Molson Coors Beverage Company (TAP) — Q4 2016 Earnings Call Transcript

Thank you Andrea and hello and welcome, everybody, to the Molson Coors earnings call and many thanks for joining us today. With me on the call this morning for Molson Coors we have Tracey Joubert, our Global CFO; Gavin Hattersley, CEO of our U.S. Business; Fred Landtmeters, our Canada CEO; Simon Cox, the CEO of our Europe Business; Stewart Glendinning, our International CEO; Sam Walker, our Global Chief Legal and Corporate Affairs Officer; and Brian Tabolt, our Global Controller; and last but not least, Dave Dunnewald, our VP of Investor Relations. On the call today, Tracey and I will take you through highlights of our full-year and fourth quarter 2016 results from the Molson Coors Brewing Company along with some perspectives on 2017. Now, clearly, the biggest news for 2016 was completing our acquisition of the remaining 58% of MillerCoors and the Miller global brand portfolio for $12 billion, representing the largest transaction in our Company's history which made Molson Coors the third largest global brewer. We also retain the rights to all of the brand that were in the MillerCoors portfolio in the U.S. and Puerto Rico, including REDD's and import brands such as Peroni, Grolsch and Pilsner Urquell. The transaction was completed at 9.2 times effective purchase multiple, including the present value of cash tax benefits. Additionally, we will be driving substantial cost synergies in the next three years and we continue to expect this transaction to be significantly accretive to underlying earnings in the first full year of operations. With the completion of the transaction and the changes we're making to align and enhance our organization, the building blocks are in place for our Company to drive top-line growth, profit, cash generation, debt pay-down and total shareholder returns in the years ahead. Led by our First Choice for consumer and customer agenda, these building blocks are grouped into four key areas. First, our organization and France are all under one roof for the first time. We've also reset our performance incentives around growth in sales, specifically volume and revenue per hectoliter, profit, cash and profit after capital charge or PACC, to help ensure top to bottom alignment with our key priorities and of course, those of our investors, including driving total shareholder return and performance towards our committed deleverage targets. Second, our consumer excellence approach. Our global brand portfolio of Coors, Miller and Staropramen, supported by our national champion, craft and specialty brands, now provides a platform for accelerating performance outside of our core developed markets over time. Within our largest markets, we now have more opportunities to lift and shift our highest potential brands, creative platforms, commercial ideas and innovations to drive growth and value. We remain absolutely focused on driving improvements in our core brand performance in the U.S. and Canada, in particular. Outside of North America, Coors Light continues to grow volume at double-digit rates through 2016 and our largest brand was almost flat globally. Our Europe business increased retail volume and market share in the past year and our international business drove strong volume growth in high potential markets in Latin America and Asia Pacific. Thirdly, our customer excellence approach. We're investing heavily in sales capability and execution improvement, including a suite of leading-edge sales technology and tools, supported by our new global commercial team with First Choice Learning Center; we've rolled this approach across all of our markets and are excited about the promise of this effort to drive incremental revenue, margin and profit. The key metric we used to evaluate our customer engagement is a net promoter score or NPS and we're already making great strides in improving our NPS performance across all of our markets. In fact, for the first time in its history, MillerCoors finished number one in the most recent Tamarron Supplier Survey which pulls hundreds of U.S. distributors in rating the performance of beer, wine and spirits suppliers. We're building stronger partnerships by providing beer expertise, customer centric solutions and industry-leading service and results. Progress is also reflected in other customer awards our teams have recently won, including the number one supplier ranking in the UK's advantage chain retail survey, Supplier of the Year across all categories by Tesco, the biggest retailer in the UK, and the Supplier of the Year award from Boston Pizza, the largest on-premise chain in Canada. As one organization, we're lifting and shifting the best disciplines and customer solutions across markets, including bringing our U.S. Building with Beer tool to Canada and other markets this year. And lastly, our focus on talent development, diversity and inclusion is really laser-focused on enabling our First Choice agenda and leadership capability right across our enterprise. With these building blocks in place, we believe that Molson Coors is positioned to grow total shareholder returns. The completion of the MillerCoors transaction represents a step forward in the size and strength of our business and this will drive some significant changes in our financial numbers in the near term as we align and enhance our financial reporting. In order to provide more comparable financial information, unless otherwise indicated, all fourth quarter and full-year 2016 consolidated and U.S. results discussed on this call will be presented on a pro forma basis as if the MillerCoors transaction and its financing had been completed at the beginning of 2015. So, start with business highlights for 2016. Overall, we're pleased with the progress our Company made last year. We increased global pro forma net sales per hectoliter 1.4% in constant currency for the year as we continued to achieve positive net pricing and to premiumize our portfolio towards higher margin, higher growth above premium brands. We