Molson Coors Beverage Company (TAP) — Q2 2016 Earnings Call Transcript

Thank you, Nicole. And hello and welcome everybody to the Molson Coors earnings call. Apologies for that slight delay due to a technical issue. Many thanks for joining us today. With me on the call this morning from Molson Coors, we have: Mauricio Restrepo, our Global CFO; Gavin Hattersley, CEO of MillerCoors; Stewart Glendinning, CEO of Canada; Simon Cox, our European CEO; Kandy Anand, our International CEO; Lee Reichert, our Deputy General Counsel; Brian Tabolt, our Global Controller; and Dave Dunnewald, the VP of Investor Relations. For our earnings call today, Mauricio and I will take you through highlights of our second quarter 2016 results for Molson Coors Brewing Company, along with some perspective on the second half of 2016. In the second quarter, we continued to focus on our First Choice ambition and on building a stronger, broader and more premium brand portfolio, underpinned by incremental sales and marketing investment, as we discussed on our first quarter earnings call. Progress in the second quarter included; net sales revenue per hectoliter growth on a constant currency basis in all of our businesses, strong Coors Light growth globally, improved core brand momentum, fast-growing innovations in key markets, and strong above premium growth globally. We significantly increased investments behind our brands, although the timing of shipments and other short-term factors held back bottom-line performance in the quarter. In brands, Coors Light grew volume more than 4% globally, including strong double-digit growth in Europe and Latin America and low-single-digit growth in the U.S., its best performance here in nearly three years. In above premium, our craft portfolio drove growth from Doom Bar and other Sharp’s brands in the UK; from Creemore Springs and Belgian Moon in Canada; and from Leinenkugel’s Grapefruit Shandy and newly acquired Saint Archer in the U.S. Staropramen grew strongly across Europe outside of its home market, and in ciders, we grew volume with Rekorderlig in Europe and Strongbow in Canada. In Flavored Malt Beverages, we now have the largest hard soda franchise in the U.S. with the successful introduction of the Henry’s Hard Soda brands earlier this year. We continued to strengthen our business through improvements to our sales execution and revenue management capabilities, increased efficiency of our operations, and implementation of common global systems. To ensure that our supply chain is fit for the future, in the second quarter, we reached an agreement to purchase land in British Columbia on which we’ll build a new efficient and flexible brewery over the next few years. This new brewery site is attractively priced, has rail access, and is situated on the Trans-Canada Highway, making it ideal for serving the Western Canada and U.S. markets. And we anticipate completing the land purchase this month. In the past few months, we’ve also made substantial progress on the pending MillerCoors transaction, including in integration planning and completing the necessary financing at very attractive rates. Investor demand for our recent debt offering was very strong, and we achieved record and near-record low interest rates on our debt issue. We’re pleased with the transaction progress made to-date, and we continue to plan for a closing before the end of 2016. More specifically, October the 10, based on the joint ABI/SAB recent announcements. We’re very excited to be much closer to completing this game-changing transaction, which will enable simplified decision-making and will reduce the complexities of dual ownership; it will help us to become a more integrated and efficient brewer; and it will enable us to become a more effective competitor as a single owner, promoting consumer choice in an increasingly diverse and fast-growing brewing industry. As part of the integration planning process, last week, I announced some leadership appointments that will strengthen our combined organization and that will take effect upon the close of the transaction. Our transaction and its timing remain dependent clearly on the completion of the ABI and SABMiller transaction. The regional highlights for the second quarter are as follows. In the U.S. while overall sales-to-retail volume decreased 1.7%, driven primarily by our below premium brands, Coors Light STRs were up low-single digits in the quarter, which was its best quarterly performance since the fourth quarter of 2012. Domestic net revenue per hectoliter grew 0.7% for the quarter as a result of favorable net pricing and positive sales mix. Our largest brand gained share of the Premium Light segment for the fifth consecutive quarter. And please note that all our performance discussions relating to Coors Light exclude the Citrus Radler extension that was discontinued last year. With flat STRs, Miller Lite gained share of the Premium Light segment for the seventh consecutive quarter. Improved momentum for these two brands was driven by continued rollout of their new visual identities and