Molson Coors Brewing Company
2019 Second Quarter Earnings Conference Call
July 31, 2019

[Slide 1]

Title Slide

Speakers:

1) Mark Hunter, President and Chief Executive Officer

2) Tracey Joubert, Chief Financial Officer

3) Mark Swartzberg, Vice President of Investor Relations

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[Slide 2]

 [Operator:]

Good day and welcome to the Molson Coors Brewing Company second quarter 2019 Earnings Conference Call.   The call will begin with remarks from Mark Swartzberg, Vice President of Investor Relations.

 

[Mark Swartzberg:]

Thank you, Gary, and hello everyone.

 

Following prepared remarks this morning, we will turn the call over for your questions.  Please limit yourself to one question. If you have more than one question, please ask your most pressing question first and then re-enter the queue to follow-up.

 

Today’s discussion includes "forward-looking statements" within the meaning of applicable securities laws. Important factors that could cause actual results to differ materially from the expectations and projections contained in such statements are disclosed in the company’s filings with the SEC.  The company does not undertake to update forward-looking statements, whether as a result of new information, future events or otherwise. GAAP reconciliations for any non-U.S. GAAP measures are included in our news release or otherwise available on the company's website at www.molsoncoors.com. Also, unless otherwise indicated, all financial results the company discusses are versus the comparable prior-year period and in U.S. Dollars.

 

With that, I will turn the call over to our CEO, Mark Hunter...

 

[Slide 3]

[Mark Hunter:]

Thank you, Mark. Hello and welcome everybody.  With me on the call this morning are Tracey Joubert, the CEOs of our business units, Lee Reichert, Chief Legal and Corporate Affairs Officer, and Brian Tabolt, Global Controller.

 

Before we begin, I am sure you all saw the press release that went out earlier this morning announcing my retirement on September 27. It has been a privilege to serve as the Molson Coors CEO for the past five years and I have thoroughly enjoyed engaging with our investors and analysts throughout our journey. This leadership change has been worked through with our Board as part of our ongoing succession planning at the executive level.

 

I’m genuinely excited about the future for Molson Coors and proud of what we have accomplished over the past five years. Our goal with the acquisition of MillerCoors and the Miller International business was to create a bigger and better company. In 2015-2016 we planned for and executed on this step-change and transformed our scale. From 2017 through to today we have delivered on the integration and initial deleverage and synergy commitments made at the time of the acquisition despite higher inflation and softer industry demand than anticipated. Along the way we have also strengthened our culture with the introduction of our first choice ambition and bolstered the leadership and capabilities of our people through our commercial excellence and world class supply chain programs. As we now shift emphasis to greater focus on top line growth while remaining financially disciplined it is an appropriate time for me to pass the baton on to Gavin to lead the company through our next chapter of continuing to energize, premiumize and modernize our portfolio and to move beyond beer with disruptive thinking…and you are already seeing some of the fruits of this work.

 

While I am happy to be able to move on to my next phase of life after a 36 year career and spend more time with my family in the UK, along with the rest of the Board, I am also very excited to see Gavin take over the reins and help successfully drive the company forward in its next chapter. Gavin has been on the executive team for the past 7 years and is well known to many of you as the former Molson Coors global CFO and as the leader of our US business unit for the past 4 years. He knows our business, he knows you and he shares my absolute passion for our people, our brands and our success.

 

Our time today is focused on earnings, so for the balance of the call today, Tracey and I will take you through highlights of our 2nd quarter 2019 results for Molson Coors Brewing Company, along with some perspective on the 2nd half of 2019. Related slides can be found on the Investor Relations page of our website.

 

[Slide 4]

After a solid start in the first four months of the year, May and June were challenging reflecting unfavorable weather and weak industry demand across our major geographies, resulting in a disappointing volume performance in the quarter. Despite this backdrop, we executed our plans for incremental brand investment to drive accelerated portfolio premiumization and innovation impact across our business. Encouragingly, we delivered strong constant currency net sales per hectoliter growth of 3.7% and our share trends improved in the U.S. and were stable in Europe. We also saw strong premium light share growth in the U.S. as Miller Lite and Coors Light each gained segment share. This was ahead of the newly launched Coors Light "Made to Chill" advertising, which is focused on new drinker recruitment by dramatizing Coors Light's purpose to refresh the spirit through its mountain cold refreshment credentials.  We believe this creative platform is distinctive, disruptive and breakthrough.  We also through the quarter maintained our focus on cash flow, through cost savings and improving working capital.

