the world’s leading brewers and own a tremendous portfolio of brands, but we’re over-indexed in declining segments, our core brands have seen years of volume losses and our marketing spend and innovation capabilities haven’t kept up with the competition.

 

Our business is at an inflection point.  We can continue down the path we’ve been on for several years, or we can make the significant and difficult changes necessary to get back on track.  Our revitalization plan is designed to streamline the company, to move faster, and to free up resources to invest in our brands and our capabilities.  Through it, we will create a brighter future for Molson Coors.

 

The plan aims to revitalize Molson Coors, achieving consistent topline growth by enabling us to:

  • Invest in iconic brands as well as opportunities to grow in the above premium space,
  • Expand beyond beer without having to sacrifice support for larger brands in the company’s portfolio, and
  • To create new digital competencies for commercial functions, system capabilities for supply chain and new capabilities for employees.

 

To make this possible, we plan to unlock resources by eliminating duplication, shedding what’s not working and restructuring the organization to better succeed in today’s competitive, fast-paced environment.

 I will review this plan with you shortly.

But first, over to you Tracey for Q3 results.

 

[Slide 4: Tracey Picture/Title]

[Tracey]

...Thank you, Gavin, and hello everyone....I will speak first to the quarter on a consolidated and regional basis then to our 2019 outlook.

 

[Slide 5: Q3 2019]

So, to recap the quarter:

  • Net sales revenue decreased 2.0 percent in constant currency. We delivered strong pricing in each business unit and positive global mix, but this was more than offset by volume declines.
  • Net sales per hectoliter, on a brand-volume basis, increased 3.0 percent in constant currency.
  • Worldwide brand volume decreased 2.4 percent and financial volume decreased 5.5 percent. Global priority brand volume decreased 2.2 percent.
  • Underlying COGS per hectoliter increased 5.9 percent on a constant currency basis driven by inflation and volume deleverage, partially offset by cost savings.
  • Underlying MG&A decreased 2.2 percent on a constant currency basis, driven by slightly lower marketing spend and lower incentive compensation, partially offset by cycling a net benefit from the amicable resolution of a vendor dispute. However, marketing spend per hectoliter was up in the quarter and year-to-date.
  • As a result, underlying EBITDA decreased 5.6 percent on a constant currency basis.
  • Our year-to-date underlying free cash flow was $884.8 million, 13.7 percent below the prior year, driven by lower underlying EBITDA and higher cash tax payments, partially offset by lower capital expenditures and lower cash interest payments.

 

Moving to our business units...

[Slide 6: US Q3]

In the U.S., net sales revenue decreased 2.3 percent, driven by a 6.2 percent decline in shipments to wholesalers, excluding contract brewing, partially offset by positive net pricing and mix.  The shipment decrease was driven by two factors.  First, we cycled last year’s network-wide inventory builds to support our Trenton and Fort Worth brewery go-lives which resulted in very strong STWs in the third quarter of prior year.  Secondly, brand volumes declined 3.9 percent on a trading-day adjusted basis in the quarter.  COGS per hectoliter increased 6.6 percent, driven by inflation, volume deleverage, and other factors, including a substantial unanticipated increase in property tax at our Golden brewery, partially offset by cost savings.  MG&A increased 3.3 percent, driven by cycling a net benefit from the amicable resolution of a vendor dispute in the prior year, partially offset by the incremental cost reductions related to the restructuring program initiated in the third quarter of 2018.  Marketing investment per hectoliter remains higher year-to-date compared to prior year.  As a result, underlying EBITDA decreased 8.6 percent.

 

[Slide 7: Europe Q3]

In Europe, net sales revenue increased 1.7% on a constant currency basis, driven by positive pricing and mix offsetting a slight decline in brand volumes.  COGS per hectoliter increased 3.5% in constant currency, due to inflation.  MG&A decreased 1.7% in constant currency, driven by lower incentive compensation expense, offsetting higher marketing investment focused on our national champion brands and premiumization initiatives.  Marketing spend per hectoliter was up in the quarter and year-to-date.  As a result, Underlying EBITDA increased 0.6% in constant currency.