consumer communications, which appeal to a broad section of men and women, millennials and multicultural consumers. Additionally, Coors Banquet is now in its tenth consecutive year of growth. In the higher-margin above premium segment, Henry’s was the number one Hard Soda franchise in the second quarter on the strength of Henry’s Hard Orange and Ginger Ale. In craft, Leinenkugel’s Grapefruit Shandy and the newly acquired Saint Archer brands continued to drive volume, although Blue Moon Belgian White declined low-single digits. As an important indication of the traction we’re gaining in the U.S., for the first time in the history of the joint venture, in 2016 MillerCoors finished number one in the Tamarron Supplier Survey, which polls hundreds of U.S. distributors in rating the performance of beer, wine and spirits suppliers. This is a key accomplishment in our First Choice ambition for our customers and is an example of the types of efforts we are driving globally to ensure we are focusing on these important customer relationships. On the bottom line, MillerCoors’ second quarter underlying net income declined 3.8% to $468.8 million, driven primarily by the timing of shipments due to calendar shifts, which were partially offset by lower cost of goods sold, higher net pricing, and positive sales mix. Meanwhile, Molson Coors’ second quarter underlying equity income in the U.S. segment increased 1.4% due to an $11.1 million anticipated refund of federal excise tax paid on imports. This tax refund is based on qualifying volumes exported from the U.S. by Coors Brewing Company, a wholly-owned subsidiary of Molson Coors, and was driven by new legislation enacted this year in the U.S. First half underlying equity earnings in the U.S. segment, which were not as significantly affected by the timing of beer shipments, increased 9.4%. In Canada, STRs declined 0.1%, and our sales volume declined 0.8% in the second quarter. Weak economic conditions in Western Canada were largely offset by favorable timing of the Canada Day holiday this year. Net sales per hectoliter in local currency increased 1.2% in the quarter, despite competitive pressures in the East and a pronounced consumer shift to value brands in Alberta. In core brands, although Coors Light volumes declined, our new packaging, advertising, and in-pack sales promotions are driving improved consumer purchase intent and brand health scores. Molson Canadian volume suffered from a significant shift towards the value segment in Alberta. In above premium and craft, we continued to see strong performance, as Coors Banquet, Belgian Moon, Mad Jack, Heineken, Dos Equis, Sol, and Strongbow Cider all grew volume and share in the quarter, along with our Creemore Springs craft brands. In headline financial results for the quarter, Canada underlying pre-tax income decreased 19.7% in constant currency, primarily due to a significant increase in sales and marketing investment, as we discussed on our last earnings call. Looking at the first half on the same basis, underlying pre-tax income decreased 10.1%, also driven primarily by increased brand investments. Our Europe business achieved 1.6% volume growth and increased market share across the region, driven by growth in seven of our 11 lead core and premium brands. Net sales revenue per hectoliter increased 1.3% in local currency, driven entirely by brand and geographic mix. In core brands, Carling, Bergenbier, and Ozujsko all grew share of segment in their primary markets. In our above premium portfolio, we saw increased momentum, with strong double-digit growth by Coors Light and our craft portfolio, including Blue Moon, Doom Bar, and the other Sharp’s brands. Finally, the inclusion of Rekorderlig cider since the middle of 2015 and the full repatriation of the Staropramen brand in the UK this year added to the solid progress we made in premiumizing our Europe portfolio. Consistent with the first quarter, underlying pre-tax income was lower in the quarter due to higher brand investments and amortization expenses, lower net pension benefit and the termination of the Heineken contract brewing arrangements in the UK, along with unfavorable foreign currency movements this quarter. Our International business grew Coors Light at a strong double-digit rate in the second quarter, driven by Latin America, including our brand launch in Colombia late last year. Overall volume, including royalty volume, declined 9.3%, driven by the enactment of alcohol prohibition in Bihar, in India; the transfer of Staropramen in the UK to our Europe segment; and the volume impact of our substantial China restructure. Underlying pre-tax performance improved in the second quarter. The drivers included volume growth in Latin America and Japan, favorable sales mix, as well as lower price promotion and overhead expenses related to the restructure of our China business last year, including cycling $3.6 million of price promotion expense a year ago. Now, I’ll turn it over to Mauricio to give second quarter financial highlights and perspective on the balance of 2016.

