Molson Coors Beverage Company (TAP) — Q2 2017 Earnings Call Transcript

Thank you, Laura and hello and welcome, everybody, to the Molson Coors earnings call and thanks for joining us today. With me on the call this morning from Molson Coors, we have Tracey Joubert, our Global CFO; Gavin Hattersley, the CEO of our U.S. business; Fred Landtmeters, our Canada CEO; Simon Cox, the CEO of Europe; Stewart Glendinning, our International CEO; Sam Walker, our Global Chief Legal and Corporate Affairs Officer; Brian Tabolt, our Global Controller; and Dave Dunnewald, our VP of Investor Relations. On the call today, Tracey and I will take you through highlights of our second quarter 2017 results for Molson Coors Brewing Company. Along with some perspective regarding the balance of 2017. On this call along with our remarks, we're also offering slides that show both reported and constant currency results and you can view and follow along with these slides on the Investor Relations page of our website. In the second quarter, we continued to drive our First Choice for Consumers and Customers agenda, with laser focus on strengthening our core brands, premiumizing our portfolio, accelerating our international footprint, enhancing our customer partnerships, and driving the integration of MillerCoors and the Miller brands globally to unlock synergies and other cost savings. As a sign of progress against this agenda, our team delivered solid growth in constant currency net sales, global brand volume, underlying EBITDA, net income, earnings per share and free cash flow. Additionally, we exceeded our goals for cash generation and debt reduction in the first half of this year and have maintained our investment-grade debt ratings. Our second quarter performance was in line with our expectations, and we remain on track to deliver our 2017 business and financial plans, cost savings targets and cash flow goals. Now, I'll turn it over to Tracey to give second quarter financial highlights. Tracey?

Thank you, Mark, and hello everybody. Following are our consolidated financial headlines for the second quarter versus pro forma results a year ago, except for cash flow, which is reported on an actual basis. Global net sales per hectoliter grew 1.7% in constant currency, driven by the U.S., Canada and Europe. Worldwide total brand volume increased 2.3%, due to strong growth in Europe and International, partially as a result of adding the Miller global brands business, but also from growth in some of our core brands. Our global priority brands grew 4.6%. U.S. GAAP net income increased 4%, and underlying non-GAAP net income increased 2.9%, driven by increased brand volume, higher net pricing, positive sales mix, cost savings and lower marketing spending, partially offset by a higher underlying effective tax rate. This non-GAAP result was up nearly 50% on a reported basis, which demonstrates the substantial earnings accretion from the MillerCoors transaction. In the second quarter, we reported nearly $794 million of underlying EBITDA, a 4.2% increase from the pro forma result a year ago. In constant currency, underlying EBITDA was up 5.7%. Year-to-date underlying free cash flow was $586.7 million, which more than tripled versus $176.9 million in the first half of 2016. This significant increase was driven by the addition of the other 58% of MillerCoors cash flows, as well as lower cash paid for taxes, which were partially offset by higher cash paid for interest. With this strong free cash flow, we reduced our net debt by more than $522 million in the second quarter. Now, I'd like to share some regional highlights for the second quarter. In the U.S., we grew net sales and underlying EBITDA on a pro forma basis, with 7.9% earnings growth driven by lower MG&A expenses, higher net pricing, positive sales mix, and cost savings. U.S. domestic net sales per hectoliter, which excludes contract brewing and company-owned distributor sales, grew 1% for the quarter as a result of higher net pricing and positive sales mix, partially offset by cycling a multi-year adjustment in federal excise tax expense last year. Cycling this adjustment in federal excise tax reduced our NSR per hectoliter by 40 basis points this quarter. Overall, U.S. STRs declined 1.9%, but against the backdrop of a weak industry, we achieved our best first-half market share trend in more than three years. STRs were particularly soft late in the second quarter, which drove moderately higher than planned inventories for our distributors at the end of the quarter, but also lower out of stocks around the 4th of July holiday. We expect the majority of this additional inventory to be sold through by the end of the third quarter. We grew our share of the Premium Light segment, with Coors Light achieving its ninth consecutive quarter of increased segment share and Miller Lite reaching 11 consecutive quarters of increased segment share. Overall, our Premium Light segment volumes were down low-single digits. Coors Banquet grew volume at a mid-single-digit rate and also increased segment share. Our total Above Premium segment returned to growth, up low-single digits, driven by both our regional and national craft brands.

