Molson Coors Brewing Company

2017 Third Quarter Earnings Conference Call

November 1, 2017

Speakers:

1) Mark Hunter, President and Chief Executive Officer

2) Tracey Joubert, Chief Financial Officer

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[Operator:]

Welcome to the Molson Coors Brewing Company 3rd quarter 2017 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, and the consolidated and U.S. segment results are presented versus pro forma results a year ago, which reflect the acquisition of Miller Coors as if it and the related financing had occurred on January 1, 2016. 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. If you have multiple questions, please ask your most important question first and then return to the queue to ask additional ones. Now, I would like to turn the call over to Mark Hunter, President and CEO of Molson Coors.

[Mark Hunter:]

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

Thanks for joining us today.

With me on the call this morning from Molson Coors, we have:

  • Tracey Joubert, Global CFO,
  • Gavin Hattersley, CEO of our U.S. business,
  • Fred Landtmeters, Canada CEO,
  • Simon Cox, CEO of Europe,
  • Stewart Glendinning, International CEO
  • Sam Walker, our Global Chief Legal and Corporate Affairs Officer,
  • Brian Tabolt, our Global Controller, and…
  • Dave Dunnewald, Global VP of Investor Relations.

Today, Tracey and I will take you through highlights of our 3rd quarter and year-to-date results, along with some perspective regarding the balance of 2017. Consistent with last quarter, we are also offering slides that show both reported and constant currency results for both the quarter and year to date. You can view and follow along with these slides using the link on the Investor Relations page of our website.

At Molson Coors Brewing Company, we will deliver growth and long-term shareholder value through our First Choice for Consumers and Customers approach, an expanded international business, the delivery of integration savings, ongoing cost savings, a more efficient global organization, and a relentless drive for financial performance.

Our focus is to deliver both top- and bottom-line growth. Year to date, we have delivered worldwide brand volume growth driven by our global priority brands, and on a constant-currency basis, NSR per hectoliter is up 2.4%, as our portfolio premiumization has driven pricing and mix benefits around the globe.

To this point, in terms of progress, above-premium brand volumes increased 19% in the quarter and 20% for the year. With this strong growth, our above premium brands now represent 18% of our total volumes.

At the same time, we have improved our EBITDA margins this year while investing in the business, with underlying EBITDA margins up by nearly 40 basis points year to date.

Our 2017 underlying free cash flow generation has been strong. We have begun delevering our balance sheet, and we are generating cost savings ahead of our plan, which has helped to mitigate higher-than-anticipated input cost inflation.

A question I get when I talk with investors is how we prioritize our top- and bottom-line goals. The management team and our Board address this important point as follows. We first will drive margin expansion and bottom-line growth by delivering cost savings, ensuring efficient brand investments, and paying down debt. Second, we will drive an improved top line, through our commercial excellence approach, which provides the most sustainable source of profit growth over the medium to long term. This is our order of priority. Additionally, we will maintain our profit focus and our continued drive for Total Shareholder Return through PACC, or Profit After Capital Charge, which is our capital-allocation tool.

One year on from the close of the MillerCoors transaction, the bigger, better and stronger Molson Coors is driving a cohesive and distinctive First Choice commercial agenda, an expanded international business, a more efficient global organization and a relentless focus on financial performance….all underpinned by highly engaged employees who are playing to win.

With that as a backdrop, I'll now turn it over to Tracey to give financial highlights.

[Tracey Joubert]

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

Let’s review our consolidated financial headlines for the 3rd quarter versus pro forma results a year ago, except for cash flow, which is reported on a year-to-date, actual basis …

