Molson Coors Beverage Company (TAP) — Q3 2016 Earnings Call Transcript

Thank you, Chad. And hello and welcome everybody to the Molson Coors earnings call. 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, our CEO of our U.S. business; Fred Landtmeters, the CEO of our Canada business; Simon Cox, the CEO of our Europe business; and Stewart Glendinning, the CEO of our International business, along with Sam Walker, our Global Chief Legal Officer, and Dave Dunnewald, our VP of Investor Relations. Today, Mauricio and I will split our call into two parts; first, we will take you through our third quarter 2016 results to an essence closeout Molson and Coors Brewing Company, as it's been structured for the past several years. Then, we'll turn our attention to our recently completed MillerCoors transaction, and three newer updated financial reporting metrics along with some perspective for the fourth quarter of this year. In the third quarter we continued to focus on our First Choice ambition of building a stronger, broader, and more premium brand portfolio underpinned by incremental sales and marketing investment as we've discussed all year. Business highlights for the quarter and year-to-date included increased net sales revenue per hectoliter on a constant currency basis in all our businesses for the quarter and year-to-date. We increased investments in our brands globally. Coors Light and Miller Lite again gained share in the U.S. Premium Light segment for the quarter, including the highest segment share gain in three years for Coors Light. We saw 1.2% global volume growth for Coors Light on a year-to-date basis, with growth of more than 14% outside of North America. We had fast-growing innovations in key markets including Henry's Hard Soda in the U.S. and Mad Jack in Canada. And we saw global growth year-to-date in our above premium portfolio, for example, Doom Bar and other Sharps brands in the UK, Creemore Springs and Belgian Moon in Canada, and our four newly acquired brewers in the U.S. We also saw strong growth by Staropramen across Europe outside of its home markets and we additionally saw cider volume increases with Rekorderlig in Europe and Strongbow in Canada. Overall, we continue to strengthen our business through improvements in our sales execution and revenue management capabilities, increased efficiency of our operations, and implementation of common global systems. Regional highlights for the third quarter and year-to-date are as follows; in the U.S. overall sales to retail volume decreased 4% for the quarter, and 2.5% year-to-date on a trading day adjusted basis driven primarily by our below premium and premium light brands. Coors Light and Miller Lite again gained segment market share, the SDR's declined reflecting industry trends. Coors Banquet continued to grow SDR volume and segment share. In a higher market above premium segment, Henry's continues to be the number one Hard Soda franchise. Our Saint Archer, Sheraton Hop Valley, and Revolver businesses have significantly expanded our craft offering for consumers and customers. Domestic net sales revenue per hectoliter grew 1.6% for the quarter, and 1.2% year-to-date as a result of favorable net pricing and positive sales mix. On the bottom line, U.S. segment underlying equity income increased 9% in the third quarter driven primarily by lower cost of goods sold, higher net pricing, and positive sales mix. Year-to-date underlying equity income increased 9.3%, primarily due to the factors mentioned above, as well as a $12.3 million anticipated refund of federal excise tax paid on imports which we discussed on our last earnings call. In Canada, net sales per hectoliter in local currency increased 0.6% driven by growth in our above premium brands. This NSR increase reflected minor price increases and positive brand mix but with higher levels of spending back as we ensured our brands were competitive on a market-by-market basis. Our performance in the above premium segment continued to be strong as we saw growth in both our own brands and our partner brands. Coors Banquet, Mad Jack, and Belgian Moon all continued to deliver strong growth and our craft brands continue to grow share in the total beer category. The mainstream segment continues to face market pressure where our brand held scores for Coors Light and Molson Canadian have continued to improve month-over-month; and our sales execution input measures are similarly improving. Our COGS per hectoliter increased 3.5% in local currency with most of the increase being driven by volume deleverage and mix shift to higher cost products. Our cost savings program continues to be strong and fully offsets impacts of inflation and other cost increases in the quarter. In the bottom line, underlying pre-tax income increased by $15.9 million in the third quarter driven by lower volume, increased COGS, higher marketing investments, and foreign exchange impacts of U.S. dollar-based supplier contracts. Europe net sales decreased 0.6% in local currency for the third quarter driven by 1.4% lower volume due to weaker demand versus strong sales last year across much of the region, along with some trade inventory overhead from the Euro 2016 Football Championships in the second quarter of this year. Nonetheless, we held our share position in the region, and our continued portfolio premiumization and mix management drove a 1.2% increase in net sales revenue per hectoliter in local currency. In the quarter, we achieved strong growth by Coors Light, Staropramen outside of the Czech Republic, and our craft portfolio including Blue Moon, Doom Bar, and other Sharps brands, as well as Rekorderlig cider. Underlying pre-tax income was lower in the quarter due to higher brand amortization expenses, lower net pension benefit, and unfavorable foreign-currency movements, especially related to the depreciation of the British pound. Year-to-date the benefit of higher net sales and NSR per hectoliter in local currency, volume, and market share in Europe were more than offset by unfavorable foreign currency movements, higher brand amortization expense, lower pension benefits, and the termination of the Heineken contract arrangement in the UK. Our international business continues to drive Coors Light momentum with year-to-date volume of this brand up mid-single digits led by growth in Latin America and Australia. Excluding impacts of total alcohol prohibition in Bihar, India, and the transfer of the Staropramen UK business to our Europe segment, our year-to-date underlying pre-tax performance has significantly improved versus last year driven by volume growth in the remaining international markets. Now I will turn it over to Mauricio to give third quarter financial highlights and new performance metrics.