 

[Slide 8: Canada Q3]

In Canada, net sales revenue decreased 4.9 percent on a constant currency basis, driven by a 5.1 percent decline in brand volume partly due to industry softness, partially offset by positive pricing. COGS per hectoliter increased 9.7 percent in constant currency, primarily driven by volume deleverage, cycling prior year distribution gains, brewery start-up costs and inflation, with a partial offset from cost savings. MG&A decreased 7.7 percent in constant currency, driven by timing shifts of higher marketing investment in Q2 as well as lower incentive compensation, partially offset by Truss joint venture start-up costs.  As a result, underlying EBITDA decreased 12.3 percent in constant currency.

 

In addition, during the quarter we identified a goodwill impairment triggering event due to prolonged weakness in industry performance impacting our long-range expected cash flows. Consequently, a charge of $668.3 million was recorded to specials in the Canada U.S. GAAP results.

 

Also note we estimate Truss related startup costs of 10 to 15 million Canadian dollars in 2019.

 

[Slide 9: International Q3]

In our International business, net sales revenue decreased 15.5 percent on a constant currency basis driven by an 8.6 percent decline in brand volume and negative geographic mix, partially offset by price increases.  COGS per hectoliter increased 6.1 percent in constant currency, driven by geographic mix and inflation.  MG&A decreased 29.0 percent in constant currency, driven by lower marketing spend and incentive compensation expense.  As a result, we delivered $7.7 million of underlying EBITDA, resulting in a 190 percent increase on a constant currency basis.

 

[Slide 10: 2019 Outlook]

Moving to our 2019 outlook, our earnings release details our guidance.

  • In terms of cost savings, we continue to expect a total of $700 million of savings for the three years ending 2019, and Gavin will speak to upsizing of our previously communicated $450 million to $600 million for the period 2020 through 2022, to be spread evenly over that period. The additional $150 million of savings is before one-time costs to achieve and will help fund additional investment.
  • We continue to expect 2019 consolidated underlying COGS per hectoliter to increase at a mid-single digit rate on a constant currency basis.
  • We now expect 2019 consolidated interest expense of $275 million plus or minus 5 percent
  • We expect 2019 capital spending of $700 million plus or minus 10 percent
  • We expect 2019 underlying D&A of approximately $850 million
  • We continue to estimate underlying free cash flow of $1.4 billion plus or minus 10 percent this year.

 

And finally, before I hand the call back to Gavin, a comment regarding the remainder of the year:

  • We continue to expect to ship to consumption in the U.S. on a full-year basis and therefore expect fourth quarter year-on-year change in shipments to exceed fourth quarter year-on-year change in brand volume.

 

With that, back to you, Gavin….

 

[Slide 11: Our Revitalization Plan]

[Gavin]

Thanks, Tracey.

I look forward to speaking with you quarterly to discuss our financial results, but today I want to focus on our revitalization plan to deliver better results than we have in recent years.

 

Our company makes some of the world’s greatest beers and our iconic brands have withstood the test of time. But as the world around us rapidly changes and the nature of competition intensifies, our business performance is lagging.  I’m sure all of you are well aware of that.

 

That is why we are implementing a revitalization plan that includes meaningful change for Molson Coors to unlock significant resources that we can invest back into the company – putting more resources behind our brands, premiumizing and modernizing our portfolio and building new capabilities.

 

[Slide 12: We can compete successfully]

The good news is that as a major brewer with a rich portfolio of iconic brands across key categories, we have the scale and cash flow to improve topline growth. We have the capabilities to succeed.

 

[Slide 13: Financial Discipline]

And while the market joins us in our attention to the topline, our financial performance demonstrates our commitment to strong financial discipline through robust cash flow, balance sheet strength and returning cash to shareholders.

 

[Slide 14: What Has Affected Our Performance]

So why do we need a revitalization plan? All of you know the dynamics we face, and we recognize where we have the opportunity to improve: increase our exposure to growth segments, bigger and faster innovations, and a more simplified and streamlined organization. What’s more, in the past few years our competitors have significantly stepped up their marketing spend and innovation capabilities relative to ours, to keep pace with the changing marketplace, and as such, we must invest more if we expect to drive long-term sustainable success.

