Molson Coors Brewing Company

2018 Second Quarter Earnings Conference Call

August 1, 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 2nd quarter 2018 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. 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, Anita. 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, CEO of International
  • Lee Reichert, Chief Legal and Corporate Affairs Officer
  • Brian Tabolt, our Global Controller, and…
  • Kevin Kim, Global Director of Investor Relations.

Today, Tracey and I will take you through our plans to drive long-term total shareholder returns, highlighting our second quarter results, and also discuss our outlook for the business. As usual, we are offering related slides on the Investor Relations page of our website.

You may have seen a press release from our Canadian business earlier today, announcing that Molson Coors Canada has entered into a definitive agreement to partner with The Hydropothecary Corporation – or HEXO- in Canada to form a standalone joint venture focused on non-alcoholic, cannabis infused beverages for the Canadian market. We will discuss this opportunity in the outlook section of our prepared remarks. But first, let’s focus on the Q2 results for the Company.

[Slide 4]

            We were pleased with the sequential improvements in the second quarter for top and bottom line results. Our full year underlying cost savings and free cash flow guidance has not changed, despite ongoing industry demand challenges in the U.S. and Canada and inflationary pressures. While we are aggressively addressing our volume performance in North America, performance in our Europe and International businesses was strong in the quarter.

            More specifically for the quarter , our underlying EPS growth of 10.6 percent reflected positive global net pricing, cost savings delivery, lower marketing spend, and a lower tax rate, while we continued to strengthen our balance sheet with lower net debt. Our results also include the unfavorable timing effect of the revenue recognition accounting standard, which reduced underlying EPS by 5 cents for the quarter. This timing difference is largely expected to reverse as a benefit in the fourth quarter. Across the organization, our teams exercised flexibility in the P&L with lower MG&A spend across all business units.

In the U.S., our results reflected headwinds from the overall beer industry, as well as continued negative impacts from the Golden brewery system implementation. Although the industry faced another tough quarter due to a challenging April and the impact of holiday mismatches, we are dissatisfied with our overall market share trends and will continue to focus on reinvigorating Coors Light, maintaining the strong improvements in Miller Lite and accelerating performance in above premium to improve both top and bottom line results. Coors Light lost segment share and we are working to turn that trend around by more boldly leveraging the World’s Most Refreshing Beer campaign. Our branding efforts will focus on creating a deeper connection with our existing consumer base and recruiting the next generation of legal drinking age consumers while our sales teams will focus on regaining distribution and maximizing retail support. Improved premiumization efforts will focus on growing our national and regional craft portfolio, improving our FMB performance through innovations such as Arnold Palmer Spiked and Henry's Hard Sparkling and continuing to take share in the import segment led by Sol and Peroni.

The Golden brewery system implementation and ongoing freight carrier constraints negatively impacted our volumes, accounting for nearly 1 percent of volume declines in our U.S. business unit this quarter. The Golden installation has now stabilized and we are brewing, packing and shipping beer in line with expectations.  We are now prepping for the successful transition of the five additional system implementations for the remaining U.S. breweries over the next 12 months. As previously disclosed, we expect a gross profit tailwind in the second half of the year as distributors build up inventories ahead of the next system implementation. As a result, we expect our second half volumes will reflect better STWs than STRs.

In Canada, while brand volumes reflected sequential improvements, excluding the impact from the revenue recognition accounting standard, NSR per hectoliter was down 1.4 percent on a constant currency basis. This was driven by negative mix shifts within the portfolio as our simplified below premium strategy delivered ahead of expectations. Through the balance of the year, we will address our NSR per hectoliter performance through our premiumization efforts by focusing on improving performance in the premium segment and driving growth across our powerful above premium portfolio.

            In our Europe and International businesses, despite various year over year headwinds, our teams produced strong results driven by balanced top and bottom-line growth, as we grew our core national champion brands and above premium brand volumes in Europe and improved profitability from focus brand performance in International. Going forward, we plan to maintain positive momentum, and we remain focused on delivering underlying EBITDA of $20 to $25 million this year in our International business.