Thank you, Mark, and hello, everybody. As a reminder, all of the results that I will be discussing are in U.S. dollars, unless otherwise noted. So our third quarter and year-to-date financial headlines are as follows; net sales were down approximately 7% in U.S. dollars in the third quarter and about 5% year-to-date, primarily due to currency movements, especially in Europe, as well as lower worldwide volume. On a constant currency basis, net sales decreased 2.2% in the third quarter and were virtually unchanged year-to-date versus the same period last year. Our net sales per hectoliter in constant currency increased 1.3% in the quarter and 0.9% year-to-date due to positive mix. On a U.S. GAAP basis, we reported third quarter after-tax income from continuing operations attributable to Molson Coors of $202.5 million, up from $13.7 million a year ago. This increase was primarily driven by cycling $275 million of impairment charges recorded for certain European brands last year. On a year-to-date basis, U.S. GAAP after-tax income increased 67.5% to $539.8 million, driven by brand impairment charges last year and a gain on the sale of our Vancouver Brewery earlier this year. Third quarter underlying after-tax income decreased 14.3% to $222.7 million or $1.03 per diluted share, driven by lower worldwide volume, a higher underlying tax rate, and higher brand investments globally, which were partially offset by positive mix and higher underlying U.S. equity income. Year-to-date underlying after-tax income decreased 5.5% to $576.4 million, driven by the same factors as in the quarter along with the negative foreign currency movements. Underlying pre-tax income declined 6.2% for the third quarter and 1.3% year-to-date. Underlying EBITDA in the quarter was $403.1 million, 4.1% lower than a year ago, and our year-to-date underlying EBITDA declined 0.8%. Underlying free cash flow in the first three quarters of 2016 was $469.4 million. This represents a decrease of $24.9 million from the prior year, primarily driven by lower underlying after-tax income and lower distributions from MillerCoors. Total debt at the end of the third quarter was $9.9 billion; cash and cash equivalents totaled slightly less than $10 billion resulting in a net cash position of $94 million as we prepare to close the MillerCoors transaction on October 11. Please see the earnings release we distributed earlier this morning for a detailed review of our business unit financial results in the quarter. Also, please see the Investor Relations page of our website this morning for updated 2015 full-year and 2016 year-to-date pro forma financial statements that reflect our preliminary purchase accounting for the transaction. Now looking forward to the remainder of 2016, following are some financial factors to consider for the fourth quarter. Our Europe business results will continue to reflect lower net pension benefit. Total alcohol prohibition in Bihar has presented a headwind in an international business since its enactment in April this year, and we will continue to address this within our business. Finally, foreign currency translation, which at current exchange rates would be a headwind of approximately $8 million to our underlying pre-tax results in the fourth quarter this year, with all of the impact in Europe. Given the volatility of our key foreign currencies, particularly the British pound, it is important to watch these rates closely. Now regarding 2016 guidance, all of the following metrics exclude any effects of the MillerCoors and Miller global brands transaction. 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 expenses. Underlying capital spending of approximately $220 million, which excludes capital this year related to the construction of our new brewery in British Columbia, which we expect to be largely funded by the proceeds from the sale of our Vancouver Brewery earlier this year. MG&A expense in corporate of approximately $120 million on an underlying basis, which excludes expenses related to the MillerCoors 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, excise tax deductions or share-based compensation adjustments to our uncertain tax position. As far as our cost outlook is concerned, we continue to expect full-year 2016 cost of goods sold per hectoliter in Canada and Europe to increase at a low single-digit rate in local currency, and we expect a low single-digit decrease in MillerCoors and a double-digit increase in international versus prior year. As we first mentioned several months ago, with the completion of the MillerCoors transaction we are no longer providing the most recent volume trends for each of our businesses. Earlier this year we told you that we would share more specifics regarding three new performance metrics with you once the transaction closed. These metrics are transaction-adjusted EPS, an all-in multi-year cost savings target, and an early view of our combined company underlying free cash flow target for 2017. So taking these in order; transaction-adjusted EPS is a new non-GAAP performance measure we are introducing to provide enhanced visibility to the performance and value of our Company post-transaction. To calculate this measure we start with underlying book EPS, a non-GAAP measure, and then add back after-tax book amortization that is directly related to the transaction, and we then add the transaction-related cash tax benefits. Based on our latest pro forma financial statements which we will post on our website this morning, our 2015 pro forma transaction-adjusted EPS was $6.11 per diluted share on an underlying basis. This calculation includes transaction-related after-tax book amortization of approximately $42 million and cash tax benefits of $275 million per year, but it does not include any pre-tax income related to the Miller global brands nor any benefit from deal synergies. Because the routes to market and supply chain structures for many of the Miller global brands markets are still being developed, the cost and margin structure for these businesses are also a work in progress. As a result, we have decided to exclude the Miller global brands from our pro forma results for periods prior to the close of the transaction. For the first three quarters of 2016, pro forma transaction-adjusted EPS was $5.43 per diluted share, an increase of 4% versus $5.22 per diluted share for the first three quarters of 2015. Going on to our second metric, cost savings over the next three years; we have set an all-in target of $550 million which will be made up of ongoing cost savings in all of our businesses, as well as transaction-related synergies, all of which will be delivered by the third full year of our combined company which is 2019. Approximately half of this three-year cost savings target is synergies which represents a synergy goal that is nearly 40% larger and 25% faster than the original $200 million synergies target over four years that we shared with you when we announced the transaction nearly a year ago. We expect the synergies delivery to be weighted towards years two and three while the other cost savings will be weighted toward years one and two of the program. As we have been discussing for the past year, we expect these cost savings to come primarily from the areas of global procurement and shared services along with North American supply chain, so they will primarily benefit the cost of goods sold line. As part of the planning process for the past year, we have also identified a moderate amount of savings from information systems. Please note that we do not plan to provide additional specifics regarding the annual phasing of the cost savings or a detailed breakout of transaction-related synergies versus other cost savings. Related to this cost savings goal, we anticipate incurring approximately $350 million of one-time incremental cash cost over three years to capture synergies, about evenly split between incremental capital spending and cash operating expenses, primarily in the first two years of the program. Note that the incremental CapEx would be on top of our recent all-in CapEx run rate of approximately $650 million to $700 million, plus or minus 10%, including 100% of MillerCoors CapEx in recent years. With a base CapEx spend of approximately $2.1 billion over the past three years, the CapEx needed to capture synergies represents an increment of less than 10% to our current run rate. We will continue to apply our pack model to these and all other significant potential capital and cash deployment decisions to help ensure that they are aligned with our priorities. Finally, as always, when these cost savings initiatives are completed in three years we will continue to pursue cost reductions across our business in order to provide resources to help drive our top line, bottom line, and shareholder value. Finally, to help you model our business, we also want to share our preliminary underlying free cash flow target for 2017, which is $1.1 billion plus or minus 10%. Note that this target includes the impact of incremental interest expense, U.S. tax expense, and synergies-related CapEx in 2017, as well as the cash tax benefits resulting from the transaction. As in the past, we plan to report back to you each year regarding how we are performing against these targets. So at this point, I'll turn it back over to Mark for highlights of the transaction, business outlook, and Q&A.