Thank you, Mark, and hello everybody. As a reminder, all of the results that I will be discussing are in U.S. dollars, unless I note otherwise. Our second quarter financial headlines are as follows. Net sales were down approximately 2% in U.S. dollars due to currency movements. On a constant-currency basis, net sales increased 1.9%, driven by Europe, Canada, and International. Our net sales per hectoliter increased 2.4% in constant currency, due to positive mix. On a U.S. GAAP basis, we reported pre-tax income of $196.9 million, 32.1% lower than a year ago, while after-tax income from continuing operations attributable to Molson Coors was $174.1 million, down 24.1% from the prior-year result. These decreases were primarily due to non-cash special charges and other non-core expenses related to our pending acquisition, the alcohol prohibition in Bihar, and planned brewery closures, along with higher MG&A expenses. Underlying pre-tax income in constant currency decreased 6.9% in the quarter and 8.6% on a reported basis, partly due to year-over-year differences in the timing of brand investments and other expenses, as well as lower worldwide volume. First half results eliminate some of these quarterly timing differences and reflected 3.4% growth in constant currency underlying pre-tax income and 2% growth on a reported basis in U.S. dollars. Second quarter underlying after-tax income decreased 9.2% to $239.5 million, or $1.11 per diluted share, driven by lower worldwide volume, higher brand investments in all of our businesses, and negative foreign currency movements, which were partially offset by positive mix, lower underlying net interest expense, and higher underlying U.S. equity income. Underlying EBITDA in the quarter was $428.7 million, that is 5.8% lower than a year ago, while our first half underlying EBITDA grew 1.2%. Underlying free cash flow in the first half of 2016 was $158.9 million. This represents a decrease of $82.2 million from the prior-year, primarily driven by lower underlying after-tax income, negative foreign currency, and less benefit from working capital changes, excluding special and other non-core items, including higher cash paid for taxes. In early July, we completed a $7 billion long-term debt offering with a weighted-average coupon of 2.9%, including the lowest 30-year BBB-minus coupon ever issued in U.S. dollars, as well as a 1.25% coupon for our eight-year euro debt issue. As a result of these attractive rates, we anticipate that our annualized interest cost on the transaction financing will be approximately $260 million at current interest and foreign exchange rates. This annual interest expense is nearly $200 million lower than the assumed bridge-loan and other transaction-related interest expense included in the 2015 pro forma financial results that we filed in May. With the debt offering, we achieved broad, high-quality investor participation and attractive pricing. More than 400 institutional investors participated in the offering. Combining this debt issue with our $2.6 billion equity offering in February and up to $3 billion of a previously arranged term loan, we now have in place all the financing needed for the pending MillerCoors transaction. Total debt at the end of the second quarter was $3 billion, which does not include the $7 billion of long-term debt we issued in July. Cash and cash equivalents totaled slightly less than $3 billion, resulting in net debt of $37 million, which is significantly lower than prior-year due to the cash proceeds received from our equity offering earlier in the year. Please see the earnings release we distributed earlier this morning for a detailed review of our business unit financial results in the quarter. Now looking forward to the remainder of 2016, following are some factors to consider for the last two quarters of this year: Incremental Europe brand amortization expense, with an annualized impact of approximately $15 million, which began in the fourth quarter of 2015, along with lower net pension benefit in Europe this year. A total prohibition on the sale of alcohol, unexpectedly implemented by the state government in Bihar, in early April. We don’t know how long this ban will be in place, and we expect this development to present a headwind for our International business for the foreseeable future or until it is overturned. And finally, foreign currency translation, which at current exchange rates would be a headwind of about $13 million to our underlying pre-tax results in the second half of this year, with most of the impact in Europe. Given the recent volatility of our key foreign currencies, particularly the British pound, it is important to watch these rates closely. Regarding 2016 guidance, all of the following metrics exclude any effects of the MillerCoors and Miller global brands transaction, the timing of which will have a big impact on virtually all of our guidance measures. For the full-year, we continue to expect cash contributions to our defined benefit pension plans to be in the range of $45 million to $65 million in 2016, and pension expense of approximately $17 million, including our 42% of MillerCoors contributions and expense. MG&A expense in Corporate of approximately $120 million on an underlying basis, which excludes expenses related to our pending transaction. Consolidated net interest expense of approximately $110 million on an underlying basis, which excludes transaction-related interest expense and income. An underlying effective tax rate in the range of 18% to 22%, assuming no further changes in tax laws, settlement of tax audits, or adjustments to our uncertain tax positions. In updated guidance, we now expect underlying capital spending of approximately $220 million, which excludes capital this year related to the construction of our new brewery in British Columbia. As far as our cost outlook is concerned, we continue to expect the cost of goods sold per hectoliter in Canada and Europe in local currency to increase at a low-single-digit rate for the full-year 2016. We now expect 2016 MillerCoors COGS per hectoliter to decrease at a low-single-digit rate versus prior-year. Further cost reductions, including acceleration of some of our cost savings initiatives, and changes in sales mix drove the change from previous guidance of approximately in line. We now expect our International COGS per hectoliter to increase at a double-digit rate for 2016. This is up from a high-single digit increase previously, due to geographic mix changes. We continue to expect annual cost savings for this year and next year to be in the range of $50 million to $70 million. This view excludes cost savings from MillerCoors, as well as synergies resulting from the pending MillerCoors acquisition, which we expect to be $200 million by year four following the transaction close. Finally, here are the most recent volume trends for each of our businesses early in the third quarter. In the U.S., for the three weeks through July 23, STRs decreased at a mid-single-digit rate, partially due to the timing of the load-in for the July 4 holiday, while they decreased at a high-single-digit rate in Canada for the same period. In Europe, volume through July 25 decreased high-single digits. And our International sales volume, including royalty volume, through July 23 decreased at a low-single-digit rate, primarily due to the alcohol prohibition in Bihar. As ever, please keep in mind that these numbers represent only a portion of the current quarter, and trends could change in the weeks ahead. Also, as a reminder, following the close of the pending MillerCoors transaction, we plan to discontinue providing these early-next-quarter volume trends.

