Molson Coors Brewing Company

2017 Fourth Quarter Earnings Conference Call

February 14, 2018

[Slide 1]

Title Slide

Speakers:

1) Mark Hunter, President and Chief Executive Officer

2) Tracey Joubert, Chief Financial Officer

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[Slide 2]

[Operator:]

Good day and welcome to the Molson Coors Brewing Company 4th 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 MillerCoors 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.

[Slide 3]

 [Mark Hunter:]

Thank you, Phil. 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,
  • Sergey Yeskov, our new International CEO, who early this year moved over from leading our commercial teams in Canada,  
  • Lee Reichert, our incoming Chief Legal and Corporate Affairs Officer
  • Brian Tabolt, our Global Controller, and…
  • Dave Dunnewald, Global VP of Investor Relations.

Before diving into results, I wanted to take a moment to publicly recognize a couple of people. Firstly, Sam Walker who has led our Legal and Corporate Affairs teams and has been on our executive team for almost 13 years.  He is retiring from our business at the end of this month to pursue an exciting opportunity in the public service sector in Colorado. For me personally through enormous change, Sam has been a trusted advisor, a good friend and a constant champion for our company and everything it stands and strives for.  These are big shoes to fill, and we are delighted to have Lee Reichert ready to step into this important role next month.

Secondly Dave Dunnewald our Investor Relations VP who has announced he will retire in the first half of this year. Dave celebrates 35 years of service this year and started when our beers were only sold in 18 western states. For the last 26 years, Dave has led our IR effort, has led 113 quarters of earnings calls and has seen our enterprise value grow from less than $1 billion to almost $30 billion. Dave, thank you and best wishes.

Today, Tracey and I will take you through our plans to drive long-term total shareholder returns, highlighting 4th quarter and full year 2017 results, and discuss our outlook for the business.  We are also offering slides that show results on the Investor Relations page of our website.

[Slide 4]

2017 marked the first full year of the bigger, stronger Molson Coors and our full year results demonstrated balance and progress against both our bottom-line and top-line goals.  Integration, synergies and costs savings were all delivered on or ahead of plan by engaged employees around the world, who are aligned behind our First Choice for consumer and customer ambition. 

 Our primary focus remained on driving margin expansion and bottom-line growth with emphasis on productivity and cost savings, efficient commercial investments and deleverage to maintain our investment-grade debt ratings.  Secondly, we remained focused on delivering an improved top line through our commercial excellence approach, which provides the most sustainable source of profit growth over the medium to long term.  Capital allocation within our business continues to be guided by our Profit after Capital Charge, or PACC approach, as we seek to deliver Total Shareholder Returns.

[Slide 5]

For the full year versus pro forma results a year ago, we over-delivered on costs savings and free cash flow and optimized commercial spending, delivering very strong net income growth, underlying EBITDA margin expansion of 77 basis points and underlying EBITDA growth of 3.7 percent.  We also strengthened our balance sheet by more than $900 million through debt paydown and pension contributions as part of our deleveraging strategy. This was complemented by an improving top line, with global brand volume growth of 1 percent and net sales per hectoliter growth of 2.6 percent, driven by enhanced revenue management and portfolio premiumization. We also grew market share in Canada and Europe for the year and delivered positive underlying EBITDA in our International business.

[Slide 6]

Across our business, we continued to focus on portfolio premiumization.  Above-premium brand volumes increased 6% in the quarter and 21% for the year, with the full year benefiting from the added Miller International volumes. This above-premium performance also benefited from strong growth across our global craft portfolio.  With this strong growth, above premium now represents 20% of our total annual brand volumes.

[Slide 7]

Importantly, we also delivered more than $1.4 billion of underlying free cash flow, as all parts of the business drove cash execution and efficiency throughout the year.

To take a step back from the quarter and the year, our track record over the last few years reflects consistency in earning more, using less and investing wisely. Our enterprise and regional teams have earned more by energizing our core, above premium and craft portfolios, through existing brands as well as successful, bolt-on acquisitions, with Aspall cyder in the U.K. being the most recent addition to our portfolio. We are using less by over-delivering on costs savings and at a lower cost to achieve, which was in part driven by closing two breweries in Europe and one in the U.S. We have continued to invest wisely with very strong free cash flow generation and deleverage focus. Later this year, we plan to update you regarding how we expect our approach to capital allocation to evolve as we approach our deleverage targets.