[Slide 5]

            Across all our markets, premiumization of our portfolio remains an important element of our strategy, and our above premium brands accounted for 21 percent of our portfolio, up from 20 percent last year. Despite strong growth from Europe and many of our above premium brands, total above premium volumes declined by 1 percent, driven by softer volumes in the U.S. and Canada. Continued premiumization of the portfolio while strengthening our mainstream brands remains central to our approach.

[Slide 6]

            Our teams are leaning in to deliver on our commitments for the full year by finding opportunities to earn more, use less and invest wisely. Guidance for free cash flow of $1.5 billion plus or minus 10 percent this year is based on continuing to drive our First Choice commercial excellence initiatives, as well as our disciplined approach to cost savings, flexibility with discretionary spending and our continued focus on driving working capital efficiencies.

            More specifically, we have a strong track record of delivering on cost savings and our $210 million guidance for the year remains unchanged. Additionally, as discussed in New York, we expect our results to benefit from additional cost mitigation efforts, particularly in the second half of the year.

Our ability to flex the P & L with our discretionary spending to protect the bottom line is another reason we are committed to our cash plans this year. Q2 results proved this as MG&A spend was down substantially across all business units. For example, MG&A spend in the U.S. was down over 5 percent and we plan to use this same disciplined approach across our business throughout the second half of the year.

[Slide 7]

            Before I turn the call to Tracey to give more detail on the quarter, I also wanted to highlight the recent release of Our Beer Print sustainability report, which demonstrates our company's positive impact in our communities and our environment against our 2025 goals. As a leading global brewer, 14 of our global sites have already reached zero waste to landfill and we have plans to improve this across all of our brewing and major manufacturing facilities as part of our larger Beer Print efforts.

So with that, over to you Tracey

[Slide 8]

[Tracey Joubert]

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

[Slide 9]

            Our number one priority for 2018 is delivering on our bottom line, which includes generating cost savings, delivering strong free cash flow, and strengthening our balance sheet via debt paydown.

Our earnings release provides more details on our cash generation and cost savings guidance, which has not changed:

  • We are reiterating our underlying free cash flow guidance of $1.5 billion, plus or minus 10 percent.
  • We are also reiterating our cost savings guidance of $210 million in 2018, which is part of our three-year target of $600 million. Recent cost inflation makes delivering these savings particularly important this year. As we discussed at our analyst day, our teams are also focused on additional cost mitigation efforts, which will not be reported within our cost savings number, but should benefit our second half profitability.

            Also, while we are reiterating our annual COGS per hectoliter guidance in Canada, Europe and International, we are now raising our U.S. guidance to up mid single-digits for the year. We have hedging programs in place that provide partial protection from the well documented inflationary environment this year. However, the inflationary environment remains a headwind, including volatility from aluminum costs and the Midwest Premium and incremental pressures from the freight carrier market in the U.S. In the current volatile cost environment, our teams are working to mitigate the impact of these increases.

[Slide 10]

            Before I share consolidated highlights, I would like to remind you of the new revenue-recognition accounting standard, which we will refer to as "revenue recognition" for the remainder of the prepared remarks today. As outlined in our earnings release, this is expected to have no significant impact to net income for the year, but will cause some timing differences between quarters, impacting some year over year comparability for net sales and MG&A, primarily in the U.S. and Canada this quarter. For example, revenue recognition negatively impacted EPS by 5 cents this quarter and 6 cents on a year to date basis, but this timing difference is expected to reverse as a benefit in the fourth quarter.