At this point, I’ll turn it back over to Mark for outlook, wrap up and the Q&A. Thank you, Mauricio. In the latter half of this year, we will continue to pursue our agenda of being the First Choice for consumers and customers in the markets we operate, aiming to create a more extensive, robust, and premium product portfolio while ensuring top-notch customer service and partnerships. In the U.S., MillerCoors is highly focused on its strategy for total volume growth by 2019. For the first time in several years, our largest business is meeting its volume expectations through the first six months. The quarter also brought us closer to our growth goals, with enhanced marketing support for our flagship brands, Coors Light and Miller Lite, where we are beginning to see positive results. We are also experiencing success in innovation. In the above premium segment, we are optimistic about Henry’s potential as the hard soda category continues to expand. In the second quarter, Henry’s became the leading hard soda brand, and MillerCoors plans to launch Henry’s Hard Cherry Cola this month. In the craft segment, MillerCoors will maintain its investment in advertising support for Blue Moon and Leinenkugel’s for the remainder of the peak beer selling season. Additionally, MillerCoors has announced its agreement to acquire a majority interest in Oregon’s Hop Valley Brewing Company and increase its stake in Georgia’s Terrapin Beer Company from minority to majority. These respected brewers enhance our leading U.S. craft portfolio, which already includes Blue Moon, Leinenkugel’s, and Saint Archer. Next month, at its fall distributor meeting, the U.S. team will outline plans to enhance the performance of its below premium portfolio, while also broadening its Building with Beer retail strategy to foster First Choice customer partnerships. The mood at MillerCoors, especially with upcoming changes in ownership, is one of excitement rather than apprehension. Meanwhile, everyone at MillerCoors remains committed to growing our business, transforming our portfolio, and enhancing shareholder value. In Canada, we are focused on advertising that emphasizes product quality and improving sales execution through our Field Sales Management program. These initiatives aim not only to boost our premium performance but also to accelerate our growth in the above premium sector. We are continuing our efforts in the hard soda space with Mad Jack Root Beer and Ginger Ale, which are our first significant hard soda introductions in Canada. Furthermore, we formed a partnership in May with Brasseur de Montreal to utilize its craft and specialty beers in Quebec and throughout our robust Canada distribution network. After the completion of the pending MillerCoors transaction, we look forward to reintegrating Miller brands into our Canada portfolio. In Europe, we recorded growth in revenue and market share in the second quarter, largely due to our core and above premium brands, as well as the inclusion of Rekorderlig cider and Staropramen brands in the UK. Increased expenses from brand amortization will pose a challenge for one more quarter, and we will continue to invest in our core brand portfolio across Europe to grow market share. This includes capitalizing on our English Premier League sponsorship beyond Carling to explore various high-potential branding and market opportunities. We will also focus on premiumizing our portfolio, featuring Coors Light, the Sharp’s portfolio led by Doom Bar, Cobra, Rekorderlig, and Staropramen in the UK, along with Ireland’s leading craft brand, Franciscan Well. Our International business is set to enhance overall growth in established and selected new markets while achieving profitability in 2016 on a constant-currency basis, apart from the effects of the Bihar alcohol prohibition. Once the MillerCoors transaction concludes, we will incorporate the Miller international brands into our portfolio and leverage a footprint that aligns with our growth strategy, allowing us to enter priority markets while scaling our business in existing regions. We will also push for rapid growth of Coors Light in Latin America. Moving forward, the Coors, Miller, and Staropramen brands will be central to our International brand portfolio, and in India, we will work to expand our Mount Shivalik operations. To summarize, in the second half of 2016, we will maintain our focus on being the First Choice for consumers and customers, guided by our Profit After Capital Charge approach with the aim of enhancing total shareholder returns. Before we begin the Q&A session, I’d like to mention that our prepared remarks will be available on our website for your reference within a couple of hours today. At 1 P.M. Eastern Time, Dave Dunnewald will host a follow-up conference call where you can ask further questions regarding our quarterly results. This call will also be accessible via web cast on our website. We also look forward to seeing many of you at the Barclays Consumer Staples Conference in Boston on September 7. Now, Nicole, we would like to open the floor for questions, please.