Thanks, Mauricio. This clearly is a historic time in the evolution of Molson Coors. Three weeks ago we completed our acquisition of the remaining 50% stake in the Miller Coors joint venture, along with the Miller global brand portfolio. We emerge as the world's third largest bringing together Molson Coors and Miller Coors into a bigger, better organization. As one Company with an expanded portfolio of iconic brands, we intend to leverage our increased scale, resources, synergies, and combined commercial experience to accelerate our First Choice agenda and deliver long-term shareholder value. Because of this game-changing transaction, Molson Coors now controls 100% of the highly strategic and attractive U.S. business, and will accelerate new growth properties in emerging and developing beer markets globally with the Miller brand rights. This transaction also improves our operating efficiency and go-to-market strategy by changing our commercial capability on a truly global scale. Financially, this is a compelling combination based on a very attractive price, ground operational synergies, substantial cash tax benefits, and the attractive financial package that we put in place earlier this year. As a reminder, for $12 billion of cash, we have purchased the remaining 50% of the Miller Coors joint venture that we didn't already own. Ownership of the Miller brands, which outside of the U.S. we managed in more than 50 countries by our Molson Coors international, Molson Coors Canada, and Molson Coors Europe businesses. Perpetual growth of free U.S. licensees for the existing ASP Miller import license brands, including Peroni, Foster's, Gross, and Reds for which Miller Coors most recently paid royalties of approximately $60 million in 2015. And finally, because this is an asset transaction for U.S. tax purposes, we will receive immediate cash tax benefits that we now estimate will exceed $275 million annually for the next 15 years. This represents an increase from a previous estimate of more than $250 million per year due to the detailed tax diligence work that we completed last year. The purchase price implies a headline enterprise value multiple of 11 times 2015 combined underlying EBITDA. When including the present value of the cash tax benefits, the purchase multiple drops to an effective 9.2 times. These tax benefits are common with this type of asset transaction and they carry a high degree of certainty. As such, we believe this is the most appropriate way to value this combination. This represents a very attractive purchase multiple, even though it does not include the anticipated benefit of our transaction-related synergies. We expect this combination to be accretive to underlying diluted EPS and transaction-adjusted EPS in the first full year of operations before synergies, and we expect it to meet our Cardinal rates in year one, which is consistent with our disciplined use of cash framework. Now, looking forward as a combined Company, our teams are focused on driving our First Choice agenda. Finishing the year with strong performance in each of our businesses and hitting the ground running on integration. You've heard us speak about these themes in the past; for each of our businesses, we will continue to focus on transforming our portfolio to the above premium segment, introducing value-driving innovation, integrating the Miller brands, and lifting and shifting best practices across the global organization. To provide just a few examples by business, in the U.S. we will focus on the development integration of these new craft partners, Saint Archer, Terrapin, Hop Valley, and Revolver. In FNB's, Henry led a new hard grape flavor to its line of hard sodas, we will introduce a new line of hard sparkling waters to claim the growing alcohol sparkling water category. Henry's Hard Sparkling will be launched nationally in March with lemon, lime, and passion fruit flavors. Reds and Blue Moon Belgian White will introduce new aluminum pipe packaging in the second quarter of 2017. Over the past few months, we've built a strategy that elevates volume across our economy portfolio. For example, Miller High Life recently announced plans to reintroduce its classic jingle, 'If you've got the time, we've got the beer.' We will also revamp its packaging to further highlight its unique heritage. Elsewhere, across the economy portfolio, Hamm's will be reintroduced nationally at an opening price point, and Milwaukee's Best is getting a total packaging update to give it a fresh new look. Beginning early in 2017, we will fully revamp Keystone Light including new packaging and advertising. For innovation in the value category, we are introducing Spike Watermelon Reserve brand family and we are increasing the size of our PET bottle singles from 40 ounces to 42 ounces for the same price, again to deliver value to our consumers and customers. In Canada, our team is integrating the Miller brands back into our portfolio and will double down on the above premium MGD. We're also assessing opportunities for Miller High Life and other U.S. brands that we can lift and shift into the Canada market. Mad Jack is performing well in the FNB space and we will consider other innovative options to drive value for our Canada consumers and customers. In Europe, we now have the Miller brands in the U.K and Ireland, and this business is also preparing to begin managing the international license and export business in the region starting January 1. This will allow us to drive and other league brands were fully aligned strategies across Europe. We will also continue to build our craft portfolio, including further expansion of Blue Moon across the region. Our international business is well on the way to full integration of the Miller global brands into our portfolio, and we’re leveraging a new footprint strategy in emerging markets. For example, in Panama and Honduras, where our partners have already embraced Coors Light, we are ready to accelerate growth with the addition of the Miller brands. The international team has also begun the planning process for transitioning Puerto Rico over from Miller Coors on January 1. Going forward, Coors and Miller brands will be priority brands for the international business. To summarize, we are delighted to have completed the MillerCoors transaction, which is a compelling, strategic, and financial opportunity for our Company and our shareholders that catapults Molson Coors to the next level. In this combination, key priorities are in three specific areas. Firstly, in brand-led growth, the cash tax benefits and cost savings made possible by this transaction will provide resources that we can invest in accelerating the transformation of the front end of our business through, for example, investing behind our core brand across all of our geographies, premiumizing our portfolio, and engaging with consumers in new ways, including cross-border exchanges of category-changing innovation, expanding the depth and reach of our international brands in fast-growing markets, including securing a certain and aligned future for the Miller brands globally. Finally, leveraging our shared commercial capability through extraordinary brand building, world-class insight, digital leadership, and unrivaled customer excellence. Secondly, this transformation of our Company offers unique opportunities for us to drive cash generation, through substantial tax benefits, cross synergies, cross-border working capital improvements, and disciplined use of our pack model across the combined Company. We expect all of these benefits to provide strong free cash flow and allow us to quickly pay down acquisition debt and maintain our commitment to investment-grade debt ratings. Thirdly, this transaction represents a prudent high-return use of cash for Molson Coors on behalf of our shareholders. We're using this transaction not only to make Molson Coors a bigger Company, but also a better Company with integration complexity normally found in a deal of this size. As we focus on deleveraging our balance sheet over the next two to three years, we expand our share repurchase program and have announced we plan to maintain our current dividend share level, and we will revisit our dividend policy once deleveraging is well underway. Overall, this combination is a game changer in our ambition to become First Choice for consumers and customers, and it's highly consistent with our goals and our focus on building extraordinary brands, delivering innovation, and driving significant volume to our shareholders. Now, before we start the Q&A portion of the call, just a quick comment. As usual, our prepared remarks will be on our website for your reference within a couple of hours this afternoon. Also, at 1:00 PM Eastern time today, Dave Dunnewald will host a follow-up conference call which is an opportunity for you to ask additional questions regarding our Quarterly Results. This call will also be available for you to hear via webcast on our website. At this point, Chad, we would like to open up for questions, please.