I personally am proud of our achievements in 2017 against the backdrop of complex structural and brand portfolio integration.  Highly engaged teams across geographies and functions executed with brilliance and stayed focused on our First Choice ambition and financial goals. Our integration work streams delivered foundational work to drive future productivity and savings, and our commercial teams strengthened our brand portfolio and our customer relationships, which will be key to our success as we play to win every day.

Now, let me turn the call over to Tracey to give financial highlights. 

[Slide 8]

[Tracey Joubert]

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

[Slide 9]

Let’s review our consolidated financial headlines for the 4th quarter versus pro forma results a year ago, except for cash flow, which is reported on a full year, actual basis. Also, keep in mind that in the fourth quarter of 2017, we changed our method of calculating pension plan assets used to determine net periodic pension cost, which favorably impacted our Canada, Europe and consolidated results.

  • Net sales increased 4.5 percent, due to positive global pricing, royalty revenue, favorable foreign currency movements and cycling a $50 million indirect tax provision from a year ago, partially offset by lower financial volumes. Net sales in constant currency grew 2.4 percent.
  • Net sales per hectoliter increased 5.8 percent, and 3.7 percent in constant currency.
  • Worldwide brand volume decreased 1.1 percent due to lower volume in the U.S. and International, partially offset by growth in Europe and Canada.  Global priority brand volume decreased 1.9 percent, and financial volume decreased 1.2 percent, driven by the U.S.
  • U.S. GAAP net income increased from a loss last year to income of $588 million this year.  This improvement was primarily due to a discrete tax benefit related to the revaluation of our deferred tax balances, which resulted from the recent U.S. tax reform, along with favorable underlying performance and cycling an impairment charge for the Molson brands in Canada and an indirect tax provision in Europe recorded a year ago.
  • Underlying EBITDA increased 17.0 percent on a reported basis and increased 14.3 percent on a constant currency basis. This strong underlying performance was driven by positive pricing, cost savings and MG&A efficiencies, partially offset by impacts of lower volume, inflation, and investments behind our global business capabilities. Results also benefited from cycling the indirect tax provision a year ago and higher net pension benefit. Underlying EBITDA margins improved 198 basis points during the quarter.

    Looking at the full year,

  • Net debt of $10.9 billion was more than $600 million lower than at the beginning of the year, despite $280 million of unfavorable foreign currency movements. We also made more than $300 million of contributions to our defined-benefit pension plans as part of our overall pension de-risking strategy and deleveraging goals.
  • Underlying free cash flow of $1.4 billion was up 68 percent from actual results last year.  The upside to prior guidance was driven by benefits from timing of working capital at the end of the year, as well as capital expenditure reductions.  

[Slide 10]

In the past several years, we have made substantial progress in improving the efficiency of our balance sheet to help generate cash and drive higher cash returns on our assets.  As seen on this slide, we have a consistent track record of improving working capital as a percentage of sales in each of the past six years – and we have more progress to make in the years ahead.   

[Slide 11]

For the full year, we improved underlying EBITDA by 4.3% in constant currency, with underlying EBITDA margin expansion of 77 basis points for the year. Our top line for the year also benefited from strong net sales per hectoliter growth and total worldwide brand volume up 1%.

[Slide 12]

Now, I’d like to share some regional highlights ….

In the U.S., we grew underlying EBITDA 4.9% in the fourth quarter versus pro forma results last year, driven by higher net pricing, cost savings and lower MG&A expenses, partially offset by COGS inflation and lower shipment volumes. Overall, U.S. STRs declined 3.0% for the quarter and domestic sales to wholesalers declined 1.5%.  This quarter marked the 13th consecutive quarter of increased segment share for Miller Lite, elevating the brand to the number-three beer in America, according to Nielsen. Coors Light remained the number-two beer and completed its 11th consecutive quarter of increased segment share. Our Below Premium brand portfolio was down low-single digits and achieved its best quarterly trend since the third quarter of 2009. We also gained share of both segment and industry with our below premium brands in the quarter, per Nielsen, led by the Keystone family.