exceeded our target for cost savings and we expanded pro forma underlying gross and pretax margins globally. We reported nearly $2.4 billion of 2016 pro forma underlying EBITDA, an increase of 2.6% from the year before. And on an underlying pro forma basis, we grew pretax income 4.1% and after-tax income 1.9% for the year. Now, I'd like to share some regional highlights from 2016. In the U.S. on a pro forma basis, MillerCoors domestic net sales revenue per hectoliter grew 1.3% for the year as a result of favorable net pricing and positive sales mix. Total net sales per hectoliter, including contract brewing and company-owned distributor sales, increased 1.2% for the year. We grew our share of the premium light segment with Coors Light completing its seventh consecutive quarter of increased segment share and its best annual volume performance since 2012, while Miller Lite reached nine consecutive quarters of increased segment share. Coors Banquet which completed its tenth consecutive year of volume growth, gained segment share and came out of 2016 with accelerating volume trends. And above premium, we purchased three regional craft breweries during the year and began integrating these high-growth, high-potential businesses. Although Blue Moon seasonals and REDD's had a challenging year, Peroni continued to grow volume and Henry's Hard Soda which was launched just over a year ago, became the number one hard soda franchise in 2016. Our U.S. team is also executing new strategies to improve the performance of our economy brands which are already showing signs of progress. Miller High Life had its best annual sales to retail performance since 2009. Overall STRs, however, declined 2.5% in the U.S. in 2016. MillerCoors pro forma cost of goods sold per hectoliter decreased 2.5% driven by supply chain cost savings and lower commodity costs, partially offset by lower fixed cost absorption due to lower volumes. 2016 underlying pro forma pretax income in the U.S. was up 13.8% from the previous year as lower cost of goods sold, net pricing growth and positive sales mix were partially offset by lower volume. In Canada, net sales per hectoliter in local currency increased 0.2%, driven by more than 1% of positive pricing and mix, partially offset by mix shift towards lower revenue packs and contract brewing volume. Our top line reflected growth in our above-premium brands as Coors Banquet, Mad Jack, Belgian Moon, Creemore and our Heineken import portfolio all continued to grow volume and market share. Meanwhile, market pressure on the mainstream segment, particularly in Quebec and the West, drove overall STR volume 2.8% lower for the year. Canada COGS per hectoliter decreased 1.1% in local currency, driven by cost savings and lower depreciation expenses. These factors were partially offset by the impacts of volume deleverage, unfavorable foreign currency movements and inflation. On the bottom line, 2016 Canada underlying pretax income declined 12.2% to $267.3 million, driven by lower volume, higher brand amortization, commercial investments and negative foreign exchange impacts, partially offset by cost savings and lower incentive compensation expense. We also determined that the fair value of the Molson Coor brands in Canada was lower than their carrying value, so we recorded an impairment charge of $495.2 million in the fourth quarter which is excluded from our underlying results. In addition, we changed these brands to definite lived intangible assets which will be amortized over 30 to 50 years. Europe net sales decreased 0.9% in local currency for the year driven by the indirect tax provision of approximately $50 million recorded in the fourth quarter related to an ongoing legal dispute along with lower contract brewing volumes. Our continued portfolio premiumization and mix management drove a 1% increase in 2016 Europe net sales revenue per hectoliter in local currency. On the strength of our above premium brands, including Coors Light, Sharp's, Franciscan Well, Staropramen outside of the Czech Republic and Rekorderlig Cider, we grew market share in the region with a 1.4% increase in owned, licensed and royalty sales volume. COGS per hectoliter in local currency increased 4.4% due to a mix shift to higher cost products and geographies, as well as lower net pension benefits. 2016 underlying pretax income was 36.2% lower due to $86.2 million of cost increases relating to the indirect tax provision, brand amortization expenses, lower net pension benefits and unfavorable foreign currency movements. Our international business delivered strong results in 2016 with double-digit growth in net sales in owned and royalty volume as well as improved bottom-line performance. Higher owned and royalty volume was driven by the addition of the Miller global brands along with Coors Light growth in Latin America and Australia, while net sales increased due to higher volume and positive pricing. This team improved 2016 financial performance significantly versus the year before and delivered on its profits commitment excluding the impact of foreign currency movements since 2013 and the total alcohol prohibition in Bihar, India from earlier in 2016. Improved financial performance was driven by the addition of the Miller brands, volume growth in Latin America and Australia, favorable mix, positive pricing, cost savings and cycling the substantial restructure of our China business in 2015. The integration of the Miller global brands within International, Canada and Europe is proceeding well in the first few months following the transaction close. But we're still in the early stages of assessing the historical and potential future performance of these brands. We're leveraging existing platforms and partnerships in some countries and establishing new supply chains and partnerships in other attractive new markets. Regardless of the structure, all of our efforts are focused on leveraging our existing scale and brand presence to grow the Coors, Staropramen and Miller trademarks and our craft brands in key markets around the globe.