Good morning. Just a quick clarifying question. That $1.1 billion free cash flow, does that include or exclude the cost required to get your synergies? Just a housekeeping item? And then second thing, of the $550 million of savings to come, can you talk specifically about how much reinvestment specifically in advertising you expect to redeploy? I know some of the strength in Coors Light is probably a function of the fact that spending is up a lot in the year-to-date period in the U.S, so I'm just wondering about the sort of targeted reinvestment level you can help us with? Thanks.

Hi, Wendy, thanks for your two questions. Let me just touch on the savings number, and then Mauricio can clarify the free cash flow number. Regarding savings, we don't offer guidance on how we will allocate those savings through our business. I don't want to constrain our business with any specific formula, and clearly as we drive the savings, they will either drop to the bottom line or be reinvested back into our business or offset, for example, inflation on our business. We continue to review our Sales and Marketing investment on a geography-by-geography basis. We now have a return on marketing investment model, which is allowing us to drive significant efficiencies in our marketing spend, and we will continue to monitor the level of spend in each of our markets to make sure we can support our brands in a way that allows them to be competitive, but we are not going to offer specific guidance on the allocation of those savings. On the free cash flow number, Mauricio do you want to clarify?

Yes. Good morning, Wendy. The $1.1 billion is after taking into account the cost required to deliver the synergies.

Got it, but just as a follow-up to conceptual. I know you said in your remarks that you're pleased that the Coors Light brand held scores have improved. To what do you attribute that? I mean again, we track the advertising spending and it looks like that's gone up a lot in the U.S. But is there other stuff specifically that you can call out that you're doing, whether it's distribution, whether it's work with your salesforce that is leading to the stronger brand held scores?

Yes, we could get lost in lots of detail here, Wendy. Across all of our businesses, Coors Light is going from strength to strength, and I think what's at the heart of that is the clarity of the brand's positioning, which is distinctive and consistent. So I've said in the past I'd rather spend less money on a great idea than more money on a poor idea, and actually, I think we’ve got clarity on our positioning with a great creative platform certainly across our international, U.S., and our European business. We have now started to transfer the U.S. creative platform into our Canada business as well, and as we've done that, we've seen our brand held scores accelerate in Canada over the last couple of quarters. I really think it comes down to the differentiation and consistency of the positioning.

