Molson Coors Brewing Company

2017 Second Quarter Earnings Conference Call

August 2, 2017


1) Mark Hunter, President and Chief Executive Officer

2) Tracey Joubert, Chief Financial Officer



Welcome to the Molson Coors Brewing Company 2nd 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 – – 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 in order 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, Laura. 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, VP of Investor Relations.

On the call today, Tracey and I will take you through highlights of our 2nd quarter 2017 results for Molson Coors Brewing Company, along with some perspective regarding the balance of 2017.  On this call, along with our remarks, we are also offering slides that show both reported and constant currency results, and you can view and follow along with these slides on the Investor Relations page of our website.

In the 2nd quarter, we continued to drive our First Choice for Consumers and Customers agenda, with laser focus on strengthening our core brands, premiumizing our portfolio, accelerating our international footprint, enhancing our customer partnerships, and driving the integration of MillerCoors and the Miller brands globally to unlock synergies and other cost savings.  As a sign of progress against this agenda, our team delivered solid growth in constant currency net sales, global brand volume, underlying EBITDA, net income, earnings per share and free cash flow.  Additionally, we exceeded our goals for cash generation and debt reduction in the first half of this year and have maintained our investment-grade debt ratings.  Our second quarter performance was in-line with our expectations, and we remain on track to deliver our 2017 business and financial plans, cost savings targets and cash flow goals. 

Now, I'll turn it over to Tracey to give 2nd quarter financial highlights.  Tracey...

 [Tracey Joubert]

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

Following are our consolidated financial headlines for the 2nd quarter versus pro forma results a year ago, except for cash flow, which is reported on an actual basis …

  • Global net sales per hectoliter grew 1.7% in constant currency, driven by the U.S., Canada and Europe.
  • Worldwide total brand volume increased 2.3%, due to strong growth in Europe and International, partially as a result of adding the Miller global brands business, but also from growth in some of our core brands. Our global priority brands grew 4.6%.
  • S. GAAP net income increased 4%, and underlying non-GAAP net income increased 2.9%, driven by increased brand volume, higher net pricing, positive sales mix, cost savings and lower marketing spending, partially offset by a higher underlying effective tax rate. This non-GAAP result was up nearly 50% on a reported basis, which demonstrates the substantial earnings accretion from the MillerCoors transaction.
  • In the 2nd quarter, we reported nearly $794 million of underlying EBITDA, a 4.2% increase from the pro forma result a year ago. In constant currency, underlying EBITDA was up 5.7%.
  • Year-to-date underlying free cash flow was $586.7 million, which more than tripled versus $176.9 million in the first half of 2016. This significant increase was driven by the addition of the other 58 percent of MillerCoors cash flows, as well as lower cash paid for taxes, which were partially offset by higher cash paid for interest.
  • With this strong free cash flow, we reduced our net debt by more than $522 million in the second quarter.

Now, I’d like to share some regional highlights from the 2nd quarter….

In the U.S., we grew net sales and underlying EBITDA on a pro forma basis, with 7.9% earnings growth driven by lower MG&A expenses, higher net pricing, positive sales mix and cost savings.  U.S. domestic net sales per hectoliter, which excludes contract brewing and company-owned-distributor sales, grew 1.0 percent for the quarter as a result of higher net pricing and positive sales mix, partially offset by cycling a multi-year adjustment in federal excise tax expense last year.   Cycling this adjustment in federal excise tax reduced our NSR per hectoliter by 40 basis points this quarter.  Overall, U.S. STRs declined 1.9 percent, but against the backdrop of a weak industry, we achieved our best first-half market share trend in more than three years.  STRs were particularly soft late in the second quarter, which drove moderately higher-than-planned inventories for our distributors at the end of the quarter – but also lower out of stocks around the Fourth of July holiday.  We expect the majority of this additional inventory to be sold through by the end of the 3rd quarter. 

We grew our share of the premium light segment, with Coors Light achieving its ninth consecutive quarter of increased segment share and Miller Lite reaching 11 consecutive quarters of increased segment share.  Overall, our Premium Light segment volumes were down low-single digits. Coors Banquet grew volume at a mid-single-digit rate and also increased segment share.

Our total above premium segment returned to growth, up low-single digits driven by both our regional and national craft brands.   Blue Moon Belgian White, Leinenkugel’s, and Peroni grew strongly, while Redd’s and Henry’s posted lower volume. Zima, which returned to the U.S. market for a limited period, was Nielsen’s number-five growth brand for the four weeks ending July 1.  Our below-premium brands were down low-single digits for the second consecutive quarter, a significant trend improvement from the past several years. 