 

We remain resolute on the ambition to improve our top-line through increased investments in our brands, portfolio premiumization and innovation initiatives, including the launch of our Truss cannabis infused non-alcoholic beverage portfolio in Canada later this year.  We are committed to doing this while maintaining our investment grade credit rating and strengthening our quarterly dividend, which increased by 39% to $0.57 per share, in line with our target of 20% to 25% of prior fiscal year underlying EBITDA and payable for the first time in September.

 

[Slide 5]

As you know, our First Choice strategy has three major components focused on top-line, bottom line and use of cash allowing us to improve shareholder returns.

 

[Slide 6]

Earn More is focused on improving top-line growth, and we know our top-line performance can improve.

 

Encouragingly, the quarter also showed our disciplined pricing across brands and regions, positive global mix, improved share trends in the U.S., maintenance of share in Europe, our focus on reshaping and premiumizing our portfolio, and our readiness to spend against this focus.

 

[Slide 7]

Our Use Less discipline is demonstrated by enterprise productivity and cost savings initiatives, all of which remain on track. This includes our work in Canada, where we have begun brewing trials in our new British Columbia brewery, recently completed the sale of our Montreal property, and are in the early stages of building a state-of-the-art brewery in Longueuil, Quebec.  I am pleased with our progress monetizing and modernizing our brewery footprint in Canada and expect significant benefits from the upgrades we are making to our network, including more flexible capacity to meet demand, lower unit operating costs, and increased supply chain efficiency. Please remember that the one off start-up costs for the new brewery in British Columbia impacted the Q2 results in Canada.

 

More broadly in relation to Using Less, and as former Coors Brewing chairman Bill Coors once said, “Waste is a resource that is out of place.” Molson Coors helped pioneer the recyclable aluminum can revolution 60 years ago, and this year, we are stepping up our efforts to tackle the global plastic waste crisis. Over the next two weeks, we will launch Our Beer Print Report 2019, outlining the progress made against our 2025 sustainability goals. With the release of the report, we will also launch a set of additional ambitious commitments to minimize the impact of our packaging alongside the great work that is already underway across our responsibility, sustainability, and inclusiveness agenda.

 

[Slide 8]

And finally alongside earning more and using less we are continuing Investing Wisely:

 

As you saw in the quarter, we are investing more behind our commercial agenda, increasing marketing and sales spend on a per hectoliter basis and in absolute dollars in the quarter and first half.  You should look for us to increase spending against attractive consumer segments and brands, without sacrificing our deleverage and cash return objectives.  In other words, we intend to use multiple tools to deliver improving topline performance, namely higher return commercial spend, targeted increases in brand investment and innovation, and a more effective supply chain minimizing out of stocks.

 

In terms of deleverage, we recently completed the sale of our Montreal brewery for 126 million Canadian dollars, providing us with additional funds for debt paydown, and on July 15th, we repaid $500 million of senior notes through a combination of cash and new commercial paper...and...

 

We expect to continue to delever, thereby maintaining and strengthening our investment grade credit rating.

 

So with that, over to you Tracey.

 

[Slide 9]

[Tracey Joubert]

...Thank you, Mark, and hello everyone....I will speak first to the quarter on a consolidated and regional basis, then to our 2019 outlook, and finally to our capital allocation plans.