Fair enough, thank you.

Hi, good morning.

Hey, Vivien.

So firstly on the consolidated cost savings number, clearly encouraging you being able to upsize that and pull that forward. Would you be able to offer any incremental color on what gives you that enhanced confidence around the total cost save realization? Thanks.

Thanks, Vivien. Let me deal with that. If you remember at the time we announced the agreement to acquire Miller's tours business, we did some quick reasonably well-informed analysis on the cost savings opportunity and we suggested it would be around $200 million over four years. We have the benefit of very detailed planning over the course of the last eight or nine months, and that work has unearthed further opportunities. The detailed planning has allowed us to move with more pace and set a target that's materially higher than our initial target.

But just in terms of the three buckets that you guys had previously identified, is there one bucket that's driving an outsized contribution to that more constructive view?

We haven't given any color on the proportionality of the cost savings, but the three areas that we've flagged historically in terms of procurement, North American supply chain, and shared services, we’ve endorsed those numbers that we had originally and in some areas they have improved. In addition to that, we’ve unlocked some additional synergies in the area of IT systems as we consolidate our IT infrastructure and we're pushing out into areas around commercial, particularly at the North American level as we look at the efficiency of our accretive platforms. But in the roundness, still pretty much the same errors we identified initially. Hopefully, we'd expect that, because of familiarity with the business being high, we went into this with a reasonably good estimate of where we could drive the volume.

Perfect. That's very helpful, thanks. Moving on to Canada, I would have expected a slightly better outcome given the level of investment spending that we saw in Q2-Q4, so I was hoping you could comment a little bit more on that? I think you noted the softness in mainstream, so it's really a two-part question: do you think that the incremental spending is doing what it needs to? And does he think ahead to 2017, what potential impact do you think the legalization of recreational cannabis can have on the beer industry in Canada? Thanks.

I would describe it as a broad-spectrum test on your two questions. Everything I was expecting from the second part of that. So while I'm chatting, Stewart, get thinking. Let me just give a couple of comments on the first part regarding spending and performance in the quarter. Our strategy remains consistent in Canada, around making sure that we modernize our supply chain and drive our costs down, taking further costs out of our business and improving our overall commercial performance. You are aware of some of the changes we made at the leadership level, and as Fred is number two in the customer area, across moved from Europe. Their focus will be on commercial execution, really driving our field sales management model, and I think we are playing smarter execution in the marketplace. That started to show up in some of our information measures. But Stewart, do you want to offer just a little more color on the third quarter? Things that you're pleased about, and then if you could think about the recreational drugs question as well, perspective on that would be helpful.

Yes, absolutely, Mark. Looking at the third quarter, there are three main factors driving our results. First, there are transactional foreign exchange impacts related to sourcing raw materials from the US, along with lower volumes and increased marketing spending. On the volume side, as Mark mentioned, we are experiencing some challenges but have been gaining market share in the western provinces, which historically has been tough for us. In September, we achieved flat market share in Ontario, a significant beer market for us, and we are increasing our share in the LCBO market. The number of challenging areas is decreasing, and I believe our enhanced execution will contribute positively. Additionally, our higher marketing expenditures are resulting in better brand scores, and we anticipate that this will translate into improved volumes.

That's really helpful and thanks for indulging the cannabis question.

Cannabis is something we are considering very carefully, both as a business and within the industry. There is much discussion about its usage and deployment, but there is still a lot we don't know at this time. We're not completely clear on where and when it will be sold. A good reference point for understanding its potential impact might be the experience in Colorado and how it has affected beer sales. For now, we are studying the situation due to the uncertainty surrounding the distribution of the product itself.

Fair enough. Thank you.

Good morning, Judy.

So a few questions. First, Mauricio, the transaction-adjusted EPS for 2015 that's now $6.11 versus the $5.72 that you have given us at the September conference, so it went up by $0.39. I think the cash tax went up by $0.12 and I think the book amortization actually went down, so can you just bridge from $5.50 to $6.11? What's gone up in that adjustment?

Yes, thank you, Judy. So the two items that you mentioned are correct. What I would refer you to the call that we are going to have afterwards led by Dave and you will be able to bridge that. Now the other factor that you are missing there is the fact that our interest cost went down from that preliminary number of $5.72 that we had given you, which is the third component that gets you to the EPS, but we will give you a more detailed walk on the comp.

Judy, we can give you more details on the call a little bit later, but at least the initial headline is that the bridge we put out in May that you are referring to for the $5.72 transaction-adjusted EPS included bridge financing for US GAAP. The financing we actually put in place for the long-term funding of the transaction actually has much more favorable rates than the bridge loan financing, and so that's the driver of lower interest expense.

Okay, and the $5.70 is the number you gave us in September, correct? I don't think that was the May number.

Okay, well, the adjustment for interest rates, additional refinement of purchase accounting, and the adjustment of cash tax benefits related to the transaction.

Okay, we can follow up later. And then Mauricio, just on the free cash flow follow-up. So, can you give us the underlying pro forma free cash flow for either 2015 or 2016? Because I'm just trying to get to the $1.1 billion based on kind of the transaction adjusted EPS numbers that you've given us, and it seems to imply very little underlying growth, and I'm just trying to see if I'm reading it correctly.