 

 

[Slide 15: Our Revitalization Plan]

There are five components in our plan to revitalize Molson Coors…

  • We are going to invest in our iconic brands.
  • We are going to aggressively grow our above premium business.
  • We are going to expand in adjacencies and beyond beer.
  • We will increase our investment in marketing and commercial capabilities.
  • And all of that will be enabled by streamlining our company, resulting in a more effective organization, with additional fuel to fund our investments.

 

As I walk through the plan I will also highlight how things will be different than before.

 

[Slide 16: Invest in Iconic Brands]

We have shown we can improve the performance of our iconic brands and can stabilize brand performance and position for sustainable growth - by accelerating investment behind our largest brands, by focusing on recruitment especially of new legal age drinking consumers, by driving relevance with breakthrough marketing, and by innovating on core brands to attract new legal age drinkers.

 

[Slide 17: Progress on Coors Light]

We’re seeing what’s possible right now with Coors Light in the US.  Now, I understand it’s still very early, but the highly acclaimed Coors Light “Made to Chill” campaign that launched in the U.S. is already showing positive results. The brand is suddenly part of pop culture again – with new partnerships, as a topic on late night TV shows and even as a favorite of the Jonas brothers. So much so that in the past few months the brand has generated more than 2 billion PR impressions. Today, after struggling for years in the U.S., Coors Light is finally gaining segment share and seeing volume improvement under the new campaign. Our plan is to put more resources behind breakthrough marketing like this.

 

[Slide 18: Redefining “Miller Time”]

It’s a model for breaking through the noise of your usual big beer ads that we hope to replicate with the new Miller Lite campaign in the U.S. that just launched during the World Series last week. The brand is redefining the iconic “Miller Time” slogan for a new generation of legal age drinkers, connecting them to Miller Lite in a fresh way that we haven’t done before.

 

These are very different new campaigns for two of our biggest brands. 

 

And under our revitalization plan, we can execute big campaigns for our iconic brands without having to sacrifice our efforts to premiumize and modernize our portfolio.

 

[Slide 19: Aggressively Grow Above Premium]

Now you know we are not happy with our above premium performance, but we are not without our successes.

  • In Europe, we have successfully transformed our portfolio over the last few years and are now sourcing more than 30% of our volume from above premium brands, including increasing strength for Staropramen.
  • In the U.S., this quarter represented Blue Moon’s best quarter since 2017, and Peroni is growing strongly on the strength of the brand and its first national media campaign of the year.
  • And in Canada Belgian Moon is continuing its great run, up forty percent year to date.

 

[Slide 20: Above Premium Innovation]

Our revitalization plan is intended to give us the resources we need to aggressively build on those above premium success stories with our existing brands, with new innovations and potentially through new bolt on acquisitions and investments for our portfolio.

 

This means more money to market big ideas like Saint Archer Gold, Blue Moon Light Sky, and Coors Peak in the U.S. and Coors Slice and Molson Ultra in Canada.

 

It also means enhancing our ability to bring new beverages to the market more quickly and with more precision. We will expand the model that has reduced the time it takes to bring our innovations to market to as little as four months in the U.S. We will also expand a “test and learn” approach that lets us determine market potential for products and then quickly scale up like we are with Movo and Saint Archer Gold in the United States. Going forward, we plan to innovate, test, and scale products faster than we ever have before.

 

[Slide 21: Successes Expanding Adjacencies]

We also expect to be able to invest more in whitespace and beyond beer opportunities. This will give us the ability to invest in the continued growth of recent successes like Carling Black Fruits draught in Europe or taking Movo wine spritzers – our first ever canned wine – national in the U.S.  We also expect it will allow us to fuel an even stronger second year of Cape Line and a stronger third year of Arnold Palmer Spiked in the U.S., which we plan to rapidly scale.

 

[Slide 22: Strong Pipeline of Adjacencies]

And we need to do more. Our pipeline includes the recent introductions of La Colombe hard coffee in the U.S., Pip & Wild premium ciders in the U.K., Vizzy hard seltzer in the U.S. which we plan to launch early next year, and Truss’s new line of Cannabis-infused nonalcoholic beverages in Canada, including the recently announced Flow Glow CBD-infused spring water. You will see us push into these whitespaces faster than we ever have in the past.