Thank you. Good morning, everyone.

Hey, Judy.

Hi, Judy.

So first, it seems like your volume trends have worsened in July for all of your regions. I’m understanding that this is really your short-term trend, but can you provide any color just in terms of how much of this is maybe worsening macro versus timing versus any other drivers of that softness?

Hey, Judy. It’s Mark. Let me take that. I mean, as we’ve intimated, we’re going to discontinue post the acquisition of these short-term trends because my idea is that they are not helpful and there’s so much volatility around trading days, the timing of holidays, and some of the promotional activity in the market. So, it’s very, very difficult to take a read on it. So, it’s very early in the quarter. I think if you look at our longer-term volume trends, that’s a much better indication of the health of our business, and I really won’t read too much into the short-term numbers.

Okay. That’s fair. And then the second quarter, obviously we’ve seen your brand investments step up, and you certainly called out that this would happen in the quarter. But, I just wanted to get a sense of some of the payback that you’re seeing as you step up these investments and the likelihood that you continue to see these investments going forward. And then if I drill down into Canada, it seems like certainly the STR got better in the second quarter, but margins did get negatively impacted. So, sort of the trade-off that you’re seeing in that particular region in terms of share versus profitability.

Okay. Well, couple of questions in there, Judy. So, I’ll pass over to Stewart shortly to pick up on the Canada-specific question. I think your broader point on investment is a good question. I mean, we are driving a First Choice for consumer and customer agenda. Central to that is the quality, the breadth, and depth of our brand portfolio and our ability to premiumize our portfolio while building a customer relationship. So, we made good on the commitment to step up our investment through the second quarter. I think if you look at our NSR per hectoliter, we saw NSR per hectoliter growth in all of our regions. I’m encouraged by the sequential improvement in our share trends in all of our regions as well from Q1 into Q2. But clearly, brand building is a long-term game, and my objective and the executive’s objective here is to continue to invest in a sustained way. Clearly, the focus is always on the quality of our investments. You’ve heard me say in the past, I’d rather spend less dollars on a great idea than more dollars on a bad idea, but our job is to develop great ideas and then invest in a sustained way, and that’s what we’re doing, and I expect to see us continue to do that through the third quarter as well. As I say, the sequential improvement that you’ve seen from Q1 to Q2, I think, is a testament to the focus and outlook right across our business. Stewart, do you want to pick up on the Canada-specific question?

Got it. Okay. That’s fine. Thank you.

Thanks, Judy. Hey, Stewart?

Mark.

You’re back on.

Am I back on now? Okay. Well, hold on.

Yeah.

Kind of redial me in. So, cancel that thought. Okay. So just – if I can just answer that question. Sorry, I was talking, and nobody could hear me. But obviously, two pieces to margin, Judy. The NSR which we were quite pleased with was broadly in line with the underlying trend in Q1, really was driven by the COGS. And if you looked at what happened in cost of goods sold in the second half, we broadly offset our inflation with cost savings, and the increase you see there was the increase in some of our marketing investments for impact promotions which go in case. So that was investment behind the brands. You saw some impact from transactional effects and volume deleverage. But, I would look at the first half and say, if you looked at the first half, actually, we had an improvement in COGS of about 0.7%. So, hopefully that helps.

Got it. Thank you.

Okay. Thank you Stewart.

Thank you.

Thanks, Stewart. Thanks, Judy. Nicole, back to you.

Hi. Good morning.

Hi, Vivien.

Hi, Vivien.

I was hoping to touch on the European segment please. While the positive net revenue per hectoliter is certainly encouraging, given what we’ve seen over the course of 2015 per your comments, rate itself was negative. So, could you just offer a little bit more color on the pricing environment in Europe and whether there is any reason for optimism that the pricing outside of positive product or geographic mix could start to materialize? Thank you.

Okay. Thanks, Vivien. I’m going to be hopeful here and suggest that Simon might be on the call. Simon, are you with us?

I’m speaking now. Hope you can hear me?

Yeah, we can. Thanks, Simon.

Okay. Great. Yeah, okay. So, yes. I got the question. Thank you, Vivien. I mean, overall, we would characterize the European quarter as pretty solid and that sales revenue were up by 3%. What we’re trying to do obviously is make sure that we’ve got an appropriate balance between price and volume, or net NSR per hectoliter and volume, which again, I think we achieved in the quarter. Volumes were up 1.6% and NSR per hectoliter at 1.3%. So, I think that’s a reasonably good balance. It is true that the NSR hectoliter is driven by mix with price under pressure. But that goes back to our premiumization strategy. We’ve been trying to make sure that we invest behind the premium brands to drive the right – both portfolio and geographic mix. So, whilst pricing is under pressure across many of the markets, I think we’re doing a pretty solid job in recognizing that and driving volumes and shares and mix to get to an overall positive revenue growth. So, we’ll be quite satisfied with it, recognizing that pricing remains competitive.

Thank you. That’s helpful. And just if I could follow-up on that.

Yes.

In terms of the share gains that you’re generating, those are in volume terms. But, do you have a sense of how your dollar share is trending? I’m just curious whether this pricing pressure is true across the categories, or whether your pricing is under a little bit more pressure on an apples-to-apples basis.

We don’t believe that our pricing is under excessive pressure. Obviously, we’ve got 11 markets that we have to cover, so it’s very, very difficult to give you a sort of generic answer. But, we believe that our pricing and our volume is sort of in sensible collaboration. We took about 0.3% share across the region, and I don’t think we sacrificed price in an uncontrolled way to do that. So, I keep coming back to you, Vivien. It’s important for us that we manage premiumization and mix, overall volume and share, and overall pricing. And I think as long as we’re getting overall net sales revenue growth like we have to do in the quarter end of 3%, we would be happy with that and think that’s pretty solid.