As highlighted in our earnings release:

  • Underlying EBITDA decreased 2.6 percent on a reported basis and 3.8 percent on a constant currency basis, driven by lower financial volume, higher cost inflation and the unfavorable timing impacts of revenue recognition, partially offset by positive global net pricing, cost savings and lower marketing spend.
  • U.S. GAAP net income increased 28.6 percent driven by unrealized mark-to-market gains on our commodity positions (versus losses a year ago), cost savings, lower income tax expense and lower interest expense, partially offset by lower financial volume, higher input cost inflation and the unfavorable timing impacts of revenue recognition.
  • Net sales decreased 0.2 percent on a reported basis and decreased 1.9 percent in constant currency.
  • Net sales per hectoliter , on a brand-volume basis, decreased 0.3 percent in constant currency and increased 1.9 percent on a reported financial-volume basis.
  • Worldwide brand volume decreased 2.4 percent and financial volume decreased 2.1 percent. Global priority brand volume decreased 4.0 percent.

Now onto regional highlights ….

[Slide 11]

            In the U.S., underlying EBITDA decreased 7.2 percent versus last year, driven by higher COGS-particularly aluminum and freight, lower volumes, negative sales mix and the unfavorable impact of revenue recognition, partially offset by higher net pricing and lower MG&A expenses. Top-line pressure this quarter was driven by brand volume declines, however, strong NSR per hectoliter growth reflected sequential improvements and strong Q2 pricing. Despite volume and COGS headwinds, we demonstrated flexibility in the P & L, with a 5.2 percent decline in MG&A.

            In Q2, we gained share in premium lights, led by Miller Lite increasing segment share for the 15th consecutive quarter. Coors Light continued to underperform and as noted by Mark, is a significant focus area.

            Declines in our above premium portfolio were driven by under-performance from the Leinenkugel’s Shandy family and  the tough competitive environment in the FMB segment, with volume losses from the Redd's franchise and Henry's Hard Soda. However, we are competing better within the growing hard seltzer segment through Henry's Hard Sparkling and have more than doubled our share of the category since Q1. Arnold Palmer Spiked is beating expectations and is the top-selling new FMB in 2018 according to Nielsen. Crispin is up double-digits on the strength of Crispin Rosé. In craft, Blue Moon Belgian White remains by far the #1 craft brand in the U.S., accounting for about 8 percent of total industry craft volume in the country. Strong growth from our regional craft brands continued to outpace the segment.   In imports, the marketing and packaging overhaul of Sol has led to renewed momentum for the brand, which is up triple digits year to date per Nielsen. Peroni also continues to gain momentum, growing volume for the 15 th consecutive quarter and it’s a top-10 growth brand on-premise, according to Nielsen.

            In below premium, we continued to grow share of segment in Q2, led by the Keystone family. Keystone Light remains among Nielsen’s Top-10 Growth Brands while the Steel Reserve Alloy Series has accomplished six consecutive quarters of double-digit growth.

[Slide 12]

            In Europe, our Q2 underlying EBITDA improved by 18.2 percent on a reported basis and 11.7 percent on a constant currency basis, due to favorable gross profit impacts, spend efficiency and timing of brand investments and the partial reversal of bad debt provisions, as well as the addition of the Aspall business. The top-line benefited from above premium brands and national champion brand growth, as well as World Cup consumption as volume grew 2.9 percent coupled with NSR per hectoliter expansion of 1.5 percent on a constant currency basis. In addition to strong top-line performance, lower marketing investments also helped drive the double digit increase in the bottom-line.

            As previously discussed on our Q1 call, top- and bottom-line results were impacted by the increased commercial investment we made in our First Choice agenda during 2018. In addition, we have chosen to adopt recently revised industry guidelines for calculating excise tax payments in one of our markets, which reduced our Europe NSR per hectoliter by low-single digits.

[Slide 13]

            Our Canada underlying EBITDA decreased 5.1 percent in Q2 on a reported basis and 7.8 percent on a constant currency basis, driven by revenue recognition, negative sales mix and lower volumes, partially offset by lower marketing investment.