  • Net sales decreased 2.1%, due to lower financial volumes, partially offset by positive global pricing, sales mix, royalty volume and foreign currency movements. Net sales in constant currency declined 3%.
  • Global net sales per hectoliter increased 2.9%, and 1.9% in constant currency, due to higher global pricing and sales mix.
  • Worldwide total brand volume increased 0.6%, driven by strong growth in Europe and International, partially as a result of adding the Miller global brands business, and also from growth in some of our core brands. Global priority brand volume increased 2.4%. Financial volume decreased 4.8%, driven by the U.S. and Canada, which were adversely impacted by reductions in wholesaler inventories, contract brewing and brand volumes. These volume declines were partially offset by growth in both Europe and International due to added Miller International brand volumes, as well as positive organic brand performance.
  • U.S. GAAP net income decreased 12.1%, and underlying non-GAAP net income decreased three-and-a-half percent. Underlying results were primarily attributable to lower financial volume, higher brand amortization expense, increased G&A costs and a higher effective tax rate, partially offset by positive pricing and mix, cost savings and lower interest expense.
  • Underlying EBITDA decreased 1.2% on a constant-currency basis.
  • Underlying free cash flow compared to actual results last year increased nearly 80%, driven by the addition of the other 58% of MillerCoors cash flows, as well as lower cash paid for taxes, which were partially offset by higher cash paid for interest and capital expenditures.
  • We ended the quarter with net debt of $11.3 billion, and we made an additional, discretionary contribution of $200 million to our U.S. defined-benefit pension plan in the third quarter as part of our deleveraging goals bringing our total cash contributions to approximately $310 million for the year. We remain committed to investment-grade debt ratings and reducing our leverage ratio to about four times on a rating-agency basis by the end of 2018.

Year-to-date, we improved underlying EBITDA by 1.8% in constant currency, with strong NSR per hectoliter growth and total worldwide brand volume up 1.6%.

Now, I’d like to share some regional highlights from the 3rd quarter….

In the U.S., we grew underlying EBITDA 0.8% on a pro forma basis in the quarter, resulting from increased domestic NSR per hectoliter, driven by higher net pricing, as well as by cost savings and lower MG&A expenses, partially offset by the impact of lower shipment volumes. Overall, U.S. STRs declined 2.9% for the quarter on a trading-day-adjusted basis, in part because the U.S. volume environment remains challenging. Domestic sales to wholesalers declined 7.2%, with nearly two-thirds of the gap between STRs and STWs driven by a reduction in distributor inventories, and the rest due to one less trading day this quarter. Distributor inventories were reduced in the third quarter following higher-than-planned levels at the end of the second quarter.

Our year-to-date U.S. performance was similar to the 3rd quarter, with a 2.2% increase in underlying EBITDA, 0.8% higher NSR per hectoliter, and a 2.3% decline in STR volumes. Despite the difficult backdrop, we made progress this quarter against our portfolio strategy, as Mark will share with you shortly.

Our Canada underlying EBITDA declined 0.5% in the quarter, driven by the impact of lower domestic volume, partially offset by positive pricing and foreign currency. On a constant currency basis, underlying EBITDA declined 5.7% during the quarter. We drove strong NSR per hectoliter growth with a combination of price and mix benefits, but industry volume trends remained difficult, declining approximately 2%. Our market share grew slightly, driven by the return of the Miller brands, along with strong above-premium growth from Coors Banquet and Belgian Moon.

Our 3rd quarter Canada performance represents a trend improvement compared to earlier in the year, as year-to-date underlying EBITDA declined 10.7% in constant currency. Year-to-date NSR per hectoliter grew 2.6% in local currency, reflecting positive net pricing and mix.

Europe continued to produce strong results this quarter, with underlying EBITDA up 13.6%, driven by higher volume, positive sales mix and pricing, increased net pension benefit, and favorable foreign currency. Constant currency EBITDA increased 10.4% in the quarter. Brand volume increased 9.6% in the quarter, primarily due to the addition of the Miller brands and the transfer of royalty and export brand volume across Europe from our International business. Even without this incremental volume, we continue to achieve growth from our offering of core and above-premium brands, which helped drive net sales per hectoliter growth during the quarter.

Year-to-date underlying EBITDA, NSR per hectoliter and brand volumes in Europe grew strongly.

Underlying EBITDA for our International business was a loss of one million dollars in the quarter, which represents an improvement from a year ago. Although the impact of hurricanes presented a significant challenge in several of our high-margin Caribbean markets, Coors Light continued to drive strong volume growth across Latin America, and we have moved off the Miller transitional service agreements and established platforms for growth with local partners. Brand volume increased 64.7% in the quarter and our third quarter net sales nearly doubled, driven by this higher volume, along with positive pricing, while reported net sales per hectoliter declined about 11.6% due to sales mix changes.

Year-to-date underlying EBITDA for International improved from a loss of 4.9 million dollars last year to income of 3.1 million dollars this year, with brand volumes up 56.3% and reported NSR per hectoliter down 1.3%.