Thank you, Mark and hello, everybody. Following the completion of the MillerCoors transaction, today's results reflect a number of changes we have made to our financial reporting in order to align and clarify our results. As Mark mentioned, we're providing pro forma results for the consolidated Company and U.S. business, including updates from refinements to purchase accounting and related tax-work functions and aligning the way we report our volume. Current pro forma consolidated and U.S. results will be presented as if the transaction and its financing had been completed at the beginning of 2015. With that in mind, following our pro forma consolidated financial headlines for the fourth quarter and full year 2016 are as follows. Net sales were down 4.2% in U.S. dollars in the fourth quarter and 2.3% for the full year, primarily due to currency movements and the indirect tax provision recorded in Europe as well as lower sales volumes in North America. On a constant currency basis, net sales decreased 2.2% in the fourth quarter and 0.6% for the full year versus the same periods last year. Our net sales per hectoliter in the constant currency decreased 0.8% in the quarter. On a full-year basis, net sales per hectoliter increased 1.4% due to positive pricing and sales mix. On a U.S. GAAP basis, we reported a pro forma net loss from continuing operations attributable to Molson Coors of $608.1 million for the fourth quarter, down from $6.7 million of net income a year ago. This decrease was driven by the impairment charge recorded for the Molson brands in Canada, higher U.S. GAAP tax expense and the indirect tax provision recorded in Europe. On a full-year basis, U.S. GAAP pro forma net income from continuing operations attributable to Molson Coors decreased 48.9% to $257.5 million, driven by the same factors as in the quarter. Fourth quarter pro forma underlying after-tax income increased 16.4% to $98.7 million or $0.46 per diluted share driven by 42% higher income in the U.S. and increased performance in international, partially offset by the indirect tax provision in Europe. Full-year underlying after-tax income increased 1.9% to $936 million, driven by 13.8% higher U.S. income and lower losses in international, partially offset by lower income in Europe and Canada. Underlying pro forma pretax income increased 4.4% on a reported basis and increased 10.8% in constant currency for the fourth quarter. Full-year underlying pretax income increased 4.1% on a reported basis and increased 5% in constant currency. Pro forma underlying EBITDA in the quarter was $405.1 million, 4.6% higher than a year ago. For full-year 2016, our business reported $2.383 billion of pro forma underlying EBITDA, an increase of 2.6% from 2015. Beginning in the first quarter this year, we tend to focus our consolidated and business unit performance discussions on underlying EBITDA which will allow greater comparability with other global brewers. On our last earnings call, we told you that we would provide transaction adjusted earnings per share which is how we look at value creation from the MillerCoors and Miller global brands transaction. Since then, the SEC has provided general direction to the market, reinforcing advice against non-GAAP measures. To respect that direction, we will provide components for you to make that calculation on your own. As we mentioned previously, this metric is calculated as the sum of three numbers: underlying after-tax pro forma earnings per share, transactional related after-tax book amortization and transactional related cash tax benefits. In the fourth quarter, these three numbers were the underlying pro forma after-tax earnings of $98.7 million plus $9.4 million of transactional related after-tax book amortization and $63.9 million of transactional related cash tax benefits. Also, we had 216.4 million weighted average diluted shares outstanding for the fourth quarter on a pro forma basis. For the full year 2016, these numbers were the underlying pro forma after-tax earnings of $936 million plus $37.5 million of transactional related after-tax book amortization and $275 million of transactional related cash tax benefits. We had 216.1 million weighted average diluted shares outstanding for the full year on a pro forma basis. Please see the earnings release we distributed earlier this morning for a detailed review of our business unit financial results in the fourth quarter and full year. In the area of cost savings, we exceeded our 2016 goal by achieving more than $165 million of in-year cost reductions across our Company, driven by the U.S., Canada and Europe, with savings from MillerCoors exceeding $85 million on a pro forma basis, along with more than $80 million from outside the U.S. These results benefited from significant non-synergy cost savings initiatives, such as the Eden and Alton closures which we do not expect to repeat in the near future. We generated $864 million for underlying free cash flow in 2016 on an actual basis, but not pro forma, up from $724 million in 2015. This growth was driven by the addition of the other 58% of MillerCoors cash flows post-transaction as well as strong working capital performance including lower underlying cash tax payments versus 2015. This strong cash generation allowed us to achieve a quick start on our deleverage goals by paying down $200 million of term debt prior to the end of 2016. A detailed reconciliation of our 2016 and 2015 underlying free cash flow is available in our earnings release this morning. Total debt at the end of 2016 was nearly $12.1 billion, while cash and cash equivalents totaled $561 million resulting in net debt of $11.5 billion. Looking forward to 2017, all of the following metrics now include 100% of MillerCoors results. Currently, we expect cash contributions to our defined benefit pension plans to be in the range of $100 million to $120 million in 2017. We anticipate 2017 pension income of approximately $24 million. Our 2017 capital spending outlook is approximately $750 million based on foreign exchange rates at the end of 2016. The increase in planned expenditures for 2017 is driven by the addition of MillerCoors capital expenditures, work on our new brewery in British Columbia and spending to capture transactional related synergies and other cost savings. Our consolidated net interest expense outlook for 2017 is approximately $370 million plus or minus 5%. We expect our 2017 underlying effective tax rate to be in the range of 24% to 28% assuming no further changes in tax laws, declarations of tax orders, excess tax deductions or share-based compensation or adjustments to our tax position. This range is consistent with our current expectation for our long term tax rate. We expect our cash tax rates to be significantly lower than this range due to the cash tax benefits related to the MillerCoors transaction. U.S. legislative initiative to reform U.S. tax laws could have a significant impact on our tax rates and our cash tax expectations and we're following these developments closely. The post-transaction integration of our business and cost synergies capture are progressing well with the following updates: the North American supply chain is driving to create a more efficient, flexible production network and we're evaluating options in light of the recent U.S. border tax proposals. Global procurement has 24 integration projects in flux with four already complete. Our global business services locations have been agreed in North America and Romania and we're focused on building world-class globalization of processes and digital leverage to provide sale, efficiency and effectiveness across our new business services network. In commercial, we have finalized the selection of global media partners and transferring our U.S. return on marketing investment or ROMI model to both Canada and Europe. And finally, Miller global brand integration has proceeded as planned in each of our business units. We have confirmed the sale and distribution structures for two-thirds of the Miller global brand volume with a balance operating in the near term under transitional service agreement. For cost savings, we continue to target $550 million of all in savings which will be made up of ongoing cost savings in all of our businesses as well as transactional related synergies, all of which we plan to deliver by the third full year of our combined Company which is 2019. Related to this cost savings goal, we fully anticipate incurring approximately $350 million of one-time incremental cash costs over three years to capture synergies, about evenly split between incremental capital spending and cash operating expense, primarily in the first two years of the program. In the first year of this three-year program, we plan to deliver more than $175 million of all-in cost savings in 2017 with most of these expected to come from non-synergy initiatives. We plan to capture the majority of our transactional related synergies in 2018 and 2019. Going forward, we will provide quarterly updates on transactional related items that we previously discussed, including our realized cash tax benefits and incremental amortization. We continue to expect transactional related cash tax benefits to average more than $275 million per year for the next 15 years. But we now anticipate that these benefits will be somewhat front-end loaded in the first few years, with the later years slightly lower than the $275 million average. In addition, we expect transactional related amortization of approximately $37 million annually on an after-tax basis. Finally, our underlying free cash flow target for 2017 is $1.1 billion plus or minus 10%. This target is consistent with the preliminary target we provided on our last earnings call and an increased impact of incremental cash paid for interest and synergy related capital in 2017 as well as the cash tax benefits resulting from the transaction. This 2017 free cash flow target excludes planned capital spending relating to building our new British Columbia, as this multi-year project is being funded largely by the sale of our former brewery in Vancouver early in 2016. As far as our cost outlook is concerned for the full year 2017, we expect the cost of goods sold per hectoliter in MillerCoors to increase at low single-digit rates and Canada COGS to increase at mid-single-digit rates in local currency. We expect our Europe COGS per hectoliter to decrease at a low-single-digit rate in local currency and our international business COGS per hectoliter to decrease at a double-digit rate. At this point, I'll turn it back over to Mark for outlook, wrap-up and the Q&A.