 

[Slide 10]

So, to recap the quarter:

  • Net sales revenue decreased 2.9 percent in constant currency. Although we delivered strong pricing in each business unit as well as improving global mix, this was more than offset by volume declines.
  • Net sales per hectoliter, on a brand-volume basis, increased 3.7 percent in constant currency.
  • Worldwide brand volume decreased 5.6 percent and financial volume decreased 7.0 percent. Global priority brand volume decreased 4.6 percent.
  • Underlying COGS per hectoliter increased 6.0 percent on a constant currency basis driven by inflation, volume deleverage, and increased packaging costs associated with our U.S. bottle furnace rebuild, partially offset by cost savings.
  • Underlying MG&A increased 5.7 percent on a constant currency basis, driven by increased brand investment and cycling of G&A benefits from the prior year.
  • As a result, underlying EBITDA decreased 12.8 percent on a constant currency basis.
  • Our year-to-date underlying free cash flow was $560.7 million, 15.0 percent below the prior year, driven by lower underlying EBITDA and higher cash tax payments, partially offset by lower capital expenditures and lower cash interest payments.

 

Moving to our business units...

 

[Slide 11]

In the U.S., overall industry demand was softer year on year, and net sales revenue decreased 2.9 percent driven by a 6.7 percent decline in sales to wholesalers, excluding contract brewing, partially offset by net price increases. COGS per hectoliter increased 4.7 percent driven by inflation, volume deleverage, and increased packaging costs associated with our bottle furnace rebuild, partially offset by cost savings. MG&A increased 4.5 percent reflecting higher marketing investment focused on our above premium and innovation brands as well as cycling lower employee incentive expense in the prior year, partially offset by the incremental cost reductions related to the restructuring program initiated in the third quarter of 2018.  As a result, underlying EBITDA decreased 8.2 percent.

 

In the second quarter, we took share in premium lights, with Coors Light returning to segment share growth and Miller Lite gaining segment share for the 19th consecutive quarter and also holding industry share.

 

Our above premium portfolio has a number of fast-growing brands including Peroni, Sol, Arnold Palmer Spiked Half & Half and Henry’s Hard Sparkling, which grew strongly and gained share of FMBs, according to Nielsen. This growth was more than offset by declines from the Leinenkugel’s Shandy family and Redd's franchise.  Blue Moon Belgian White had its best quarterly volume performance since the fourth quarter of 2017, holding industry share, and Cape Line, our new sparkling cocktail offering, has been a top-10 growth brand, per Nielsen, since early June.

 

[Slide 12]

In Europe, net sales revenue decreased 2.4 percent on a constant currency basis, due to a 6.5 percent decline in brand volume, partially offset by strong price increases and favorable mix.  COGS per hectoliter increased 7.5 percent in constant currency, primarily driven by inflation and volume deleverage.  MG&A increased 8.7 percent in constant currency, reflecting higher overall marketing investment focused on our national champion brands and premiumization initiatives, as well as cycling last year's partial reversal of bad debt provisions.  As a result, underlying EBITDA decreased 18.4 percent in constant currency.

 

We knew we were facing challenging comparisons due to the 2018 World Cup and the exceptional summer weather last year, and yet the quarter was still disappointing, driven by unfavorable weather and softer market demand.  We remain confident in our ability to drive balanced net sales revenue growth through our strategy of investing behind our National Champion Brands and accelerating our Premium Portfolio.  Despite soft demand, this strategy is resulting in net sales per hectoliter growth of 4.3% on a constant currency basis in the quarter and protection of our market share.

 

[Slide 13]

In Canada, net sales revenue decreased 2.9 percent on a constant currency basis, driven primarily by a 5.1 percent decline in brand volume primarily due to softness in industry volume, partially offset by positive pricing.  COGS per hectoliter increased 7.6 percent in constant currency, driven by inflation and increased distribution costs, unfavorable sales mix, volume deleverage, and brewery start-up costs in British Columbia, partially offset by cost savings.  MG&A increased 9.5 percent in constant currency, driven by higher overall marketing investments focused on Coors Light and Molson Canadian programming, our premiumization efforts, and modernization of our portfolio through innovations as well as Truss start-up costs.  As a result, underlying EBITDA decreased 25.4 percent in constant currency.

 

Weak industry demand drove the majority of our volume declines, but premium segment share trends continued to improve for our Coors Trademark and Molson Canadian brands.  Coors Trademark volume was positively impacted by the successful launch of Coors Slice and growth in Coors Edge, and we continue to realize strong double digit growth from Belgian Moon and Miller Lite.