Please see the earnings release for a detailed review of our business unit financial results in the 3rd quarter, as well as our latest outlook and guidance targets.

This quarter, we have the following updates regarding our guidance metrics:

  • For the medium term, we continue to expect underlying EBITDA margins to increase an annual average of 30 to 60 basis points over the next 3 to 4 years. For 2017, we anticipate margins being in this range. Also, it is important to remember the cash tax benefits associated with the MillerCoors transaction, which were $109 million this quarter and are expected to be more than $400 million for full year 2017.
  • We now anticipate total capital spending of approximately $650 million, plus or minus 5%, which is updated from $750 million, plus or minus 10%.
  • Underlying corporate net interest expense of approximately $360 million, plus or minus 5%, is updated from consolidated net interest of $370 million, plus or minus 10%.
  • We have tightened our underlying effective tax rate range to 26 to 28% from 24 to 28% previously.
  • We now expect cost of goods sold per hectoliter for the International business to increase at a low-single-digit rate – versus a mid-single-digit decrease previously.
  • We have raised our outlook for pension income to approximately $27 million, up from $24 million.
  • Although we are not changing our 2017 cost savings guidance of “more than $175 million,” we are pleased that these savings are coming in ahead of our original plans because it is helping to cover inflation, particularly related to aluminum, which is higher than our expectations early this year.

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

[Mark Hunter:]

... Thanks, Tracey.

I began this call by outlining our plans to drive total shareholder returns. While the business environment, especially in North America, remains more challenging than anticipated, we believe our ambition to be First Choice for our Consumers and Customers will generate sustainable returns to our shareholders.

Our regional business priorities are clear and consistent:

In the U.S., we remain focused on gaining segment share in Premium, growth in Above Premium and stabilizing our Below Premium brand share. As you can see on this slide, this drives our consumer excellence approach. Let me give you some proof points on our progress.

In premium, Miller Lite is well on track to become the #3 beer in America. Strong momentum for Coors Banquet continues, as we expect 2017 to mark the eleventh consecutive year of annual growth for this iconic American brand. In 2018, Coors Light will relentlessly strengthen its message as “the World’s Most Refreshing Beer,” including some exciting packaging changes. Both Miller Lite and Coors Light are powerhouse brands – they gained segment share again this quarter, a trend that has extended for more than two-and-a-half years.

In above premium, Leinenkugel’s Summer Shandy had a record-breaking year with volumes up low-double digits. We plan to build on this success next year through a number of packaging and shandy innovations. Meanwhile, the Blue Moon family is widening its lead as the world’s #1 craft brand, and Blue Moon Belgian White will continue its growth momentum with new SKUs and a focus on our legendary on-premise orange ritual, which is driving strong velocity and incremental tap handles across the US. Per Nielsen, Blue Moon and Leinie’s families accounted for 22% of total craft beer volume growth year to date in the U.S.

In regional craft, Terrapin, Hop Valley, Revolver, Colorado Native and Saint Archer are all growing at strong double-digit rates – well ahead of the overall craft segment, as we continue to integrate and expand geographically. And Peroni is growing and accelerating this year as we have enhanced the geographic reach of this aspirational import brand through improved market prioritization.

In below premium, our new packaging types, price points and commercial focus are delivering a significant trend improvement in this segment, as per our strategy.

We are also very excited about our brand additions in the U.S. As of October 1, we assumed the rights to import, market and distribute Sol, which further strengthens our above premium portfolio. And over the next few months, we will bring to retail new high-potential brands with Arnold Palmer Spiked, designed to take share in the valuable alcoholic tea segment, and Two Hats, which is positioned to recruit new legal-drinking-age consumers into beer.

We’re confident we have the right plans to achieve growth, and we will continue to execute with relentless focus while looking for further Build, Borrow and Buy opportunities for additional above-premium scale. Our customers tell us that our First Choice approach to sales and supply chain execution is working, with 14 supplier awards so far in 2017. We also continue to roll out our Building with Beer tool to new channels and customers. These are the building blocks for long-term, profitable growth for our US business unit.

In Canada, our consumer excellence teams will remain focused on gaining segment share in Premium, accelerating our growth in Above Premium and stabilizing our Below Premium brand share. Improving the performance of our two biggest brands, Coors Light and Molson Canadian remains the number 1 priority, and we are currently executing upweighted volume-driving activities with consumers.