Thanks, Tracey. In 2017, we will continue to play to win via our First Choice consumer and customer agenda. In the U.S., as we move forward in 2017, we will continue to drive towards our goal of flat volume in 2018 and growth in 2019. We'll again invest heavily in our flagship brands, Coors Light and Miller Lite, plus Coors Banquet. Coors Light recently launched a new extension of the Climb On campaign built on our continued commitment to sustainability which we believe will resonate with a growing number of consumers who support brands that make the world a better place. And above premium, Henry's Hard Sparkling and new products to play in the growing alcoholic sparkling water category will be launched nationally in March with lemon lime and passion fruit flavors, while REDD's and Blue Moon Belgian White will introduce new aluminum pint packaging in the second quarter. Tenth and Blake, the craft and import division of MillerCoors will continue its focus in integrating and rapidly expanding the geographic reach of our craft acquisitions. As an example, the Terrapin Beer Company will reopen its brand new taproom and micro-brewery and The Battery Atlanta, adjacent to SunTrust Park which will soon be the new home of the Atlanta Braves baseball team. In addition, Tenth and Blake will accelerate efforts on Peroni to drive incremental growth. Finally, we're implementing a range of new initiatives to boost our economy portfolio. Miller High Life has new marketing and redesigned packaging, the Keystone family will unveil new packaging early this year and Mickey's is bringing back its popular large format glass bottle packaging. In First Choice customer engagement, beside the Tamarron, when more than 15 retailers recently named MillerCoors their supplier of the year. And we increased production flexibility across our brewery network and ramped up two new aluminum pint filling lines in Fort Worth and Shenandoah to meet demand for this package. We also remain committed to developing and maintaining strong relationships with our U.S. distributors. In Canada, our First Choice agenda will be focused on bringing back momentum to the top line through a relentless focus on our two largest brands, Coors Light and Molson Canadian in the premium segment. We look forward to the launch of the new Molson Canadian campaign celebrating Canada's 150th anniversary this year and to aligning the Coors Light creative platform with the U.S. Climb On campaign. We'll also drive for further growth in above premium by Coors Banquet, Mad Jack, Belgian Moon and the Heineken brand family. While MGD will be the main focus Miller brand in the short term, we're fine-tuning the potential roles of Miller Lite and Miller High Life to further strengthen our portfolio. Our customer relationships remain one of our key assets and there will be increased call efficiency in 2017 and more focus on in-store execution of our brand campaigns across all channels. We will also continue to transform our cost base to ensure we maximize our future competitiveness, including in our brewery network. In Europe, our First Choice consumer agenda now includes the Miller brands as well as the international license and export business in the region starting on January 1, so that we're now driving Staropramen, Coors, Carling and Miller with fully-aligned strategies across Europe. We're also continuing to build our craft portfolio, including Sharp's, Franciscan Well and further expansion of Blue Moon across the region. In January, we purchased a controlling interest in the Spanish craft brewery, La Sagra. Located near Madrid, La Sagra expands our craft portfolio in the world's 11th largest beer market and offers a new distribution partner in Spain for Blue Moon Belgian White. In customer excellence, our overall Europe net promoter score increased again in 2016 for the third year in a row, with 9 out of 11 countries improving their customer rating. In the UK, our key accounts in convenient retail customers scored as number 1 out of 21 beverage suppliers. Our international business is now much bigger with the addition of the Miller global brands, including attractive developing and emerging markets. Beginning on January 1, we also changed our Puerto Rico business reporting to the international segment so that one team is now managing the entire Caribbean while at the same time transferring the European MCI markets to our Europe business. We're building on our existing Coors Light momentum in Latin America and leveraging opportunities to grow the Coors and Miller brands in high-opportunity markets using an asset-light model by our strong partnering and local license agreements. The addition of the Miller global brands complements our growth strategy and we've already hit the ground running in key priority markets. In existing priority markets, such as Australia and Honduras, where our partners have already embraced Coors Light, we're ready to accelerate growth with the addition of the Miller brands. In attractive new markets, we have begun expanding distribution with local partners, onboarding our country managers and activating local transition service agreements. To summarize our discussion today, we're pleased with the overall progress our Company made in 2016. In addition to completing the MillerCoors and Miller global brands acquisition and moving quickly to integrate our business, we exceeded our targets for cash generation and cost savings, and expanded pro forma gross margins and underlying pretax margins globally. We grew our above-premium business globally, gained share of the key premium light segment in the U.S. and accelerated the growth in performance of our international business. As one Company with an expanded portfolio of iconic brands and a highly focused Leadership Team, we have the building blocks in place to leverage our increased scale, resources and combined commercial experience to accelerate our First Choice agenda and deliver long term shareholder value. Now, before we start the Q&A portion of the call, a quick comment.

