Molson Coors Brewing Company

2019 Fourth Quarter Earnings Conference Call

February 12, 2019

 

 

Speakers:

1) Gavin Hattersley, President and Chief Executive Officer

2) Tracey Joubert, Chief Financial Officer

3) Greg Tierney, Vice President of FP&A and Investor Relations

 

[Slide 1:  Title Slide]

[Andrea]

Good day, and welcome to the Molson Coors Beverage Company full year and fourth quarter 2019 Earnings Conference Call.  Participants can find related slides on the investor relations page of the Molson Coors website.  Our speakers today are Gavin Hattersley, President and Chief Executive Officer, and Tracey Joubert, Chief Financial Officer.  With that, I’ll hand it over to Greg Tierney, Vice President of FP&A and Investor Relations.

 

[Slide 2:  Safe Harbor Slide]

[Greg]

Thank you, Andrea, and hello everyone.

Following prepared remarks from Gavin and Tracey, we will take 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.  To the extent that you have technical questions on the quarter, we ask that you pick them up with me in the days and weeks that follow.

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, over to you, Gavin...

[Slide 3: Introduction - Gavin]

2019 was a challenging year for Molson Coors Beverage Company. However, despite significant headwinds and continued volume declines, we grew NSR/HL and improved our mix, delivered strong free cash flow and cost savings, reduced our debt, and started making progress toward premiumizing and modernizing our portfolio.

 

[Slide 4: Our Revitalization Plan]

We know we have a lot of work still to do. That’s why last quarter we announced a plan to get Molson Coors back to consistent topline growth. The plan is designed to streamline the company, allow us to move faster, and free up resources to invest in our brands and capabilities.  As promised in October, we’ve wasted no time implementing the plan.

To remind you:  There are five components of the revitalization plan…

  • Invest in our iconic brands.
  • Aggressively grow our above premium business – in beer and in flavored beverages.
  • Grow beyond beer.
  • Strengthen our capabilities, and
  • Streamline our company.

So let me update you on some of the progress we’re making.

 

[Slide 5: Invest in our Iconic brands]

We believe in the future of our core brands because they have the power to recruit new legal-age drinkers, which is why investing in our core is a key part of our revitalization plan. In the fourth quarter of 2019 in the U.S., we released new creative pieces in the Coors Light “Made to Chill” campaign and the Miller Lite “It’s Miller Time” campaign, and we’ve already unveiled more spots in 2020 as well. The early results are positive. Additionally, global Coors Light performance was flat, reflecting its best quarter in over three years and showing improvement in each of our segments. Miller Lite grew in all segments, delivering high double digit growth in Canada and had its best quarter in the U.S. since 2014.

 

[Slide 6: Grow Above Premium Beer]

As we work to aggressively grow our above premium business, we see progress in our above premium beer and in above premium flavored beverages.

Volume and NSR improved for the full year 2019 in above premium, with an acceleration in Q4. We will support this acceleration by providing more fuel to our fastest growing brands and new innovations in the above premium space.

Last month we launched new creative for Peroni in the U.S., which grew strong double-digits in 2019 and presents a real opportunity for us in 2020.  Belgian Moon continues to be one of our biggest success stories in Canada growing strong double-digits in both the quarter and the year, and delivering its third consecutive year of growth. And Staropramen, our Czech Lager, celebrated its 150th anniversary with volumes up high single-digits on the year, with strong momentum heading into 2020 as Q4 volume and revenues grew double-digits.

We have launched two big bet innovations in the U.S. already with Blue Moon LightSky and Saint Archer Gold.

LightSky is a low calorie, low carb beer brewed with tangerine peel. It’s a great product that pushes the Blue Moon brand into incremental occasions and consumers.

Saint Archer Gold is a premium light lager that offers a better tasting* alternative to Michelob Ultra, as proven by an independent expert beer panel.  We introduced consumers to Saint Archer Gold with a broad media campaign that kicked off during the professional football championship game and showcases how the brand is the better tasting* light beer.

 Our Tenth and Blake Portfolio again outperformed the U.S craft market in 2019, growing 16 percent per AC Nielsen versus a flat craft market. In January, we agreed to acquire Atwater Brewery, a regional craft brewer in Michigan. It fills a geographic void, gives us distilled spirits capability and will help position our craft portfolio to continue outperforming the broader craft market. 

 

[Slide 7: Grow Above Premium Flavors/Adjacencies]

We are investing more in flavored malt beverages and whitespaces that differentiate us and allow us to reach more consumers. Building on our 2019 successes, in the U.S. we will continue to invest behind Cape Line sparkling cocktails which were a Nielsen top ten growth brand for 14 consecutive weeks in 2019 and we are expanding La Colombe hard coffee to additional markets. In Canada, we will continue to invest in Mad Jack -- a popular FMB that was up double-digits on the year. And next month, we will launch Vizzy in the U.S., a hard seltzer that offers differentiated ingredients, which will help it carve out a meaningful space in the seltzer category.