 

[Slide 23: Molson Coors Beverage Company]

Our revitalization plan depends upon our competing and winning on the foundation of our great beers.  It also means we must extend beyond the beer aisle, and so beginning January 1, 2020, our corporate name will be Molson Coors Beverage Company. While this is a simple change, the name speaks volumes about who we are and what is possible for our business.

 

[Slide 24: Invest in Capabilities]

We will also invest in expanding in key capabilities. That will mean improving our digital competencies, expanding our data resources and building out our innovation systems. It will also mean investing in tangible plans to build a more diverse and inclusive organization and to support growth opportunities for our people.

 

We also plan to invest several hundred million dollars to modernize our brewery in Golden, Colorado.  This previously planned investment will modernize the brewery to allow for more flexibility, enable us to move with pace and deliver new products to meet changing consumer preferences.  The company is not using the cost savings generated from this revitalization plan to make this brewery investment possible.

 

[Slide 25: Reorganizing to Simplify and Fund Growth]

Those of you keeping models will see we are upping our three-year cost savings plan to $600 million from $450 million.  But the reorganization driving that is much more than a new cost-savings program:

  • It comes with the difficult decision to consolidate and reorganize office locations and eliminate a number of positions.
  • It means a streamlined organization, as we are moving from a corporate center and four business units to two business units – North America and Europe.
    • Our North America business unit will combine the United States, Canada and our corporate center, giving us consolidated leadership teams and enabling us to move much more quickly with an integrated portfolio strategy.
    • The Europe business unit will be structured to allow for standalone operations, developed and supported by a European-based team, including a regional leadership team and commercial and support functions.
    • Our International business provides important growth opportunities, but the existing Molson Coors International team will be reconstituted to more effectively grow our global brands. The international business in the Americas will become part of the North America business unit, while the international business in Africa and Asia will become part of the Europe business unit.
  • It also means a revised leadership team, including Tracey as CFO, Simon Cox as President and CEO of Molson Coors Europe, and Michelle St Jacques as Chief Marketing Officer. We won’t have a President of the U.S. business, rather a significant portion of my job will be dedicated to ensuring our success in our North America business unit.
  • We currently estimate the costs of all these changes will result in total one-time costs in the range of approximately $120M-$180M over the balance of this year, 2020 and 2021.

 

Once the transition is complete our organization will look and act dramatically different than it has in the past and we fully expect to be better positioned to compete in today’s fast-paced, competitive market.

 

[Slide 26: Outlook]

Which takes me to our financial outlook:

  • We expect 2020 to be a transition year and anticipate net sales revenue to be flat to down low single-digits on a constant currency basis. We expect EBITDA to be down mid-single digits off the base of the last 12 months trailing underlying EBITDA of $2.289 billion on a constant currency basis.  We estimate underlying Free Cash Flow of $1.1 billion plus or minus 10%, including higher cash taxes than in 2019 and additional capital spending to support growth.  And we are upsizing our expected cost savings from $450 million to $600 million for the period 2020 through 2022, to be spread more or less evenly over that period.
  • We expect 2021 and thereafter to deliver net sales revenue and EBITDA growth versus 2020, while delivering the remainder of the $150 million in added cost savings.
  • We intend to maintain our investment grade credit rating, and there is no change to our dividend payout objective.
  • The change in structure to two business units will not be effective until January, 2020, and therefore the resulting financial reporting changes will not be reflected until our first quarter 2020 results.

 

[Slide 27: Wrap-Up]

This is a lot of change, but we will execute it efficiently because we cannot wait and risk allowing the competition to continue passing us by, to outspend us, to out innovate us, and to outmaneuver us.

 

We will move faster and free up resources. We will invest in our brands and in our capabilities. We will regain the success of our past, and we will create a brighter future for the Molson Coors Beverage Company.

 

[Slide 28: Q&A]

Thank you for your time and attention, and with that, I'll turn it back to __ for Q&A.

 

[END]

[Gavin]

Thanks, ____.  I know there may be additional questions we weren’t able to answer today. Tracey and I are planning to meet with many of you over the next few weeks to answer any clarifying questions you may have, and in the meantime, you can always contact Mark Swartzberg. With that, thank you everyone for participating in this morning's call.