I was hoping we could drill down a little bit on the U.S. business. In particular some of the evolving dynamics that you're seeing in the competitive landscape and specifically at economy price points. Can you talk a little bit about some of the discount names that we're really seeing in the U.S. and what you think these are rational choices that are being made in the subsegment? Thanks.

Thanks for that question, Vivien. I will ask Gavin to give some color. I think the context before we get into that detail is just look at our NSR per hectoliter performance in the U.S. which actually 2016 versus 2015 was relatively solid which is I think a good place to start the conversation. Gavin, do you want to just talk a little bit about the progress we're making on the economy and what pricing environment looks like?

Sure, good morning, Vivien. Look, I mean I just reiterate what Mark said right as our fourth quarter net pricing grows was only slightly than the growth we achieved for the full year. For the full year of 2016 growth of 1% is actually higher than we realized in 2015, so we're not really seeing a deceleration of pricing. As it relates specifically to our economy portfolio and the economy beer segment is binge drinking relative to economy wines and spirits. Obviously, engaging the economy beer drinker is really important. Our strategy in economy is actually designed to bring more value to our drinkers across our brands. That's not a price focus strategy. The economy represents a significant volume for us; it represents a significant volume opportunity for us and it's important that we get drinkers into the economy portfolio rather than getting them to cheap wines and spirits because once they are in that, that is where they tend to stay; they grow loyalty to beer. As far as the progress we're making is concerned, Miller High Life has moved away from the more hipster 'I am rich' campaign; we're now focusing on if you've got the time, we've got the beer campaign and the brand had its best quarterly annual performance in seven years. In fact, in the public Nielsen data that we actually grew share and grew volume in early February of this year. We're offering better value at retail to our customers with Keystone light 15 packs; this is the 12 pack, Milwaukee's Best introduced a new packaging and looking were taking the alcohol up a Milwaukee's Best on regular and on ice. We've taken alcohol content on ice house up and Hamm's, which has been around since 1865, has begun to reposition itself in certain geographies at opening price points. I'm pleased with the progress that we've made on our strategy for economy and it's really important for us as a business that we keep our drinkers in beer as opposed to wine and spirits.

Can I squeeze in one more?

Sure. Why not, Vivien?

Thanks, guys. So if we're looking at the price mix realization or the net revenue per hectoliter that you saw in the fourth quarter, you guys have announced there's going to be a change in terms of the funding split between you and your distributors. What would that have looked like if that change had gone into effect at the beginning of the fourth quarter just so we understand the relative benefits of making that change?

We're changing domestic industry standard 50/50 on all package beer and we worked very hard to ensure that the model is consistent keeping both MillerCoors and our distributors net revenue neutral point in time. It's all about executing our pricing strategy versus someone else's. The change will ensure that we can equally share in investments and benefits from a joint customer point of view; we're ultimately making better choices together, but it's revenue neutral. So you will see changes in our finance reporting on the sales revenue.

Actually, two things if I could. One is just a quick clarification. I may have missed it but did you realize any savings against your three-year plan in the fourth quarter that just concluded? That would be the first question and just kind of building off of Vivien's question on the economy as you ramp up the economy focus how certainly repercussions have you taken that you can draw attention from economy wine and spirits as competitor beer brands and not cannibalize from elsewhere in your portfolio?

To start on the first question, just to be clear I mean the $550 million of savings announced for the next three years starting from the beginning of 2017, and we have given you the specific cost savings that we've achieved through 2016 which was at the top end of our expectation, principally driven by the fact that we had the Eden and Alton closures in 2016; those were significant non-recurring events. So as you think about comparables, I would push them to one side because, as I said, they are non-recurring events but the $550 million is still solid for the next two years and obviously, as I said, we will update that progress against that on a regular basis and update more fully on an annual basis. On your question on the economy brands, to be fair I think Gavin really colored most of what we're doing there. We're ensuring that our portfolio is fit for purpose, operational consumer value and makes our economy brands attractive relative to the choices that are available in economy spirits and economy wines, so we believe that we're strengthening our relationships with drinkers bringing drinkers back into our brands by offering value across the portfolio. A measure there's really anything else to add to that.

The thing I would add to Mark is that we haven't seen impact on our premium brands. In fact, we increased share meaningfully in the fourth quarter and December was actually one of our best months in a very long time. In the economy strategy went to back into the year. In fact, we grew segment share with Miller Lite and Coors Light for 20 consecutive months. I haven't seen that impact that Stephen refers to and it is certainly not a strategy.

Actually, ever go on the other side of the beer segment somewhere the premium one. You have been saying that you transferred the Blue Moon brand from Tenth and Blake to your core business. Can you tell us, I mean, where you stand on that transfer and how it is working? And also all the different initiatives you do to drive that revenue back to hectoliter.

Gavin you want to pick up on Blue Moon and I think it's important to talk about Blue Moon Belgian White. Obviously the seasonal part of that business and industries have been under a lot of pressure. Do you want to update?

Sure, thanks. We originally conceived Tenth and Blake in 2010 to cripple and expand craft brands like Blooming and Leinenkugel's and some of the iconic brands like Peroni and since that time Blooming and Leinenkugel's have grown from regional powerhouses into really national mainstays. They're holding their own through this explosion of choice and different styles and given the scale and size of these two brands, it made absolute sense for us to move it into the marketing department or each of the marketing departments and the move has gone particularly well. Mark referred to the seasonals and variety packs and yes, Blue Moon has lost volume on seasonals and variety packs but this is industry-wide and Blue Moon is no different to anybody else. We've made some tweaks to our above-the-line and we're seeing the early benefits of that with meaningful trend improvements in the fourth quarter and into 2017 so I guess the short answer is the transfer has gone well.

Laurent, I think your question just talked about how we're driving our net sales per hectoliter right across our business. The focus in all geographies is really about how we premiumize our portfolio and if you look at our results across Canada, Europe and more broadly our international business we're only playing in the above premium segment is a return oriented Business thought the same time recognizing the economic engine is still our mainstream brand. It's the power we've got to keep our big mainstream brands performing well and we talk about share improvements particularly in our biggest market, the U.S., at the same time premium is in our portfolio and that is what we're about and that is what we will continue to focus on.

I wanted to follow up with a few questions on the cost savings. Given that 2016 actually came in at the high end of your range, can you talk about the potential upside to your $175 million target for 2017 as part of your three-year cost savings target and it seems like we're actually looking for a step down versus 2016 so just wanted to get a little bit more clarity around that. And then can you tell us in terms of the split of MillerCoors versus other segments with that $175 million target? And Tracy, I think you talked about potentially looking at supply-chain opportunities and evaluating it in light of the potential border just ability as part of the corporate tax reform so if you could talk about the implication of the total number that you set out?