Yes, Judy, at this point we are just going to give you the underlying free cash flow projection for 2017. I would encourage you to, a little bit later on, we post the pro forma on our website, you can do your calculations there. Obviously, when you do the back-of-the-envelope math, you can think about the free cash flow generation for MillerCoors and the free cash generation for Molson Coors pre-acquisition, and you would get to a level of maybe $1.3 billion, $1.4 billion. Now, there are obviously some tailwinds that are represented in the form of the $275 million of cash tax benefits, but also some headwinds because we have a significant interest expense increase of around $250 million per annum because of the acquisition financing. There is additional G&A expense from the step up, due to the fair value re-measurement required by purchase accounting of around $17 million, and there's higher income taxes because now that we own the other 58% of MillerCoors, we’re paying additional taxes of around $200 million in 2017 versus what we did before.

Okay, and the $350 million of cash restructuring charges, is all that hitting in 2017?

No, that $350 million number is what we will be spending. That will be a one-time expenditure but it will be spread over the three-year period.

Okay, and then maybe, Gavin, just wanted to get your perspective on the volume performance for MillerCoors in the third quarter. Obviously the industry has been a little bit soft. Clearly, you still have a vision to get to flat volume by 2018, but it just seems like that's a pretty challenging order given the recent trend. So do you think that you need to really step up investments even more on some of your key brands? Or do you think this is really just a broader industry problem?

Hey Gavin, do you want to speak to that directly?

Yes, sure, thanks, Mark and thanks, Judy. Look, you are right, three STR volumes were down across all brand segments and reflective of the industry. Just as far as our expectations for long-term goals, expectations are still to be flat in 2018 with growth in 2019. And yes, we did see soft industry trends, and you see that in our STR figure. But we have now for three straight quarters closed our volume gap with the industry. We've got some work to do on the segment, but we really like our portfolio there with the largest craft brand in the country with Blue Moon, and Leinenkugel’s was in the top five as well. We’ve made four acquisitions we're pleased about, and we've grown our flavored malt beverage share meaningfully over the last year or so. Our premium brands continue to perform well. Miller Lite gained share of the premium light segment for the eighth consecutive quarter, Judy. Coors Light gained share for the sixth consecutive quarter. We’ve reengaged the economy drinker and it's a high priority for us. We've refined our economy strategy at the full distributor meeting; that was well-received by our distribution network. Our above premium performance specifically was hindered by some of the performance of Blue Moon and Leinenkugel’s, seasonally and through variety packs, and as an industry-wide trend. It’s an issue we are addressing, and we have execution plans for early next year, but we are pleased with our performance on a brand like Grapefruit Shandy, which doubled its volume. So overall, Judy, it's one quarter, and I'm pleased with the performance overall, particularly from a share point of view.

Got it. Okay, thank you, everyone.

Thanks, Judy.

Good morning, everyone. I have two questions. First, many investors ask me about Mark Hunter's track record and why he and the team are the right people to lead here. I ask this respectfully, but people see Felipe, who has been with the company for 20 years, and I want to understand this. Looking back at MillerCoors, which has been around for 40 years, Gavin, could you explain your track record and why investors should feel confident that this management team can effectively execute this major plan? My second question is more numerical, directed at Mauricio. There are various ways to interpret the guidance you've provided today. One way I assess it is by considering the cost savings that MillerCoors has achieved over the past five years, averaging approximately $129 million annually, with $88 million last year, about $80 million this year, and another $99 million anticipated this third quarter. So that averages around $120 million over the last five years. Conversely, the synergies you've mentioned today total $275 million, which averages to $92 million when divided by three, and then we subtract the Molson Coors savings, which accounts for another $52 million. This means synergies plus cost savings at MillerCoors are roughly $124 million annually over the next three years, similar to what was achieved in the previous five years. I'm uncertain how to evaluate that number. Given the significance of this transaction and the many opportunities for cost savings, why would the $124 million in savings, as I calculated, align with what you've done over the past five years? Those are my two questions. Thank you.

Pablo, it’s Mark here. Clearly to your first question, I'm not going to conduct a performance review over our quarterly earnings call or get into detail as to why our board believes that I am the right leader for this business and why I believe Gavin is the right leader for this business. I will let the track record speak for itself. We are both seasoned professionals who have been in the beer industry for a long time, driven significant change across many businesses, and integrated businesses like Starbucks and driven this transaction at a valuation multiple that I think is utterly compelling for our business, so I’ll just leave it there, I'm not going to talk in any more detail with you on that. Let me just back up one second. You asked for Mauricio. What we have endeavored to do here is ensure full transparency and ensure that we are not duplicating any of the cost savings in our business, and clearly, we've now set a target for the next three years. We will update that on an annual basis. There were a lot of questions around the synergies number and we've scaled that up and picked up pace in the synergies number, and we've ensured that there is no duplication with the synergies. They are not underlying cost savings. We will continue to test ourselves whether that number can be further improved, as we actually get into fully running the business. But we feel it's a number we can meet, and we will attempt to beat it as it makes sense. As we look out at our business, our business has very little geographical overlap. We are going to try this with a number of restructuring initiatives, setting up shared services globally, and we will get at that. We will update you if there's any new news on that number, but we feel it's the right number for our business at this point in time.

Thank you. And just a very quick follow-up regarding cadence. I know you're not willing to talk about savings or accretive to the bottom line, but would you be reasonable to assume, given that you have this target of stabilizing volumes by 2018 and growing after that, that a lot of the savings would really invest initially? Should we be thinking more year three and four seeing the accretion decline? If you could comment on that, that's all.