[Slide 13]

Our full year U.S. underlying EBITDA increased 2.7% versus pro forma results last year driven by a 1.0% increase in domestic net sales per hectoliter, cost savings and lower MG&A expenses, partially offset by COGS inflation and a 2.9% decrease in domestic STR volumes. For the year, we gained market share within the premium light and premium regular segments, as Coors Banquet completed its 11th consecutive year of growth. In Above Premium, Blue Moon Belgian White grew during each quarter and continued to acquire incremental tap handles.  Leinenkugel’s was up low-single digits for the year, propelled by Summer Shandy’s best volume year in the brand’s history.  For the year, we also held share within the below premium segment, which was one of our 2017 goals.

[Slide 14]

Our Canada underlying EBITDA declined 4.2% in the fourth quarter on a reported basis and 8.4% on a constant-currency basis, driven by inflation and higher distribution costs, partially offset by positive pricing, lower MG&A expenses and favorable foreign currency. Our brand volumes increased 0.8%, and market share during the quarter was consistent with the prior year, with share gains in the above premium segment. We also drove the top line with 1% net sales per hectoliter growth in constant currency during the quarter. 

[Slide 15]

One meaningful portfolio highlight in the premium segment in Canada was flat volume on an absolute basis during the quarter. While this benefited from incremental Miller Lite volume, our two biggest brands reflected sequential improvements compared to earlier in the year.

[Slide 16]

Full year results benefited from improving trends in the fourth quarter.  However, full year brand volume declined 0.5% and underlying EBITDA declined 11.6% in constant currency. Full year net sales per hectoliter grew 2.2% in local currency, reflecting positive net pricing and mix.

 

[Slide 17]

Our Europe team continued to grow both the bottom and top lines. Fourth quarter underlying EBITDA grew 239.5% in constant currency, driven by higher volume, positive sales mix, and increased net pension benefit, as well as the benefit of cycling the indirect tax provision a year ago.  Brand volume increased 10.4% 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 core and above-premium brands, which helped drive net sales per hectoliter growth. 

[Slide 18]

For the full year, underlying EBITDA grew strongly, driven by volume growth, positive sales mix and higher net pension benefit, along with cycling the indirect tax provision that was booked in 4th quarter 2016 and reversed in 1st quarter 2017.  We also grew net sales per hectoliter, as well as our market share, as brand volumes increased 10.3% in Europe.

[Slide 19]

For our International business, underlying EBITDA was $0.4 million in the quarter, a $1 million decrease from a year ago, driven by the loss of the Modelo contract in Japan, the transfer of royalty and export brand volume to Europe, and higher MG&A from the addition of the Miller International Business. This was partially offset by the addition of Puerto Rico and volume growth across several Latin American markets. While we were able to grow organic volumes in existing markets, total brand volume decreased 15.1% in the quarter. Reported net sales per hectoliter increased 6.1% due to favorable sales mix changes and positive pricing. 

[Slide 20]

International full year 2017 underlying EBITDA of $3.5 million represented a $7 million improvement from a loss a year ago.  Underlying gross profit increased more than 50% to $87.1 million, which exceeded prior guidance as our Caribbean team was able to mitigate some of the anticipated hurricane impacts. International brand volumes were up 28.9%, and reported net sales per hectoliter increased 0.8%.

[Slide 21]

While our earnings release provides more details, I want to spend a moment to share the following financial targets for 2018:

Underlying free cash flow of $1.5 billion, plus or minus 10 percent, which excludes the recently disclosed $330 million cash receipt related to resolving a purchase price adjustment. As I mentioned earlier, 2018 free cash flow will be cycling some timing of working capital benefits in 2017.

[Slide 22]

Cost savings guidance of $210 million in 2018 is part of our newly increased three-year savings target of $600 million up from our previous target of $550 million for 2017 to 2019. This represents an acceleration of deal-related cost savings into years 1 and 2 of the three-year program.  We now also estimate that our costs to capture synergies for the program will be $250 million, down from $350 million previously due to efficiencies in both capital spending and non-core operating expenses.

Delivering on these savings commitments will be particularly important this year, given recent increases in input costs such as aluminum and fuel.  We currently anticipate an inflation headwind across our company in 2018 that is more than $50 million larger than in 2017, driven by aluminum, diesel fuel and other factors. See our earnings release this morning for specific cost of goods rate guidance by business unit for 2018.

Cost savings remain a way of life at Molson Coors, and, as we have previously committed, we will deliver on the current three-year cost savings program for 2017 through 2019, which we have just increased to $600 million.  We are in the process of developing our next three-year savings program, which will be for 2020 through 2022, and we plan to offer details in the first half of 2019.