[Slide 8: Expand Beyond Beer]

Lastly, we are expanding beyond the beer aisle altogether. This is a big shift, but it presents real growth opportunities.

In November we announced an equity deal and long-term partnership with L.A. Libations, an incubator of better-for-you nonalcohol beverages. This investment essentially creates a new nonalcohol innovation team for the Molson Coors Beverage Company, something we simply did not have before. I want to be clear, we are not looking to compete in the soda aisle with Coca-Cola and Pepsi Cola. Instead, we will be selective about where we compete, always looking to leverage our unique strengths.

And of course, next month we’re taking a definitive step into the wine category with the national launch of Movo wine spritzers in the U.S.

 

[Slide 9: Streamlining to Simplify and Fuel Investment]

The organizational restructuring is well under way and we are making progress toward our goal of improving efficiency and unlocking an additional $150M in annual savings, bringing our total expected cost savings to $600 million over the 2020 through 2022 program. We have simplified our structure from four business units and a corporate center to two streamlined units – North America and Europe. In North America our new organizational design is now set. All teams have been selected and people are transitioning to new office locations. In Europe, we have announced all senior leadership changes and anticipate completing the re-organization by the end of March. As part of our updated structure, we have a new data and analytics team and are expanding and developing new commercial and operational capabilities that will make us smarter and more efficient. We continue to estimate the costs of all these changes will result in total one-time charges in the range of approximately $120M-$180M spread over Q4 2019, 2020 and 2021. Next quarter we will report our financials under our new operating structure.

As you can see, we are moving quickly to implement our plans and we’re starting to see glimpses of transformation within our portfolio. Also, the new structure is already providing greater clarity and accountability. Teamwork has improved and the speed of decision making is substantially quicker. None of this is easy and it won’t happen overnight. But the tough decisions we’ve made, and quick actions and investments we are making, will ensure the Molson Coors Beverage Company is built to succeed in today’s marketplace.

Now over to you Tracey for a review of the fourth quarter and full year, and our outlook...

 

[Slide 10: Tracey Picture/Title]

[Tracey]

...Thank you, Gavin, and hello everyone....I will first cover the quarter and full year on a consolidated and regional basis then move to our outlook.

[Slide 11: Consolidated Q4]

So, to recap the quarter:

  • Net sales revenue increased 3.0 percent in constant currency. We delivered positive global pricing and mix, as well as a 1 percent increase in financial volume, including a planned benefit in the U.S. from shipments exceeding brand volume as full year shipment volumes and retail volumes converged.
  • Net sales per hectoliter, on a brand-volume basis, increased 1.1 percent in constant currency, reflecting continued favorable global pricing and mix. Our Europe business continues to deliver strong NSR/HL increases, driven by both pricing and mix. In North America, we saw a sequentially lower increase in our U.S. business and slightly lower rates in Canada.  Remember general price increases have largely shifted from the fall to the spring in the U.S., with the most recent increase last spring. Our U.S. mix benefit was neutral in the quarter. 
  • Worldwide brand volume decreased 1.0 percent and financial volume increased 1.0 percent, reflecting a planned benefit in the U.S. as we shipped largely to consumption for the full year. Global priority brand volume increased 1.6%. In the U.S., brand volumes benefited from improving industry volumes - October 2018 was soft following a general price increase - and improving premium light segment trends as you heard in Gavin’s remarks.  Canadian volumes remain challenged in the fourth quarter, driven in part by continued industry softness. In Europe, our brand volume benefited from a broad-based improvement in industry trends and continued premiumization. Our international business brand volumes grew double-digits, driven by strong performance in Latin America.
  • Underlying COGS per hectoliter increased 1.7 percent on a constant currency basis driven by inflation and mix, partially offset by cost savings. The trend was significantly improved versus prior quarters, primarily reflecting fixed cost absorption in our U.S. business resulting from shipment timing between quarters and the cycling of one-time costs in our Canadian business from 2018.
  • Underlying MG&A decreased 6.3 percent on a constant currency basis due to a non-recurring vendor benefit in the U.S. and lower one-time incentive Compensation expenses driven by anticipated departures as a result of the revitalization plan. These items together account for approximately 50% of the reduction in MG&A. Additionally, our marketing spend was lower in the fourth quarter, reflecting a planned shift of spending to support brand launches earlier in the year and align our marketing pressure with the key selling seasons, particularly within Europe and the U.S.
  • As a result, underlying EBITDA increased 15.8 percent on a constant currency basis.