Our above premium performance, led by Coors Banquet, MGD, Belgian Moon and the Heineken portfolio, is accelerating with exciting further ‘lift and shift’ brand additions planned in 2018, and we are executing a plan to simplify our below premium portfolio with the launch of Miller High Life from late in the 4th quarter. Since the introduction of Coors Banquet just a few years ago, exceptional consumer demand has propelled this brand at double-digit growth rates to become the most successful new-product introduction in the past five years in Canada.

Our performance across the portfolio will also be driven by customer excellence, as we lift and shift best-practice sales tools from other regions. As an example, we have started to see improved volume performance from the early retail adopters of the Building with Beer program.

Our supply chain team continues to prioritize efforts on building and planning for the new British Columbia and Greater Montreal breweries. This work will create efficiency and flexibility in our supply chain, which we expect to unlock material savings in the medium to long term.

In Europe, consumer and customer excellence is driving the top and bottom line. We will continue to drive a balanced portfolio approach as we strengthen our national mainstream brands and continue to premiumize by driving our craft portfolio, Staropramen, Coors Light and cider brands, along with the addition of the Miller brands and the royalty and export business in the region.

In July, we completed the purchase of Birradamare, a small Italian craft brewery, which provides us another opportunity in Italy and select export markets to build on our strong above-premium performance. So far this year, our balanced portfolio approach across Europe resulted in maintaining our share-of-segment in our mainstream brands, as well as generate double-digit growth in Above Premium. One driver of successful portfolio premiumization in the quarter and the last few years is Coors Lights ongoing focus on “ice cold, rocky mountain refreshment” which is resonating powerfully with consumers, and Coors Light has grown to become our second-largest brand in the U.K. Above-premium Staropramen (outside the Czech Republic) has also grown at strong double-digit rates across Europe, such that the total Staropramen family now exceeds 2.5 million hectoliters of annual volume in the region.

Furthermore, in what remains a fiercely competitive environment in the U.K., our First Choice customer approach earned us the number-one ranking in the Advantage survey of multiple grocers for the second consecutive year.

Our International business will continue to leverage our strong global brands, partnerships and commercial capabilities around the world and focus our brands on the most attractive segments to grow Coors Light, Miller brands and Blue Moon. Our customer teams have successfully rolled out a common segmentation analysis in all our markets, Coors Light is growing at strong double-digit rates in Latin America, and within a year of acquiring the Miller brands, we are currently launching the original white can packaging for Miller Lite to more than 20 markets globally.

The scaled-up International business requires up-front investments to grow our brands, and as indicated earlier this year our MG&A will be higher this year, funded by a step change in gross profit, as we lay the foundation for accelerating top- and bottom-line growth from 2018 onwards. We expect our gross profit to be at the lower end of our 2017 guidance range of $90 million +/- 10%, partially due to the impact of the hurricanes in the Caribbean. We expect this impact of approximately 3 to 5 million dollars to flow through to the bottom line this year as we continue to invest in our brands. For 2018, we have plans to offset these negative impacts and continue to drive top-line growth and improved profit performance from our International business.

In reviewing our performance in the 3rd quarter, as well as year to date, we are building traction against our strategic priorities, as indicated by delivering growth in global brand volume, net sales per hectoliter and underlying EBITDA margin. In the 4th quarter this year, we anticipate less significant distributor inventory dynamics in the U.S. than we saw in the 3rd quarter, along with a favorable comparison in Europe as we cycle a $50 million indirect tax provision in the 4th quarter of last year. Despite challenging market conditions in North America, we remain on track to deliver our 2017 business and financial plans, exceed our original cost savings targets and cash flow goals, as well as maintaining our investment-grade debt ratings.

One year on from the close of the MillerCoors transaction the bigger, better and stronger Molson Coors is driving a cohesive First Choice commercial agenda, an expanded international business, a more efficient global organization and a relentless focus on financial performance….all underpinned by highly engaged employees who are playing to win.

[pause]

Now, before we start the Q&A portion of the call, a quick comment:

As usual, our prepared remarks and slides will be on our website for your reference within a couple of hours this afternoon. Dave Dunnewald and Kevin Kim will be available via telephone or email to assist with any additional questions you may have regarding our quarterly results.

So, at this point, Rachel, we would like to open it up for questions, please….

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