Absolutely. Thank you very much.

Thanks, Vivien. Nicole?

Yes. Thanks and good morning, everyone. One on Canada, Mark or Stewart, and another one on the global potential of some brands besides Coors Light. But on Canada, I think the takeaway here is that the spend increase is working. The share trends are improving. When you lift the hood, what gives you confidence, if you have it, that the upgrade in trend is sticky, so to speak? What are you seeing with brands and channels that makes you think that there won’t be an issue three months from now? Of course, the category is competitive, but trying to get a little bit better understanding of how much confidence we can have that it will hold. And to the extent you can factor in July, appreciating that it’s just one month of data, that would be helpful too. So, that’s my question on Canada.

Mark, do you want to come back for the global question? And so, I’ve asked Stewart to take that – to respond to that. Then if you come back on the global brand piece. So, Stewart, do you want to...

Oh, sure. Sure enough.

Yes. Sure, Mark. Yeah. Look. You probably did, just talking about our First Choice agenda just briefly and just saying that against the three platforms, we’ve been driving – lowering our cost base, overhauling our supply chain network and improving the frontend. All three of those actually are looking good. On the first two, we continue to see cost savings in the quarter, and that allowed us to drive some of that brand investment that we put behind commercial. And the money that we put behind commercial really went to three places. It went to invest behind our growing above premium portfolio, which has continued to grow share of beer. So, I think actually that’s very sticky. Those brands have continued to grow, and Coors Banquet turned in a better than 20% growth again this quarter. I think the second piece is we put money behind our big brands relative to in-case promotions. And I think last year, we had some concerns that we weren’t competitive. I think this year, we were well-balanced, and I think that was a positive. And then on the third investment, we pushed investment behind our share of voice. We were under indexing. And together with really effective advertising copy, we’ve seen that now continue to grow our brand scores. So, growing brand scores is a great tell-tale sign that you’re spending money in the right place. So, that’s how I’d describe the brand expense for Q2.

That’s great. Well, congratulations. I’ll get back in the queue.

Cheers.

Mark, do you want to pick up your global question?

Oh, okay. I thought you were saying – that would be great. Yes. Thank you for that. Coors Light, I mean, plus 4% is a great number, and I think there are reasons to believe you can accelerate from there. So that in itself is something to draw attention to. But, you mentioned Staropramen. You mentioned Miller. Could you give us a sense of where you think you are in the evolution specifically of Staropramen, how much potential you see here for the brand, in the U.S.? But more broadly, we see how it’s helping you in Europe. Just trying to get a sense of how much it can start to deliver on the kind of performance we’re seeing from Coors Light.

Yeah. So, if you look at the shape of our existing International portfolio, the two backbone brands are principally Coors Light and Staropramen. And clearly, Blue Moon is now in many, many markets globally, growing rapidly from a small base. If you look at Staropramen specifically, post the StarBev acquisition, we increased investment in the brand really across Greater Europe, so outside of the Czech market, and we’re seeing double-digit growth in many of those markets. My personal perspective is on a Greater Europe basis, there’s still a lot of runway ahead of us. And one of the changes I announced just in the last couple of weeks, Mark, is that we’ll now look at our European business, including our export and license markets, and one of the benefits from that is we have a more holistic Europe approach across all markets on Staropramen. I think outside of Europe, that’s part of our thinking and our emerging planning ahead of integration. As Staropramen is currently in Canada, we’re just going to – testing and incubating the brand there. The U.S. market was slightly more complex because of the distributor relationship or the importer relationship that we inherited when we acquired the StarBev business. We’re working our way through that and there’s a broader conversation with Gavin and the team really looking at where we want to place our bets on our own portfolio going forward, recognizing that we’re kind of – we have an embarrassment of riches with Pilsner Urquell and Peroni and Staropramen potentially in the future. So, that’s work that we’re currently thinking our way through just now. But in terms of the heartland for Staropramen which is, let’s call it, Greater Europe, we’ve seen very, very solid progress and even in Ukraine, which is a really difficult market, we continue to take share there. So, I feel very good about the possibilities ahead for Staropramen as part of our kind of three-pronged International portfolio including the addition of the Miller brand.

Fair enough. All right. Thank you, Mark.

Thank you.

Great. Thank you very much. A couple of questions, first, pretty significant lowering in your CapEx guidance, I wonder if you could give us some color around that please?

Okay. Is that one of two questions, Robert?

Yes. I was going to hold back on the second.

Yes. Hi, Robert. How are you? So, the guidance we had previously given was CapEx of $300 million. We revised that down now to $220 million. The original guidance included the new plant in Vancouver, and under the new guidance, we’ve excluded that plant. So, the delta there will be $80 million, includes that plant plus some savings that we have on our annual CapEx plan.

Okay. And then what was the reason for excluding it now?