            The top line reflected a 2.4 percent decline in brand volume with declines in Western Canada and Ontario, coupled with a net sales per hectoliter decline of 4.5 percent in constant currency during the quarter. Excluding the effect of revenue recognition, NSR per hectoliter would have decreased 1.4 percent due to negative mix. The bottom line reflected benefits from lower MG&A spending and lower COGS per hectoliter.

            The Premium segment declined mid single digits, but Coors Light continues to improve its market share trajectory confirming the positive impact of our renewed marketing and sales focus behind the brand.  While the Above Premium and Craft segments declined, growth came from continued success of MGD and Belgian Moon, while the newly acquired Trou du Diable is broadening its reach in Quebec.  Strong growth in the value segment, which represents about a fifth of our volumes in Canada, was driven by our recent actions to refocus the portfolio, including the very successful launch of Miller High Life.

[Slide 14]

            Regarding International, underlying EBITDA versus last year improved $7.4 million in the second quarter driven by positive net pricing, positive brand and geographic mix, along with higher volume and lower MG&A costs.  These factors were partially offset by the loss of the Modelo brands in Japan.

            The top-line benefited from a 3.8 percent improvement in net sales per hectoliter on a brand volume basis and a 0.6 percent increase in brand volume in the quarter. Positive volumes were driven by organic growth in our focus markets, partially offset by the loss of the Modelo contract in Japan. The bottom-line also reflected improved COGS per hectoliter performance, in addition to lower MG&A spending levels in the quarter.

[Slide 15]

            Looking forward, we will ensure that our business continues to generate strong free cash flow, as we strengthen our balance sheet and deliver cost savings.

            And, finally, I want to reiterate our discussion from our analyst day around capital allocation priorities. Returning cash to shareholders over the next two years includes the following:  First, we are committed to maintaining our investment grade rating and expect to achieve approximately 4x leverage on a rating agency basis by the end of 2018. After that point, our plans are to achieve about 3.75 times leverage on a rating agency basis around the middle of 2019, after which our board currently intends to reinstitute a dividend payout-ratio target in the range of 20-25 percent of annual trailing underlying EBITDA for the second half of 2019 and ongoing thereafter. Deleveraging and our dividend are our current priorities, and as we pass these two stages, we will then consider future uses of cash, which may include continued deleverage, investment behind growth initiatives and share repurchase activity in the context of our capital allocation framework, underpinned by our Profit after Capital Charge, or PACC model.

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

[Slide 16]

[Mark Hunter:]

...  Thanks, Tracey.

[Slide 17]

            All of our business units are focused on a series of commercial excellence drivers that will help build our top and bottom line. These include building extraordinary brands, strengthening customer excellence, and driving disruptive growth.

            Within building extraordinary brands, we are concentrating on energizing our core brands, accelerating the growth of our above premium and craft portfolio and building the scale and footprint of our global brand portfolio. Within strengthening customer excellence, we are scaling up and driving the Molson Coors Advantage program across our global sales teams…. this approach is designed to drive category value that both our customers and Molson Coors can share. And finally, within driving disruptive growth initiatives, we are focused on expanding our portfolio beyond beer, driving a leading-edge digital and e-commerce agenda across every aspect of our business and accelerating the pace of our growth in international markets. All of these commercial activities are underpinned by strong insights and analytics to refine and amplify their impact.

[Slide 18]

            As referenced earlier, the proposed joint venture in Canada announced this morning by Molson Coors Canada is consistent with the company’s overall strategy to drive disruptive growth in our markets globally. As we recently shared in our NY analyst meeting, we are growing our global non-alcoholic beer portfolio and have recently invested in diversified brewed beverages in the U.S. like the Bhakti Chai tea company and Clearly Kombucha.