Thanks, Pablo. Again, I haven't given any guidance as to how we apportion cost savings. One of the things that did indicate earlier this year was that we have now developed a small global growth group led by Kandy. That team will be looking for incremental opportunities to accelerate our top-line performance. Clearly, some of those opportunities will require incremental investment in our business. But we will look at those in the round as we aggregate our total Sales and Marketing spend across our business. I'm more interested in the quality of our marketing and I think there's plenty of examples. In the U.S. market, one where people are competitors have been spending very aggressively, but let’s just say that incremental spend doesn’t always buy you success. I'm really focused on the quality and the marketing and the discipline of our execution, and will continue to drive efficiencies across our marketing spend. If there's a return that makes sense, we will put it through the pack model and we will spend incrementally to generate additional return. We want to drive hard on getting the top line moving and that will be a focus for us over the course of the next 24 to 36 months. I won't get any more specific.

Yes, thanks, good morning, gentlemen. A couple on the free cash flow and then a couple in the U.S. On the free cash flow, the $1.1 million you mentioned includes these one-time cash costs. How much of that $350 million is actually in that $1.1 billion? And how much is an expense item and how much is a capital expenditure item? And then are there other one-time items in there? On a per share basis, we are at $509 million in free cash flow. You basically tone is the transaction-adjusted EPS will be down in calendar 2017 or you're saying there are some pretty significant CapEx, I am just trying to understand what else is going on in that number?

Yes, hi, Mark, this is Mauricio. Look, we haven't given a specific breakout of the $250 million, other than to say that about half of that would be additional CapEx and half of that would be additional OpEx. If you think about the nature of the cost savings that are going to deliver including the synergies, a lot of the delivery of the synergies will be happening towards the latter part of the three-year period, which means that actually the investment to deliver those synergies will be weighted towards years one and two. We haven't really given a specific amount of how much of that will specifically hit 2017. As for the headwinds and tailwinds, the $275 million of cash tax savings, that's a tailwind for the next 15 years. The additional interest expense because of the Company financing, again, that's something that's going to be there for the foreseeable future, as will the additional G&A expense, obviously even though that's a non-cash item, but something that's also going to be there as a generator of those cash tax savings.

I'm still confused because I have $611 million here, and you're saying that number is growing this year, so let's say it’s around $6.20 to $6.25 for the transaction-adjusted EPS, and the free cash flow is projected to be $5.09. This puts us more than $1 below the transaction-adjusted EPS, suggesting there may be significant capital expenditures or some other issues affecting the transaction-adjusted EPS, which is only pro forma for this transaction and does not include the international brands. So maybe it's a 1 o’clock—I'm just not sure if you have a response to that.

Rather than get into the weeds on this call, can I suggest we heard the question, and I can give you an answer, so Dave and the team will pick it up this afternoon. We will try to give you a bridge to give you the clarity.

Okay, fair enough, that would be great.

Best way to deal with the question. Appreciate the question; we will get a response and take you through that in this afternoon's call.

Great. And just shifting to the U.S., I just a curious, Mark or Gavin, craft has been weak for everybody, so just from a broader industry perspective, why do you think craft has gotten weaker sequentially? And how enduring do you think that is? I know that's hard to predict, but what do you think that is? And then, just mechanically for the U.S. business, it seems like your distributor inventories are higher than you'd like them to be, so is it reasonable to think your own shipments will lag your STRS in the fourth quarter?

Mark, let me break that down into two parts. Gavin, I'll turn it over to you shortly for the STRS section. I want to highlight a few key points about craft. It's not entirely accurate to say that craft has been weak for everyone; that's a broad statement. Several craft companies are still experiencing strong growth, and we have recently acquired several of them, which is beneficial for our business. What we are observing in the market is an oversupply of flavors and stock-keeping units, where both retailers and consumers are trying to navigate through the overwhelming number of options available. Overall, craft has positively impacted the beer industry by generating conversations and interest in beer at an unprecedented level. However, it reaches a point where each SKU must perform on a velocity basis and prove its worth to both customers and consumers. As Gavin noted earlier, seasonal packs, which have significantly contributed to the craft segment, are beginning to face challenges because consumers are essentially creating their own seasonal packs based on their shopping habits. This is indicative of the craft segment starting to sort itself out, with well-positioned and distinct brands, while retailers aim to simplify their offerings; this current situation is starting to affect overall craft performance and trends. Gavin, would you like to add anything to that before addressing the STRS question?

Yes, anything I can add to that, pretty much what you said. I mean there’s tons of choice and there’s not a lot of floor space; velocity retail is important, so that’s why our building with beer program which we launched had such a positive impact with beer buyers at retail, not only on premise but also off premise. As far as the STRS are concerned, Mark, fundamentally that’s just a difference in timing. If you remember at the end of Q2, that dynamic was reversed with domestic STRSs down, and STRS were down less than that. On a year-to-date basis, those two numbers are much closer, and generally, we try to align those things much closer by the end of the year as we try to ship to consumption. I wouldn't get too worked up on quarter-over-quarter because of timing on those price increases and so on.

That's great. And if I could real quick, and that's very helpful, July 4, Anheuser-Busch called out the timing of July 4 as affecting the industry? Do you think the timing of July hurt the industry in the third quarter?

Yes, it did, yes. I would agree with that statement.

Good morning, everybody. I'm going to hold off on the free cash flow question until 1:00 o'clock. Dave, this could be one of the most anticipated 1:00 o'clock calls in a while, I think. So my question is just related to the cost savings and if you could give us some outside of the synergies, if you could give us a sense of like what’s included and what’s not? You've got the process you're going through in Vancouver in terms of selling the brewery, and you'll migrate to a new brewery there. I guess there is a potential the same thing could happen in Montreal. Is Eden, North Carolina brewery in that inside the savings number? Just any sense of some of those bigger items that may be in there would be helpful?