Just to give you greater transparency in terms of what the CapEx would be excluding that because it’s obviously a very large CapEx project and we didn’t want that number to be just offering all of the number, plus the proceeds of Vancouver are not in the free cash flow number.

Hey, Robert.

Okay. So, it’s still going on. This is just basically a change in how you’re describing what you’re doing. There’s no change in terms of the Vancouver plant.

Absolutely. Exactly. That’s correct.

Yeah, Robert, essentially, the new plant in Southern B.C. is largely, but not completely probably, going to be funded by the proceeds from the sale of real estate from our Vancouver brewery. So, because the proceeds are excluded from free cash flow and CapEx and those types of numbers, we thought it would be fair to have sort of a comparable view on a CapEx guidance as well.

Got it. Got it. And then just a – I want to dig just a little bit more on the International brand potential. What if anything have you been able to accomplish in the last few months in terms of thinking through how you’re going to go to market both in terms of route-to-market as well as manufacturing brewing infrastructure for the Miller global brands, and how quickly do you think you’ll be able to move on that after the transaction closes?

Hey, Robert. It’s Mark here. So, let me give you a couple of headlines and I think Kandy can fill in just a few of the details. I mean, just to reiterate, obviously, this is a significant step-change opportunity for our International business. And I think as I’ve indicated in the past, if you think about the Miller brands internationally, there’s really kind of three volume platforms and value platforms. One is across our existing infrastructure. So, as I indicated, we’re looking forward to getting the Miller brands back into our portfolio in Canada, and obviously, the volumes in the UK and Ireland will roll into our existing business there. The second platform is those markets where we already have route-to-markets and strong positions, and that will build those positions out further. So, for example, in Panama, our business, which is a strong Coors business, post that change in scale terms with the addition of the Miller brands, that’ll open up a number of new markets where we currently don’t have a route-to-market. And, Kandy, do you want to just talk about the progress that’s been made, particularly on the second and third areas?

Thanks, Mark. Hi, Robert. So, it is very exciting for the International business and the Miller portfolio to an already fast-growing Coors Light portfolio which is growing strong double-digits. In terms of the actual progress, if you take out our top 20 markets or the Miller brands that we are inheriting, including Canada, UK, Ireland, that basically covers 95%-plus of that total volume. On these large markets, we have either got agreements or we’re in the process of getting agreements, to ensure that we have a route-to-market on day one. In terms of supply agreements, the combination of transition service agreements that we have previously negotiated with ABI post-transition or exporting from our U.S. business. So, those are our supply agreements. We made good progress. I mean, there is still a lot of work, a lot of countries, and a lot of new markets. But, I would say at this point of time, we are on track for our day one integration.

That’s...

...just to add, some of the transition agreements would be with – potentially with Asahi since they are taking over some of the European supply locations.

That’s terrific. Do you have any sense of how the brands are doing this year? So the brands flat this year, up, down, any sense of order of magnitude?

Robert, it’s a mixed bag, markets where brands doing quite well and has momentum, and there are others where it’s down. So, I think as we look at the totality, they are more or less where we expected them to be based on the idea that we have which is, of course, quarter or later stage.

Yeah. Robert, it’s Mark here. The thing I’d ask you to bear in mind is clearly this is going to be a complex transition. I think we are well-planned and ready for execution. There are still some details to be sorted out. But I would actually think of it in very much in the medium-term to long-term basis. As you think about the growth trajectory of our business, Coors, Miller, and Staropramen combined along with our emerging International craft portfolio, if you look at over the course of the next few years, I think it places us in a very, very positive place to really build out our International footprint and our International trajectory. So, the first year will be challenging and tricky in some places, but you’ve got to look beyond that to the value that’s going to be created by the addition of the Miller International portfolio.

Terrific. And just one last question. Coors Light, you gave us, I think, a 4% global number. Can you tell us what it did in Canada specifically and then what it did outside of North America, please?

Off the top of my head, in Canada, we were down kind of low- to mid-single digits. And then internationally, if you look at our MCI business, we were up double-digit growth. And in the UK and Ireland, we were up double-digits, in fact, kind of high-20%s, low-30% growth. So, Canada, down low- to mid-single; everywhere else outside of Canada, double-digit growth.

Okay. And any visibility in terms of stabilization in Canada?

Well, I think Stewart picked up on that. The focus has been on driving the right input which had an impact on the output. And I’m certainly very encouraged and I know the teammates are by the fact that we’ve seen our brand health metrics and our purchase intent numbers move in a very positive direction through the second quarter. So, any quality of our copy, the promotional intensity in terms of our in-case, the rollout of the visual identity, further alignment with the U.S. creative platform, all of those things are very well. But this is a big, big brand and you don’t turn things on or turn things off overnight. So, we are working this hard, and I think we’re working on the right input measures, starting certainly through our brand tracking to demonstrate that we’re pulling on the right levers, and I expect to see performance improve through the balance of this year and into 2017. Encouragingly, when you look at Coors’ trademark in totality, in Canada, and adding Banquet, which Stewart mentioned, is up over 20% again in the month. With the Coors trademarks in generally good health, Coors Light, if we can get that moving in the right direction, will be in a very strong position.