            With Canada breaking new ground by federally legalizing cannabis this Fall, Molson Coors Canada is in a unique position as one of Canada’s leading beverage companies to pursue opportunities in this nascent but rapidly expanding consumer segment.  By creating a separate standalone venture with a trusted partner who shares our values and commitment to doing business the right way, Molson Coors Canada can drive disruptive growth while remaining focused on its core beer business. More details will be provided in due course once the transaction closes and the joint venture is formed.   

Let us now return to our regional outlook.

[Slide 19]

            In the U.S. , as we said in Q1, we will build distributor inventories in the second half of the year, as we prepare for further brewery system implementations.

            Also, we will continue to drive our portfolio strategy of building distinctive brands across all segments to meet the needs of American beer drinkers. We have an urgent focus on improving Coors Light trends through bolder execution of the World's Most Refreshing Beer and sharper feature and display activity while continuing the strong share trends for Miller Lite through a distinctive competitive position. Additionally, we expect FMB and Cider performance to benefit from incremental volumes from Arnold Palmer Spiked distribution, flavor and pack innovations from Henry's Hard Sparkling, and the introduction of slim cans for Crispin Rose.

            More broadly in above premium, we are accelerating our import share with both Sol and Peroni, while strengthening the Blue Moon franchise and rapidly scaling our family of regional craft breweries.

 [Slide 20]

            In Europe, we are encouraged by the strong start to the summer selling season. Our teams will continue to use a balanced portfolio approach by building on momentum from the international growth of Staropramen outside of the Czech Republic, Coors Light and our Craft and Cider portfolio.  Additionally, we will remain disciplined with retail execution and optimization of our brewery network and infrastructure.

            As discussed on our Q1 earnings call, when modeling the results of Europe remember that we currently anticipate a low-single digit negative impact per quarter to NSR per hectoliter for the remainder of the year as we have chosen to adopt recently revised industry guidelines for calculating excise tax payments in one of our markets.

[Slide 21]

            In Canada, the commercial excellence teams will continue to focus on strengthening the portfolio by stabilizing our premium brands performance, accelerating the growth of our above premium portfolio, and simplifying our offering in the value segment.

            In premium, Coors Light is our top priority and we expect to improve brand activations and promotional intensity with an emphasis on refreshment to drive feature and display. Our premiumization efforts will drive an acceleration of the growth of our key import brand Heineken, as well as our MGD and Coors Banquet brands. Trou du Diable - our most recent Canadian craft addition - is broadening our footprint in the world of craft in Quebec, and is delivering strong results.  We have also lifted and shifted Leinenkugel’s Summer Shandy and Henry’s Hard Soda from the U.S.  The recent addition of Coors Edge, a new non-alcoholic offering, is complementing Heineken 0.0 in this rapidly growing segment. In below premium, the recently launched Miller High Life brand continues to deliver strong results, while complementing our Pilsner and Black Label brands, and underpinning continued segment share growth.

            Finally, as we look to ongoing productivity improvements, the construction of our new highly efficient brewery in B.C. is on track for brewing in 2019 and planning for our new brewery in Quebec is advancing quickly.

[Slide 22]

            Strong year-to-date performance from the International business gives us added confidence in generating $20-$25 million of underlying EBITDA this year. We expect the second half to build on successes in Latin America, including in Mexico, Paraguay, and Honduras, along with further development of our Asia Pacific markets, such as South Korea.  Please note Q2 represented the last quarter of lapping the loss of the Modelo contract in Japan last year. We will continue to focus our efforts on succeeding in high-potential markets and brands that will play a pivotal role in reaching our long-term top- and bottom-line international growth targets. International will be a meaningful driver of underlying EBITDA performance for Molson Coors this year.

[Slide 23]

            Across Molson Coors, our teams are focused on our first priority, which is to drive margin expansion, bottom-line growth and strong free cash flow to enable deleverage and our second priority, which remains to deliver an improved top line through our First Choice 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 PACC approach, as we seek to deliver Total Shareholder Returns.

[Slide 24]

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 later this afternoon.  Kevin Kim will be available via telephone or email to assist with any additional questions.

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