Judy, that's cheating; there was about 18 questions and not one. I think that was kind of three groups there so on the first one in relation to 2017 versus 2016 I think I covered that earlier. 2016, which we're very pleased about, was kind of inflated versus what you call the normal normalized number because of the closure of Eden and Alton brewery, as though those are nonrecurring but very significant events to make a looking at 2016 and 2017 will start to strip out that impact. The $175 million number that we guided for 2017 is in a that we feel confident that we will be focused on delivering and as we always intended to do; we set our savings targets we try to meet them. Period, that is what we will attempt to do you through 2017. And that will be solid progress against our longer term $550 million of savings. With regard to the North American supply chain, you want to just talk to how we're thinking about that?

So we have plans in place. We're making costs possible because it's very difficult very early to predict and comment on any kind of changes that will come from tax reform that the administration is looking at. We have plans; we plan on if something changes, we will make sure that we can change direction.

Tracey, if I could just follow up so the last earnings call there was some confusion around the free cash flow guidance and obviously came up with $1.1 billion that's in line with what you given us but any kind of color you can give us in terms of what you think you one-off or one-time items within that $1.1 billion number would be for 2017 that would be appreciated?

The guidance has remained consistent with what we told you is $1.1 billion plus or minus 10%. We don't break out that affects our free cash flow but some of the factors that probably you should consider is we've spoken about the incremental CapEx is going to be required to capture synergies and other cost savings and most of that will come in 2017 and 2018. If you recall we did tell you that the total cash cost was around $350 million to deliver the synergies and cost savings; that's going to be split evenly between CapEx and OpEx over the next three years. The other item to consider around free cash flow is we've got the incremental cash interest as a result of the acquisition date sale. That's a step up on that line. And then other items that affect us would be things like pension contributions, timing of working capital changes and then cash taxes from incremental income from the U.S. which is now a higher proportion of our income so that will also affect the free cash flow.

Hey, Mark. Continuing one of the topics that Tracey, the comments made about the related synergies is that the majority will be realized in 2018 and 2019. So, the obvious question is what you mean by majority? I doubt you will tell us the difference between 50% and 99% but as you think about moving past these next three years and the due diligence you will be doing on opportunities, is it fair to think very up this morning areas for incremental savings is procurement, is a commercial? I'm just trying to get a sense of where the additional savings might come from over the next few years.

Let me offer a couple of comments there, Mark. We're not going to get into splitting out the detail of the $550 million. We have said that the synergies related element which if you remember we did talk about in our last call, which has come in as a bigger number and a faster number; faster realization which is good news, it's principally weighted into years 2018 and 2019. 2017 is more of a transition year as the businesses come together and all of the work streams are up and running to move any volume around the network requires significant planning and CapEx investment I forgot the phasing we've got. In the facts, those $550 million of savings will be in the year by the end of 2019. I don't want to give any further detail beyond that. I think as our businesses come together in the markets, our ability to flex production across geographies but also how we can generate additional revenue synergies as we transfer some of our commercial excellence capabilities around our business, which is central to my approach, something I think will unlock real value for us actually improving our overall commercial performance, First Choice agenda and the thing is shifting as practice ideas. Whether that's pricing and revenue management, plugging portfolio gaps and getting behind brands that we've launched that are working well in one geography, moving them to other geographies. All of that is ahead of us and for me is an opportunity and exciting but more of that to come I think into course.

That's very helpful. And to build on that, Mark, commercial and customer excellence sure is contributing to this upgrade you're seeing among distributors in the U.S. and the way they are rated versus other suppliers. Is also translating it seems into and Gavin you pointed this out, to improve share performance in premium light but your overall share trends are quite unfolding the way you would like. Can you talk a little bit about what in that customer excellence focus is to come so to speak that can translate into either a pickup in the pace of share taking and premium life or an improvement in the performance of other aspects of your portfolio?

I actually think that we're very pleased with our share performance, Mark, 22 straight months of performance highest we've had in many years and the month of December. But if you peel back the various brands, Mark, Coors Light for proceeding quarters we've had the best run since 2012. We've upgraded the regional identity on Coors Light and we're going to be building on the Climb On campaign to sustainability efforts as we head into summer. Miller Lite has had very positive volume growth in three of the last nine quarters which represents the best performance that we had from the brand. It goes back to the change in the original packaging in 2014 and then it is very different campaign. We're pleased with the platform for which we could for Miller Lite and 2016. Coors Banquets achieved its tenth consecutive year of growth in 2016 with front have performance in the low single digits and accelerating in the second half of the year to the mid-single-digit growth and we're going to be building a campaign as we go forward. We're introducing Spanish-language TV to go after the Latino segment of beer drinkers. I think I've really covered our economy strategy and our economy portfolio strategy early enough, Mark. I'm not going to repeat all that.

So Gavin, the only thing I would add in, and Mark just for information is we wanted the decisions I've made is to take a portion of our synergies and reinvest our back into our business into our global growth team, our commercial excellence team in the focus around a handful of areas. So we're investing more pretty fundamental segmentation analysis which will inform an awful lot of our portfolio decision-making going forward and that's been done consistently across our business unit. We got a stronger broader global innovation team in place to drive for more disruptive innovation. We've now got a new global digital team in place for each of our business units with best practice. We've got a small global brands team in place and a global customer excellence team focused on things like our MPS performance, field sales management, pricing and revenue management. So for us to get different outputs going forward, we're making some changes in our business from an input perspective which I think will stand us in good stead as I look out over the course of the next 35 years and really building the commercial muscle of our organization over 18,000 people now lined up behind our First Choice agenda and I'm convinced that will pay dividends to our business as we move into the future.

And if I can make one last one on the global dimension, Mark. Of course the international Miller business is now yours. Can either you or Tracy give us some sense of the dollar amount we're talking about in terms of the cost of owning that either in year one? And the slope so to speak on that number? Because you need to layer in costs; you addressed it in your prepared remarks but I don't have a good sense of the dollar value. We put something in our model that can you give us some sense of the year one increment there and then with the slope on that number might be over the next few years?