[Slide 23]

Following the enactment of U.S. tax reform, we anticipate approximately $200 million of transaction-related cash tax benefits in 2018 and substantial benefits in the 13 years after this year, as seen in this slide.  Beyond this, we expect additional cash-tax benefits from tax reform, primarily related to lower corporate income tax rates and accelerated depreciation of qualified assets for tax.

Additionally, following the enactment of U.S. tax reform, we expect an underlying effective tax rate in the range of 18 to 22 percent in 2018.  This rate is 6 to 8 percentage points lower than prior to tax reform and reflects a substantial benefit to after-tax underlying income and earnings per share for our shareholders. 

We currently expect a long-term effective tax rate in the range of 20 to 24 percent. Please keep in mind additional definitive guidance from the U.S. government regarding the implementation of the recently passed tax reform legislation could impact this outlook.

[Slide 24]

It is also important to highlight that our 2018 results will be impacted by $850 million of underlying depreciation and amortization, which represents an approximate $50 million increase from 2017. This increase is driven primarily by information system investments in the U.S., including in our order systems, which will make it easier for our customers to do business with us.

Additionally, 2018 results will be impacted by the adoption of the new revenue recognition standard and pension & OPEB accounting guidance, as well as changes to segment reporting related to pension and other postretirement benefit costs.

With these changes in pension accounting, we expect $46 million of Europe pension income in 2017 to move to corporate results.

The new revenue recognition accounting standard became effective for us at the beginning of 2018, and prior period results will not be restated.  Along with some timing changes, we currently anticipate that this change will reduce both net sales and MG&A expenses by approximately $70 million to $90 million during 2018, primarily within our Canada segment, with no significant impact on net income.

The impacts of these accounting changes are discussed in further detail within footnote 2 of our 2017 Form 10-K filed this morning.

Consistent with last year, our focus in 2018 will be ensuring that our business generates strong cash flow, as we strengthen our balance sheet and deliver cost savings, while increasing our EBITDA margins over the next 3-4 years. As Mark mentioned, we plan to revisit our three buckets of capital allocation priorities later this year, which include returning cash to shareholders, strengthening our balance sheet and growth opportunities, such as M&A and brand investments. But in the near term, we will focus further on strengthening our balance sheet, while maintaining our annual dividend.

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

[Slide 25]

[Mark Hunter:]

...  Thanks, Tracey.

[Slide 26]

I began this call by outlining our plans to drive total shareholder returns. Going forward, we believe our ambition to be First Choice for our Consumers and Customers will be central to our bottom- and top-line success.

Our regional business priorities are clear and consistent:

[Slide 27]

In the U.S., while 2017 industry dynamics were challenging, our teams continue to be disciplined, decisive and accountable as we continue to deliver long-term profit growth. We have grown underlying EBITDA in the U.S. substantially since 2009, including in difficult trading conditions. This year exemplified that ability as we grew underlying EBITDA 4.9% in the quarter and 2.7% for the full year.

We know we have the brands, plans and team to achieve our goals, which includes our growth agenda. Our objective of flat volumes by 2018 and growth by 2019 remains our strategic imperative, but we’re not driving for growth at any cost. We will strengthen and expand our portfolio, drive investment efficiency through ROMI, or return on marketing investment, and also through global procurement and the use of PACC, and we will continue to earn category captainships underpinned by tools such as Building with Beer, as these are all steps to help us and our partners sell more beer more profitably. 

Within our brand portfolio, we will continue to gain segment share in Premium, grow in Above Premium, and continue to stabilize our Below Premium brand volume. We will refresh Coors Light packaging and release new creative over the next couple of months, while continuing to build momentum behind Miller Lite, the original light beer. Within above premium, we will accelerate our performance by building on solid growth in 2017 from our two national craft brands, Blue Moon Belgian White and Leinekugel’s Summer Shandy, as well as the strong growth of our regional brands including Terrapin, Hop Valley, Revolver, Saint Archer and Colorado Native.

[Slide 28]

Additionally, excitement from our distributor and chain partners for our 2018 innovation lineup is also apparent with tens of thousands of incremental placements already committed. The Sol brand will be relaunched in April with redesigned packaging supported by an integrated marketing campaign, alongside Peroni, which is also accelerating, we will have a strong 1-2 punch in the import segment. Additionally, in just the past few weeks, we have brought to retail Arnold Palmer Spiked Half & Half, designed to take share in the valuable hard tea segment, and Two Hats, positioned to bring new legal-age drinkers into beer.