Mauricio, do you want to address that?

Yes. Hi, Bryan. With respect to the cost savings, I mean some of the items that you allude to during your questions are indeed in there. So for example, the savings that will come from the Eden Brewery closure are included in there. The work that we are continuously doing in terms of looking at our procurement, in addition to the savings related to procurement that are in the synergy number. As Mark referenced earlier, we made a concerted effort to ensure that we've separated what is sort of business as usual savings, which is a way of doing business here from the piece that’s going to come specifically from the synergies. There are also other savings that are coming from looking at our supply chain network that are not included in the synergy piece of the optimization of the North American supply chain grid. Just a lot of savings that are coming from the business as usual, running the business versus the synergies that have specifically to do with those three buckets that we alluded to earlier.

Brian, this is Mark. The other context point I will give you is over the course of the last three or four years, at an enterprise level we’ve tried to drive forward what we've described as one-way principles. Across our major functional areas, we try to drive for consistency of approach in world-class supply chain, HR, one way, and we’re now introducing that from a commercial perspective in terms of our commercial excellence approach. Really trying to drive for best practice orientation and consistency of approach wherever we can in the business, and that's been one of the drivers for unlocking additional efficiency savings through our business. I think a big part has been in our world-class supply chain where we truly believe that we are world-class or close to world-class in many areas. So we will continue to crack the handle on that and drive as much value and efficiency as we can out of those areas while overlooking the synergy opportunity as well.

Great. Gavin, we certainly understand the goals for improving volumes and the trajectory for 2018-2019. If that doesn't happen, and if the current trends continue, what opportunities do you think there would be in managing the brewery footprint to address that?

Mark, do you mind if I take the question direct?

No, just on you go Gavin and I will give you some...

I was speaking with Robert. I'm determined to succeed. I believe we have the right plans, strategies, brands, and people to make this happen. This shouldn't be viewed as just a quarterly assessment; it's part of a longer-term strategy. The industry faced challenges this quarter, but our expectations for 2018 remain steady, with growth anticipated in 2019. I'm happy to outline our plans for our brands. As a business, we are committed to that goal and confident in our ability to accomplish it.

And Rob, as an enterprise level, we’re committed to supporting putting Gavin and the team to make that happen. There have been lots of questions over the course of the last 12 to 18 months on how we will get there and we’ve tried to release simplified thinking into three specific areas; our economy, our below premium strategy, and many of you have asked about clarity on our thinking there—that's now been clarified and launched and generated a lot of excitement with their distributors. Many of you have asked about our ability to get Coors Light and Miller Lite growing at the same time, and we are now doing that consistently; and alongside them, Coors Banquet is going from strength to strength. We continue to drive the premiumization of our portfolio on craft acquisitions and Henry's are great examples. Don't forget that Red's, which is now such a significant brand didn't even exist just over three years ago. My view is that we still have untapped opportunities in our own portfolio as well. So all of the component parts are there. A lot of it is down to how purposeful we want to be from an execution perspective. But Gavin and the leadership team have driven a significant change in the ambition, energy, and focus in our U.S. business, and it's been great to see that happening. Some quarters will be tougher than others, but we are absolutely resolute on our ambition to get this business back into growth trajectory and as Gavin said, that's over the course of the next couple of years.

That's great. Can you provide an update on the Miller brands globally and let us know if there have been any new agreements regarding supply and distribution?

Yes. So let me ask you Kandy, who is obviously transitioning at the moment from his previous role across the Stuart, but Kandy's been leading that stream of work. So Kandy, do you want to just offer some highlights around that at this stage?

Sure. Hi, Robert. We've got progress in terms of planning and executing a transition of the Miller brands into our systems because it was relatively easier in places like Canada and the UK, which came onto our business footprint. We have cities or markets where we've had existing partners; Panama and Honduras, as an example, where we moved the distribution onto our existing partners in the markets which were new to us. We have established with one or two exceptions, almost all of the new distribution agreements that are in place. In terms of production, we are aligned either on our infrastructure like MillerCoors and in certain cases, we are continuing to rely on transitional service agreements by ABI; and we will be working to transition those into our own system as well. But overall, I'm very pleased, and Stewart, Simon, and Fred are all involved in transitioning this, and our initial two to three weeks have gone without any significant issues, and so we are quite pleased with the transition.

Are you able to discuss who any of the new partners are in the more notable markets?

We haven't made any kind of public statements around that other than in markets like Panama; we have an existing partner there and we've transitioned across. But I think I would probably save that maybe until our Q4 February call. Robert can give a filler update just because we are working through some of the finer details at this point in time. But where there is not a partner in place, there are transitional service agreements in place, and as I mentioned earlier, some of the markets are doing better than we anticipated, while some of the markets are going to take a bit more work to get back on the front. So as you would expect in a transition of this nature, but we'll get probably more color and a fuller update on our February call.

Great. Well, thank you very much.

Thanks, Robert.

I just like to thank everybody for their continued interest in Molson Coors. We've opened a new chapter in the history of our business and as a leadership team, we are delighted to be leading the business forward from this position. We look forward to updating you as we make our business bigger and stronger in the coming quarters ahead. So thank you for your continued interest in our business. Thanks, everybody.

Thank you.