Terrific. Thank you very much.

Thanks, Robert.

Good morning. Just a quick question. There’s a push for now in the law called beer. Just wondering kind of what your thoughts are on the opportunity there? Kind of where you sit today as you go through some of your major markets?

Hi, Brett. I think that question was around no and low alcohol beers? So, that’s something which has already been a relatively large part of our thinking within Molson Coors and one of the benefits when we acquired the StarBev business was actually the addition of the beer mix portfolio to our portfolio. So commonly described as radlers, these are beers run about 2% alcohol. So, we’ve got, I think, some good learning in our business about the consumer drivers line low and no alcohol and it is a central innovation point within our business, so more to follow. I think many people in alcohol are now looking at low and no alcohol choices. It’s very much one of our agenda. And there will be news on that front in due course.

Thanks.

Hey. Good morning, everyone.

Hi, Bryan.

Hello, Bryan.

I’ve got two questions. One related to interest rates and the other related to reporting. So, I guess the first one just on interest rates, with interest rates, I guess post Brexit, the outlook, it looks like it’s even lower. It’s going to stay low for a long time. So Mauricio, could you just sort of talk to us about any effect that might potentially have on things like pension funding, assumptions that you’re using for pension funding? And then also how it might affect the way you apply the PACC model, just simply because the cost of financing or cost of capital come down, does it sort of change it all the way you’re planning, and you apply the PACC model in looking at certain projects?

Yes. Thank you, Bryan. Look, I mean, in terms of our financing, first of all, obviously, as you heard me say before, we had a fantastic result in our long-term debt offering. The interest cost that we were able to get on the financing was about $200 million lower than what we had assumed in the pro forma financials that we had submitted a couple of months ago. So, that clearly will have a very beneficial impact going forward. And as for the PACC model, of course, we’re constantly updating the cost of capital that we would use to analyze and review the various alternatives, i.e. should we delever, should we invest behind our brands, or should we pursue certain M&A opportunities, or should we return money to shareholders. And obviously those rates will be adjusted and are adjusted accordingly, given what’s happening in the market and our outlook going forward.

And then just on pensions, I guess as you’re contemplating the merger of MillerCoors and Molson Coors and just looking at your pension assumptions, is there anything that we should be watching out for there, again, related to the interest rate outlook being lower for longer, probably?

Well, as you know, I mean, that tends to have a double effect on the one hand because of the returns that you have on the pension assets and also the discount rate that you use for the obligations. But at present, I mean, those things have been taken into account in terms of the guidance that we’ve given; and again, where our defined benefit pension plans, we think that the cash contributions will be in the order of between $45 million to $65 million this year and the expense of around $17 million, and that includes the 42% of our MillerCoors contribution and expense. Obviously, that will be updated going forward for 100%.

Okay. And then just one last one on financial reporting. I think at the Investor Day, you kind of walked through how you’ll give us a little bit better visibility in terms of the transaction-related reporting. I think this spring the SEC had, I guess, made some rulings or statements about just sort of, I guess, more scrutiny on non-GAAP disclosures and maybe auditing it or scrutinizing it a little bit more. So, can you just – is there anything that we should think about in terms of your plans for the transaction-related reporting relative to kind of what the SEC has been commenting on?

Well, look, I mean, on the one hand, what you’re saying is absolutely right. The SEC has revised their position in terms of GAAP versus non-GAAP disclosures, and we obviously are following in line with that as are many other companies, many other public companies in the U.S. And what that means is that in the 10-Ks and the 10-Qs, you will not now see some of the underlying measures that we used to put in there before. As for the information that you would receive post-transaction, obviously, that’s information that you are going to receive through our calls, and we’ll still refer to those metrics because we think that they can give the investors and the analysts a very good indication of how our business is performing. And just to recap what we had mentioned to you at the New York Analysts Conference is that post the transaction close, we will be referring to a new number of updated synergies and cost savings. We are also going to talk about the transaction pro forma adjusted EPS. And we’re also going to talk about the cash flow-generating ability of the new business going forward.

Okay. That’s great. Thank you.

Sure, Bryan.

Okay. Well, if there are no questions, I’d just like to thank everybody for your interest in Molson Coors Brewing Company. We are poised, as we look forward to the hopeful conclusion of the ABI and SAB transaction and our acquisition of the 58% in MillerCoors, which will be transformational for our business. So, I’m sure everybody will be tuned in over the coming months as that comes to culmination. Thank you for your interest, and we look forward to seeing many of you shortly in Boston at the conference at the beginning of September. Thanks for your interest today, everybody.