[Slide 12: Consolidated 2019]

Recapping the full year:

  • Net sales revenue decreased 0.6 percent in constant currency. We delivered positive global pricing and mix, but this was offset by a decline in global volume.
  • Net sales per hectoliter on a brand-volume basis, increased 2.9 percent in constant currency, driven by favorable pricing and mix as we continue to focus on premiumizing our portfolio.
  • Worldwide brand volume decreased 3.5 percent and financial volume decreased 4.0 percent. Global priority brand volume decreased 2.2 percent.
  • Underlying COGS per hectoliter increased mid-single-digits, up 4.9 percent on a constant currency basis driven by inflation, mix and volume deleverage, partially offset by cost savings.
  • Underlying MG&A decreased 0.9 percent on a constant currency basis. Corporate underlying MG&A was $158 million, coming in below prior year and below our prior estimates, driven largely by lower incentive compensation expense and other targeted spending reductions.  Marketing spend per hectoliter was up for the year in each of our segments.
  • As a result, underlying EBITDA decreased 2.6 percent on a constant currency basis. Depreciation & amortization expenses were $827 million, in-line with prior year results but below our prior estimate driven by later and lower than planned capital expenditures.
  • Net interest expense of $273 million was in line with our third quarter estimate.
  • We delivered underlying free cash flow of $1,370 million, in line with our estimates, and 3.7 percent below the prior year, driven by lower underlying EBITDA and higher cash tax payments, partially offset by lower capital expenditures, favorable changes in working capital and lower cash interest payments. Capital expenditures of $593 million were lower than our prior estimate driven by savings and the timing of capital spending as we evaluated and made capital decisions to drive stronger returns.
  • In 2019, we completed our three year savings program associated with the MillerCoors acquisition and integration, delivering $230 million during 2019, and bringing our three year total savings to $725 million. Costs to capture the savings over the three years were $208 million, coming in at the low end of our most recent estimate of $230 million driven by the addition and delivery of higher value, low cost projects.

[Slide 13: Outlook]

Which takes me to our financial outlook:

  • We expect 2020 to be a transition year and anticipate net sales revenue to be flat to down low single-digits on a constant currency basis. We expect underlying EBITDA to be down high single-digits on a constant currency basis from fiscal year 2019 underlying EBITDA of $2.364 billion. Our estimated underlying effective tax rate is 20 to 24 percent. We expect interest expense of $280 million plus or minus 5%, and expect depreciation and amortization expense to be approximately $850 million.   We estimate capital spending of $700 million plus or minus 10% and underlying Free Cash Flow of $1.1 billion plus or minus 10%, reflecting lower expected EBITDA performance as well as higher cash taxes than in 2019.  And as mentioned on our Q3 earnings call, we increased our total cost savings program for the period 2020 through 2022 to $600 million as a result of the revitalization plan, to be spread more or less evenly over that period.  As a reminder, we are planning to reinvest these additional cost savings behind our brands and other capability building. With the exception of costs that would qualify for Special Items treatment, all other costs to achieve the $600 million in savings are included within our underlying EBITDA guidance.  Examples of special items included in the $120 to $180 million of costs to achieve are severance, retention, and relocation costs associated with the revitalization plan.  Accelerated depreciation and other direct costs associated with the Irwindale Brewery closure will also be reported as special items.
  • We expect 2021 and thereafter to deliver net sales revenue and underlying EBITDA growth versus 2020.
  • We intend to maintain our investment grade credit rating, and as our FY 2019 trailing annual underlying EBITDA has our current annualized dividend within our target range of 20-25 percent, we do not anticipate the board of directors will change our dividend rate at this time.
  • The change in structure to two business units went into effect at the start of the year. Therefore, the resulting financial reporting changes will be reflected in our first quarter 2020 results, including allocation of corporate MG&A expense to our two business segments. 

Also, please consider the following related items:

  • Our estimate of 2020 EBITDA is unchanged versus our estimate on October 30, 2019, in spite of a strong fourth quarter benefiting from one-time items, shipment timing and deferred spending as we refined the revitalization plan. Our business continues to face a number of headwinds including significant inflation, and we are committed to investing to improve topline performance.
  • While we expect the full year’s underlying EBITDA to be down high single-digits on a constant currency basis, we expect the second half EBITDA to be better than the first half for two main reasons. Our full year increase in marketing investments will begin in H1 as we launch new products and add support to our premium brands and; the cost savings that we expect to realize in 2020 will be skewed to the back half of the year. 
  • In January, we announced the decision to close our Irwindale brewery. The associated cost savings are not considered part of the revitalization plan, but are included in the previously announced $600 million cost savings program for 2020-2022.

[Slide 14: Q&A]

With that, thank you for your time and attention, and I'll turn it back to Andrea for Q&A.

[END]

[Gavin]

Thanks, Andrea,  I know there may be additional questions we weren’t able to answer today.  Please follow up with Greg, and Tracey and I look forward to talking with many of you as the year progresses. With that, thank you everyone for participating in this morning's call.