 

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

 

[Slide 14]

In our International business, net sales revenue decreased 12.1 percent on a constant currency basis driven by an 11.9 percent decline in brand volume along with the shift to local production in Mexico. This was partially offset by price increases and a positive geography shift.  COGS per hectoliter increased 7.8 percent in constant currency, driven by inflation and sales mix changes. MG&A decreased 5.3 percent in constant currency, driven by lower overhead costs, partially offset by higher marketing investments behind our focus brands.  As a result, underlying EBITDA decreased 10.8 percent on a constant currency basis to $5.8 million.

 

Brand volume declined due to higher net pricing on Coors Light in Mexico and supply chain constraints related to the general election in India, partially offset by double-digit growth in several of our focus markets, including Argentina, Panama, and Puerto Rico.  Coors Light volume was down principally because of Mexico, while Miller Lite volume increased mid-single digits across all of our International markets.

 

[Slide 15]

Moving to outlook, our earnings release details our guidance.

  • We continue to expect 2019 consolidated underlying COGS per hectoliter to increase at a mid single digit rate on a constant currency basis.
  • In terms of cost savings, we continue to expect a total of $700 million of savings for the three years ending 2019 and plan an added $450 million for the period 2020 through 2022, to be spread evenly over that period. These savings will help fund our investment plans, the costs of achieving the savings, and offset input inflation.
  • We continue to expect our International business to deliver underlying EBITDA growth of strong double digits in constant currency for 2019 versus 2018...and...
  • We continue to estimate underlying free cash flow of $1.4 billion plus or minus 10% this year.

 

Finally, before I hand the call back to Mark, a few comments regarding our recently announced dividend increase, modeling, and our approach to brand support.

  • Our next quarterly dividend, declared at 57 cents per share, is payable September 13th and brings our dividend in line with our target of 20% to 25% of prior fiscal year underlying EBITDA.
  • We ended the second quarter with normal levels of inventory and have shipped to consumption on a year-to-date basis.
  • Recall that the Trenton and Fort Worth go-lives last year led to very strong STWs in the third quarter, contributing to very soft STWs in the fourth quarter.  We have two remaining system go-lives in Albany, Georgia and Irwindale, California and remain on track to complete them by year end. The inventory build will be limited within these brewery orbits.
  • So for the balance of the year, we expect to ship to consumption and anticipate prior year comparisons will lead to a higher STW trend in the fourth quarter than the third quarter.
  • Our third quarter will also reflect the lapping of the favorable resolution of a U.S. vendor dispute, which was more than half of MG&A favorability in the third quarter of last year. We will also be lapping Canada distribution gains within COGS in the third quarter of last year.
  • Finally, North America industry conditions remain challenging. We will continue to spend our dollars efficiently while also increasing spending against attractive consumer segments and brands, and as Mark said, we will do so without sacrificing our deleverage and cash return

 

At this point, I'll turn the call back to Mark….

 

[Slide 16]

[Mark Hunter:]

...  Thanks, Tracey.

 

[Slide 17]

As you know, our "Earn More" focus depends upon extraordinary brands, customer excellence, and disruptive growth.

 

[Slide 18]

Looking at our brands...

 

...We continue to realize strong pricing across our business units, giving us more fuel for brand investment, which is increasing to energize our core brands, premiumize and modernize our portfolio.

 

...In terms of our core brands, as I mentioned, within the U.S., we saw strong premium light share growth and we expect this to accelerate where our new Coors Light advertising has just launched.  More on that in a second.

 

...In terms of premiumization, global mix became positive as a result of our performance in Europe, and though package mix in the US trended unfavorably, this was partially offset by brand mix which was positive for the first time since early 2018.  Drivers of our premiumization progress included Staropramen and Pravha in Europe, Belgian Moon in Canada and Cape Line, Blue Moon Belgian White, Peroni, Henry's Hard Sparkling, Arnold Palmer Spiked Half & Half, and the Sol trademark in the U.S.  We also expect bolt-on M&A to continue to aid premiumization, and in Europe, we recently completed the purchases of Pardubicky pivovar in the Czech Republic and Hop Stuff Brewery in London.