I thought you might ask that question; the short answer is no at this stage, Mark. We are on our pro forma, we've excluded the Miller international brands and we're still working through the fine detail of the trailing EBITDA number. And then the aspirations moving forward. It is complex because it wasn't a definitive kind of business unit within SAB and it was spread across all of their operating units.

Look, Mark I think to Mark's point, more detail to come later but I think broadly we've had a very good start. We transition many of the markets of the PSA's. We're excited about the prospect for the brand. As you might imagine of course there are some markets that are performing better than we expected, some markets that are performing as well but broadly speaking these are strong, growing markets that are now open the door for our other brands, have brought send scale to bear in existing markets where we're already selling course products and I think about a very strong opportunity going forward.

And Mark, the only thing I would add is continue very much focused around our asset light approach, working on partnerships and a license and export basis that has served us well and I think from a relative cash use framework that we have articulated pretty consistently I think is the right approach for our business.

A couple of questions if I may. Firstly, you refer in your remarks about Europe to the ongoing legal dispute and you put a $50 million indirect tax provision in the quarter. Can you just remind us what is going on there, what's behind that and what this sort of outcome is and whether there is any danger of needing any further provisions in 2017? And a slightly more detailed one can you just give us an idea of what your UK volumes have done in the year? And then perhaps thirdly could you just give us an idea of your trading year-to-date in the New Year?

Sure, so kind of in reverse order we don't give a trading update and that's a change that we made last year Andrew; so the biggest slice of our business now is our U.S. business and the scanner detail is in the public domain so I would just refer you to that or any other data and any other markets we don't give short term trading updates. With regards to our UK brands, Simon just talked about in a second he can set that in the context of how our European business is performing and to your first question around the provision that we took, that's an ongoing legal dispute so we can't really get into any further details. Our review is that's the best estimate of the potential requirement on a multiyear basis. There is further detail in our 10-K which gives you a sense which gives you little bit more color. And really refer you to look at that but $50 million provision is really a four-year perspective so that gives you a sense of let's call it your requirements because it's an ongoing legal dispute; I can't get into any more detail than that.

Yes.

Our UK business is in very good shape. If I put the UK business in context, the European business is probably helpful to note or more helpful to you guys actually to get our European business performance. Taking aside the indirect tax provision which by the way has been an issue spanning just over four years. So if I took that to one side of the a full-year issue weighing on every single quarter, it gives you a very distorted picture. If I give you the underlying fundamentals of the European business, they're pretty strong. In quarter 4 we grew our volumes by 2.5% and we gained share at our Q4 share was accelerated share gain versus the rest of the year. In combination with that we grew our net sale revenue by 3.1% and if I take the tax provision to one side and give you a number in constant currency, our underlying pretax profits grew by over 20%. So we would be very successful by the UK performance driven by immunization First Choice for customers in the overall European performance through Q4 and that pretty much reflects the year that we've had in Europe as well.

So just to help you with navigating to the financials at the top of the summary of operations for example the year business those volume numbers of what we call financial volume and they include not only some brand volumes and things that flow through the P&L but also contract manufacturing and also factor brand line which is part of our new volume policy for this year. What Simon was talking about to define call it brand volumes owned and royalty and so forth in the narrative of the release and the prepared remarks for the call.

A couple of questions, thank you, a couple of questions on the U.S. business. First, just in terms of Q4 and implications on Q1 can you talk a little about the fairly significant difference between the best years the STRs in the U.S. and Q4? As well as any impact from calendar issues and the weather on the market and our performance?

One change we made this year is we kept our orders up and all the way through the end of the year which is different from what we've done in the past we want to make sure that we cover dollar distributors orders we did that we fulfilled all the orders we received. We didn't push any inventory into our distribution network. We did have somewhat higher inventories as a result of the overall industry reduction in December. Our share was actually as good as it's been for a while but the overall industry as you know is right across the alcohol and package goods was down in December so that drove our inventories up a little bit. The higher inventory level we had, Robert, certainly helped us with our service in the first month of the year. And we reduced our stocks and improved service quite meaningfully compared to previous years in January. From a weather point of view the only real weather impacts we've had at the end of the year were some freezing conditions in both Milwaukee and Colorado which led to some challenges with Blue Moon and Blue Moon inventory, but other than that no. As far as 2016 is concerned, inventory levels at the end of the year but our current plan is to ship to consumption in the year.

So if it wasn't weather-related what happened in the industry in December then?

Robert, I'll leave it up to you. Despite the fact that we were down in volume, I was very pleased with our share performance particularly in the premium light segment and as I said we saw particularly good performance coming out of only parts of our economy strategy with dollar highlife and I'll be repeating myself if I go into all that again.

Robert, if you look more broadly across alcohol in CPG there just seems to be a general sluggishness in terms of demand. I think we're wrestling to pinpoint why particularly at a time where there was so much frothing at the stock market so it remains a little bit of a mystery, but it was I think a broad CPG kind of weakness through the month of December and is difficult to say it was due to X or Y.

And Gavin a bigger picture question on U.S. beer. One of the striking things that we saw in 2016 was a fairly significant slowdown in the craft sector and lots of reasons for that for some changes at least what we're hearing in terms of retailers in terms of their sets maybe knocking out some long tail of some of the smaller crafts. So could you kind of give your assessment big picture in terms of what's going on in the beer market in the U.S. with the American consumer, what's happening with craft and retailers and how you're positioning yourself to take advantage of that?