Our Canada underlying EBITDA declined 9.7% on a reported basis, primarily due to the impact of lower volume, input cost inflation, and negative foreign currency movements.  Underlying EBITDA in constant currency was 7.2% lower.  Overall Canada brand volume declined 1.3%, as a result of lower domestic volumes, partially driven by soft industry volume.  Including the return of the Miller brands to our portfolio, we increased overall market share for the second consecutive quarter.  Coors Light and Molson Canadian volumes declined in the quarter.  Nonetheless, we continued to drive our First Choice agenda, including revenue management strategies, to bring momentum back to the top line.  As a result, net sales per hectoliter in local currency increased 2.3%, driven by positive pricing and brand mix, primarily due to higher import brand volume.  We continued to premiumize our portfolio through volume and market share gains by our import brands led by Coors Banquet; above-premium craft brands including Belgian Moon and Granville Island; and the addition of the Miller brands.  

Europe grew underlying EBITDA 13.8%, which equates to 21.3% growth in constant currency, driven by higher volume, positive sales mix, the quarterly timing of marketing investments, increased net pension benefit, and the later timing of the Easter holiday this year.  These positive factors were partially offset by unfavorable foreign currency movements.  Brand volume increased 11.5% in the second quarter, primarily driven by the transfer of royalty and export brand volume across Europe from our International business and the addition of the Miller brands, along with the timing of Easter and strong growth from our core and above-premium brands.  Net sales per hectoliter increased 3.7% percent in local currency due to positive mix and net pricing. 

Underlying EBITDA for our International business was a loss of $0.9 million, which improved from a loss of $1.7 million a year ago. Brand volume increased more than 40% in the second quarter to 1.2 million HL.  Our second quarter net sales grew more than 65% due to higher volume, along with positive pricing, while net sales per hectoliter declined 5.5% due to sales mix changes.  This increase was driven by the transfer of our Puerto Rico business from MillerCoors, the addition of the Miller global brands, and Coors Light growth in Latin America, partially offset by the transfer of Europe royalty and export business to the Europe segment.  In Latin America, excluding the addition of Puerto Rico, we grew Coors Light volume at a high-single-digit rate. The Miller brands integration process is continuing to progress as expected, and we have successfully exited almost all of our Transitional Service Agreements during the second quarter.  In each of these instances, we have established routes to market that give us a strong platform for growth. 

Please see the earnings release we distributed earlier this morning for a detailed review of our business unit financial results in the 2nd quarter, as well as our latest outlook and guidance targets.

This quarter, we have made the following adjustments to our guidance metrics:

  • We now expect cost of goods sold per hectoliter for full-year 2017 in our International business to decrease at a mid-single-digit rate, versus a double-digit decrease previously.
  • With the dynamic tax environment in the U.S. right now, we are not changing our tax-rate range of 24% to 28%, but our current view is that our full year underlying tax rate will be in the top half of this range.
  • We now expect cash pension contributions in the range of $300 to $320 million to defined benefit plans in 2017. This range is $200 million higher than our previous target, as we plan to make an additional, discretionary contribution of $200 million to our U.S. plan in the third quarter as part of our deleveraging goals.  Rating agencies treat pension under-funded status the same as debt, so this pension contribution will also benefit our investment-grade debt ratings.  Note that all of these anticipated pension contributions are included in our 2017 underlying Free Cash Flow target of $1.2 billion, plus or minus 10%.
  • This discretionary contribution is a strong indication of the progress we are making in achieving our financial plans and quickly paying down debt. We remain committed to reducing our leverage ratio to about four times on a rating-agency basis by the end of 2018. 

Looking forward, we are focused on three primary financial targets:

  • First, cash generation. We made great progress in this area in the 2nd quarter, and we are confident that we will achieve our cash goals this year.
  • Second, deleverage. We reduced our net debt by more than $522 million in the 2nd
  • Third, we continue to expect underlying EBITDA margin growth to average between 30 and 60 basis points for next 3 to 4 years, while we remain focused on growing our top line, as well.

At this point, I'll turn it back over to Mark for business outlook, wrap up and the Q&A.  Mark....

[Mark Hunter:]

...  Thanks, Tracey.

In 2017, we continue to focus on both top- and bottom-line performance, driven by our First Choice consumer and customer agenda and the integration of MillerCoors and the Miller brands globally.

My priorities remain unchanged as we shape the new Molson Coors to drive total shareholder returns over the medium to long term.