 

...Our global brands benefited from yet more strong performance from Blue Moon and Belgian Moon in Canada, Europe, and International, Staropramen in Europe, and Miller Lite in our International and Canada businesses growing strongly...

 

...And in terms of reshaping of our portfolio, we are demanding more from innovation.  In hard seltzers, we are committed to building on the performance Tracey mentioned, adding offerings in the segment, reflecting our confidence in the Henry's brand and the hard seltzers segment.

 

[Slide 19]

Of course, Coors Light is our largest brand, and though we are pleased to see its premium light segment share performance improve in our largest market, that is simply not enough.  Our new creative started running this week, and Gavin, Michelle, our U.S. distributors, and I are excited about "Made to Chill" which is focused on new drinker recruitment by dramatizing Coors Light's purpose to refresh the spirit through its mountain cold refreshment credentials. We believe the creative platform is distinctive, disruptive and breakthrough - especially for new legal drinking age adults.

 

[Slide 20]

Turning to customer excellence...

  • We continue to be a leader in category management in the U.S., as evidenced by a first place result among beer suppliers in the most recent annual Advantage survey and another first place on-premise result in the most recent annual CM Profit Group survey...
  • In Central Europe, we are seeing strong growth in both major channels in our Net Promoter Score, and...
  • In Canada, we continue to help customers drive category growth, as evidenced by our achievement of the partner of the year award with LCBO in Ontario.

 

[Slide 21]

We are also improving our intensity behind disruptive growth - premiumizing and extending, using new and existing brands to meet the expanding array of consumer tastes and occasions.

  • In the U.S., that includes strong double-digit growth for Peroni, early success with Cape Line sparkling cocktails, encouraging test market performance from Saint Archer Gold our premium light craft lager, Movo wine spritzers and the pending test of La Colombe hard coffees in select markets, and the strong growth of Sol Chelada following its national introduction earlier this year.
  • In Canada, Coors Slice, Aquarelle Hard Seltzer, and Bella Amari are performing well.
  • And in International, our portfolio is benefiting from continued expansion of Blue Moon - now available in more than 20 International markets.

Disruption also features in our route to market, presenting new service opportunities and revenue streams, as we step change our digital and e-commerce capabilities across our business.

 

[Slide 22]

We are also excited about the disruptive potential of Truss, which remains on track for a national launch of nonalcoholic cannabis infused beverages when they are legalized in Canada later this year.

 

For those of you less familiar with our partnership with Canada's Hexo:

  • Truss is single-mindedly focused on cannabis infused nonalcoholic beverages.
  • We know Truss's portfolio of brands will taste great and be scalable, because of its infusion technology and flavoring capabilities within its Belleville, Ontario facility.
  • Truss's portfolio will meet an array of consumer occasions.
  • Truss’s CEO, Brett Vye, heads a team that is practiced in the testing, learning, and scaling necessary to make Truss a success...and...
  • The combination of Molson Coors’ extensive beverage expertise and Hexo’s innovation capabilities in cannabis give us confidence that Truss will deliver safe, consistent and great tasting non-alcoholic beverages to meet consumers' demands.

On our next quarterly earnings call, we plan to discuss Truss's portfolio of brands which is well advanced currently in terms of retailer joint business plans.

 

[Slide 23]

Concluding on PACC and driving shareholder value, we are intensifying our focus on better topline performance, are pleased to be returning more cash to shareholders, and remain committed to further deleverage - all within the context of our capital allocation framework of:

  • strengthening our balance sheet
  • returning cash to shareholders, and
  • investing in brand-led opportunities through acquisitions and internal investment.

Thank you for your time and attention, and with that, I'll turn it back to Mark Swartzberg.

 

[Slide 24]

[Mark Swartzberg]

 

Thanks, Mark.

 

In terms of upcoming events, we look forward to seeing many of you at the Barclays Global Consumer Staples Conference, where we will also host a webcast at 10:30am Eastern Time on Wednesday, September 4, 2019.

 

With that, Gary, let's go to Q&A...

 

[Mark Hunter]

 

Thanks, Gary.  Remember, if you have additional questions, please contact Mark Swartzberg...and with that, thank you everyone for participating in this morning's call.