[Slide 29]

In Canada, our teams are building on improved 2017 momentum. Our consumer excellence teams will continue to focus on gaining segment share in Premium, accelerating our growth in Above Premium and craft and stabilizing our Below Premium brand share. Our number 1 priority for our brands remains to improve the performance of Coors Light and Molson Canadian, through refocused marketing, improved consumer promotions and stronger commercial execution.

Above premium performance will be driven by Coors Banquet, MGD, Belgian Moon and the Heineken portfolio. In addition to ‘lifting and shifting’ Miller High Life to Canada, we will introduce two further brands from our U.S. portfolio to broaden and deepen our Canadian portfolio later this year. We are also going after incremental drinking occasions by launching some great tasting innovation in the non-alcohol segment in 2018, with more to follow in due course.

On the customer excellence front, we will continue to roll out proven best-practice sales tools, such as Building with Beer. Commercial excellence continues to focus on sales productivity, customer 360 initiatives and Joint Business Planning, resulting in strong in-market impact.

Our supply chain teams continue with brewery optimization efforts and productivity improvements, as we are just over a year from opening our new British Columbia brewery and the new Montreal brewery is expected to begin production in 2021.

[Slide 30]

In Europe, while the environment remains competitive, we will continue to use a balanced portfolio approach, drive disciplined retail execution and optimize our brewery network.  In 2018, there are a few headwinds that are important to remember when modeling the results for our Europe business. In the 1st quarter, we will be cycling the $50 million indirect tax provision benefit in 2017.  In addition, throughout 2018, we will increase investment behind our brands and commercial priorities to further strengthen our First Choice agenda.  Lastly, as Tracey highlighted, as a result of the changes in pension accounting, we expect $46 million of Europe pension income in 2017 to move to corporate results.

Our commercial teams will build on our positive momentum this year by strengthening our national mainstream brands, including Carling, our largest brand in Europe, which further strengthened its overall number-one position in the U.K. beer market in 2017.

For our above-premium portfolio, 2017’s double-digit sales growth reflects the fact that “ice cold, Rocky Mountain refreshment” is resonating powerfully with Coors Light consumers in the UK and Ireland.  Above premium Staropramen, outside of its domestic market, has grown at a double-digit rate, and we continue to push the brand into new markets where the Czech provenance and quality can deliver growth in the above-premium segment. To accelerate our growth in craft, led by Sharp’s and Franciscan Well, we have added the La Sagra and Birradamare brands to our portfolio.  And with cider, we are building on strong growth by Carling Cider and Rekorderlig with the 2018 acquisition of Aspall, a growing cider brand founded in 1728 with a distinct face, place and story that supports our premiumization strategy.

Our balanced portfolio approach also relies on a continuing commitment to deliver against our focus to become First Choice for customers. We maintained our number-one supplier ranking in the U.K.’s Advantage retail survey for the Multiple Grocer off-premise channel and also recently achieved the number-one ranking in the multiple on-premise channel for the first time. 

[Slide 31]

With integration of the Miller International Business largely complete, and with nearly 4.4 million hectoliters of total brand volume in 2017, our International business has increased substantially over the past year and is now more than half as big as our Canada businesses from a volume perspective. 

[Slide 32]

We will continue to utilize an asset-light model in select markets and our efforts will focus on global priority brands Coors Light, Miller brands, and Blue Moon.  Coors Light maintained strong growth in Latin America last year, and in Mexico, passed one million hectoliters of brand volume, making it the fourth-largest Coors Light market globally.  We are currently launching the Miller Lite original white can packaging to more than 20 markets globally, and while still early days, results for this authentic packaging are positive.

[Slide 33]

Across Molson Coors, against a backdrop of integration and challenging market conditions during 2017, we delivered financial and commercial results that demonstrate our balanced priorities for bottom- and top-line growth are working.  In 2018, our First Choice focus across regions will continue to strengthen and premiumize our brand portfolio, while deepening our customer relationships. We will also continue to retain flexibility in our P&L, deliver on our cost savings and remain laser-focused on delivering against our cash targets and strengthening our balance sheet.

[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, Phil, we would like to open it up for questions, please….

[Slide 34] [Title Slide]