I am leading for a powerful and integrated First Choice culture, the successful integration of our businesses including the associated synergy and cost savings plan, a step change in our global commercial capability to support top-line growth, accelerated performance in our international markets, further global productivity improvements via World Class Supply Chain 2.0, our North American supply chain approach and global procurement, with all of this enabled by a more efficient enterprise approach across global shared services.  We are also investing ahead of the curve for growth in key brands and markets.  As part of this, in the third quarter we plan to invest incrementally at an enterprise level in our brands.  With this approach, we are driving for measured and sustainable performance on both the top and bottom line. 

Through the balance of 2017, our business unit priorities are clear and consistent:

Our U.S. goal of flat volume in 2018 and growth in 2019 remains unchanged.  We remain committed to Coors Light and Miller Lite accelerating their segment share gains alongside the strong volume performance of Coors Banquet…and to further improving the volume trajectory of our economy portfolio.

In addition, we took key steps to strengthen and further premiumize our portfolio, including the addition of Sol, as we signed a 10-year agreement with Heineken, commencing in October of this year for us to import, market and distribute this high potential Mexican beer brand. In addition, we recently announced a partnership with Hornell Brewing Company, part of Arizona Beverages, to market and distribute a new beverage called Arnold Palmer Spiked Half and Half, which takes us into the alcohol tea market in a distinctive way.  Along with a resurgent Blue Moon Belgian White, we will continue to integrate and expand the geographic reach of our recent craft acquisitions, which are growing strongly.

Encouragingly, MillerCoors shared the top spot of the 2017 Tamarron distributor survey as the best malt beverage supplier.  This marks the second consecutive year that our distributors have rated us as their best brewer across a wide range of metrics, and it is a strong First Choice vote of confidence from our distributors who believe in our imperative of getting to volume growth by 2019.

In Canada, we continue to drive our First Choice agenda to bring momentum back to the top line, including a relentless focus on our two largest brands, Coors Light and Molson Canadian.  While still under volume pressure, these brands improved their segment share trajectory in the 2nd quarter. In above premium, we are driving for further growth in the import, craft and cider segments with Coors Banquet, MGD, Creemore, Granville, Belgian Moon, and the Heineken brand family. In addition, we are beginning to leverage Miller Lite alongside Coors Light and introduce Miller High Life to simplify our economy portfolio in Canada.  

In order to further transform our cost base, the construction of our new British Columbia brewery is progressing well, and we recently announced plans to build a more-efficient, more-flexible brewery in the Greater Montreal area in the next few years…. We expect both of these brewery initiatives will unlock material savings in the medium to long term and deliver a highly efficient, fit-for-future brewery network.

In Europe, while strengthening our national mainstream brands, we will continue to premiumize our portfolio with a focus on 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.  Our craft investments have consistently delivered strong returns, and we are continuing to build our craft portfolio, including Sharp’s, Franciscan Well, accelerated expansion of Blue Moon in the region, and the addition of the number-one craft beer in Spain, La Sagra.  In July, we also completed the purchase of Birradamare, a small Italian craft brewery based just outside of Rome, which gives us an opportunity to develop its special brands in Italy and select export markets. Staropramen is growing very strongly across our European markets, and we have now unified the brand visual identity across the Czech Republic and all international markets.

Our International business will continue to leverage our strong global brands, partnerships and commercial capabilities around the world to grow Coors, Miller and Blue Moon. One action we are taking is to lift and shift the original white can packaging for Miller Lite to all markets globally in the 2nd half of this year. The scaled-up International business requires up-front investments to grow our brands, and 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.

In summary, in the 2nd quarter we continued to drive our First Choice for Consumers and Customers agenda in each of our businesses to deliver top- and bottom-line performance.  As a sign of progress against this agenda, our teams delivered solid growth across all key financial measures. We exceeded our goals for cash generation and debt reduction in the first half of this year, and we have maintained our investment-grade debt ratings.  Our second quarter performance was in-line with our expectations, and we remain on track to deliver our 2017 business and financial plans, cost savings targets and cash flow goals.  Equally important, we continue to make progress in our First Choice for Consumers and Customers agenda in each of our businesses, and we will remain resolute on:

  • PACC as the key business decision framework,
  • Using our cash to reward investors and critically ensure a healthy balance sheet,
  • Reducing costs to provide top-line investment firepower, and
  • Making smart investments that deliver brand-led growth and shareholder value.


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.  Although we will not host a follow-up Investor Relations conference call later today, 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.   

Additionally, we hope to see many of you at the Barclays Global Consumer Staples Conference in Boston in early September, or at one of our other investor outreach events in the months ahead.

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

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