Robert, it's Mark here. Let me pick up because this could be a long conversation that may come back to I think some of the comments we made last year. I think the prognosis is that craft has been great from a beer industry evolution perspective. It's brought more drinkers any more conversations about sales and provenance and that's good for beer and its long-term health and sustainability. It would appear to be the case that we're probably in a bit of an oversupply situation and many of the craft brands which are very across styles which are very occasions-specific means that there is probably a limitation as to how broad that craft footprint can become. Many retailers I think are now recognizing that they have got inefficiencies on their shelf sets and too many SKUs which are too specialized and certainly the more sophisticated retailers have been asking us for support and building with their approach to Gavin and team have in our category partnerships and actually help many retailers shift sell shots and drive efficiency and velocity appoint a purchaser think you will see that continue to 2017 and beyond and the people that one will be the big national craft brands of corporate clarity of positioning and distinctiveness of brands like ours. Regional brands have got meaning across both the states and you'll continue to see a lot of local term and very small very local label profiles, et cetera, in many retailers will continue to give that visibility and presence but overall there should be a simplification of the offer from a sharper perspective. Robert, some of the big retailers have modified their assortment strategies just address out of stocks and to improve inventory turn. We believe that's the inevitable evolution as Mark said the number of SKUs that have been added to the beer category over the past two years so overall we actually agree with that. And in some areas I would say that it has improved our positioning and in some areas it hasn't. I think it's coming into 2017 we'll us is that. In its totality. But it's a strategy that we agree with because focus to core packages and provides a healthy balance between out of stocks and variety.

I've got a couple of small picture questions I guess. One is on the tax provision. I think you covered this in response to a previous question. The $50 million provision that you took in Europe, the Europe segment, it's sort of a one-time cost. You're making an accrual based on what your best estimate of the exposure would be so as we're sort of modeling next year, we wouldn't come to me that you've got, that there would be the estimate correct, we wouldn't and that $50 million to next year. Is that right?

That is our current best estimate of what is called the exposure and it's an aggregated four-year timeline. There's a little bit more detail in the 10-K, Brian but I think that's a fair assessment. Where we're at this point in time.

So given that it is not a period cost specific to the fourth quarter, it knocked about $0.18 or $0.20 of the quarter?

Yes. That's factually correct.

Okay. And then second question, just related to the write-down in Canada, is there going to be incremental amortization expense that we have to start plugging into Canada each year now based on the way you're going to amortize the brand there?

Yes. So that's correct, Bryan. Having moved the brands, amortizing them over 30 to 50 years will give us a full-year cost of about $40 million on the full-year. Obviously that's a non-cash cost so it doesn't affect our cash flow number, but it will flow through on our earnings line. So that's correct and pretty standard in these situations.

And just so people know this is Dave Dunnewald, that started in the fourth quarter so you'll see three quarters of that impact kind of on an overlap basis in 2017.

So about $30 million in 2017, $40 million on a full-year basis.

Okay. And then the last one, I noticed on your website if got the pro forma updates through the fourth quarter. So I'm assuming is that what we should be using out to sort of adjust your models, the base for our models to model of 2017?

Yes, that's correct. We have made a concerted effort to provide clarity and consistency regarding the quarter. Using the pro forma allows everyone to gain the best understanding of our business on a like-for-like basis. One thing to note is that the adjustments from the previous set of pro formas involved more detailed planning concerning the depreciation number, which has actually increased and resulted in about $0.07 in the fourth quarter. As you review the previous performance figures against the new ones, you may notice that the depreciation figure is larger due to a more precise analysis of how we are allocating some of the asset values and their lifespans in our business, which accounts for the $0.07 difference from what you might have anticipated.

And it looks like there's also some adjustments to the prior quarter also from what I saw on that line?

Yes. That's correct. So we flowed that all the way back see if you've got full-year 2016, full-year 2016, but there was a chunk in the fourth quarter in 2016 so just look out for that as you do your analysis and then just one last one I guess is we're talking about the pro forma.

Is there anything else that's different today versus that November 1 set of pro formas besides the depreciation?

Yes, so Bryan there was another driver and that related to a pension amortization. So once we sort of got down through the interpretation of our performer guidance we actually removed a pro forma adjustment that we had in that pro forma back in November. And it also related to purchase accounting impacts so the tailwind going into 2017 for that reference was around $30 million. And just another item is that the Miller global brands are not in the pro forma.

All right. So as we're looking at bridging from pro forma to next year, there's that $30 million that shouldn't repeat next year and then whatever we were thinking about in terms of the Miller global brands?

That's right.

Plus the full-year amortization related to the Canada impairment, that's correct.

And obviously the $50 million pension is the other one that hopefully won't recur?

Provision, yes.

I have two quick questions for Pablo. First, regarding the new $550 million cost savings energy guidance, how much of this cannot be attributed to MillerCoors itself? Second, the pro forma EBIT excluding items increased by $27 million in 2016. How much of that can be linked to the deal?

Sorry, the line is a little bit tricky. Can you just repeat the second part?

Yes. The pro forma EBIT for MillerCoors was up $170 million for 2016 can you just tell us how much of that can be attributed to the deal?

All right, let me take the two questions one at a time. Tracey you want to take the second question, on the first question that is three-year guidance and acronym in a split in about by business unit we're reporting on an enterprise-level and we'll update on an ongoing basis. We have set a target of $175 million as we go through 2017 and as I said earlier we try to meet or beat those numbers as we always anticipate that we're not breaking out cost savings by business unit. On the second question which relates to the 2016 performance I think Dave Dunnewald.

Let me pick up that one. It sounds as are you looking essentially for an earnings accretion or what was the deal that affects. You will see that pro forma number we've done anything we can to make those as comparable as possible for the adjustments in 2015 and 2016 are substantially the same. You want to see the deal benefit either just looking at the more actual results to be posted for the fourth quarter and comparing that with the archers as we've had in our prior year quarter. That's going to do your best estimate at this point but we're going to actually do call it full math around the that will give you a general idea and you can see that on the EBITDA tables in the earnings release and the other let's call it pretax earnings tables look at the actual number.

Angela, that sounded almost like we choreographed that there. So many thanks for joining our call this morning and for your continued interest in the Molson Coors Brewing Company. We look forward to seeing you at forthcoming events and on our next call at the end of our Q1 earnings as well. Thanks, everybody.