Thanks, Tracey. In 2017, we continue to focus on both top and bottom-line performance, driven by our First Choice consumer and customer agenda and the integration of MillerCoors and the Miller brands globally. My priorities remain unchanged as we shape the new Molson Coors to drive total shareholder returns over the medium to long term. I am leading for a powerful and integrated First Choice culture, the successful integration of our businesses including the associated synergy and cost savings plans, a step change in our global commercial capability to support top line growth, accelerated performance in our international markets, further global productivity improvements through World Class Supply Chain 2.0, our North American supply chain approach and global procurement, with all of this enabled by a more efficient enterprise approach across global shared services. We're also investing ahead of the curve for growth in key brands and markets. And as part of this, in the third quarter we plan to invest incrementally at an enterprise level in our brands. With this approach, we're driving for measured and sustainable performance on both the top and bottom line. Through the balance of 2017, our business unit priorities are clear and consistent. Our U.S. goal of flat volume in 2018 and growth in 2019 remains unchanged. We remain committed to Coors Light and Miller Lite accelerating their segment share gains alongside the strong volume performance of Coors Banquet, and to further improving the volume trajectory of our economy portfolio. In addition, we took key steps to strengthen and further premiumize our portfolio, including the addition of Sol, as we signed a 10-year agreement with Heineken, commencing in October of this year for us to import, market and distribute the high potential Mexican beer brand. In addition, we recently announced a partnership with Hornell Brewing Company, part of Arizona Beverages, to market and distribute a new beverage called Arnold Palmer Spiked Half & Half, which takes us into the alcohol tea market in a distinctive way. Along with a resurgent Blue Moon Belgian White, we'll continue to integrate and expand the geographic reach of our recent craft acquisitions, which are growing strongly. Encouragingly, MillerCoors shared the top spot of the 2017 Tamarron distributor survey as the best malt beverage supplier. This marks the second consecutive year that our distributors have rated us as their best brewer across a wide range of metrics, and it is a strong First Choice vote of confidence from our distributors who believe in our imperative of getting to volume growth by 2019.

Good morning, Andrea. Look, in June, we filled the orders that our distributors placed and when you couple that with lower-than-expected industry-wide sales, it did increase our distributor inventory at the end of the quarter by a couple of days. On the positive side, the higher level of inventory really helped us to increase our service levels, coming into the 4th of July holiday and that worked well for us as we had a 22% reduction in distributor out-of-stocks compared to the last year.

Well, I think the pub situations are relatively well publicized situations. Clearly, we're in a litigation process at the moment, and that will hopefully come to a conclusion as we get into 2018. So, I really don't want to comment any further on that at this stage.

And what we're finding is increased interest in our craft partners as well. We had mentioned that our full craft partners delivering some really great results with shipments up well over 20%. So, overall I think when you combine our portfolio, we're well set to capture any growing segment of consumers that continue to be interested in premium products. So from a beer industry point of view, we obviously need to take wine and spirits seriously as an industry. And as I mentioned at the BR Conference in July, we need to be pro-beer first and try to differentiate our category from wine and spirits, and we need to do that together.

We're pleased that we are delivering the cost savings. We have, as you rightly mentioned, we've said that for 2017, it is going to be more than the $175 million.

Just wanted to clarify your free cash flow guidance. So, it's obviously unchanged, but there is the additional $200 million of pension contribution. You talked about the first half coming in better than you expected from a cash generation standpoint. So, can you just talk about what's driving and sort of – or these improvements kind of sustainable as we go into 2018 and 2019?

We remain committed to reducing our leverage ratio to about four times on a rating-agency basis by the end of 2018.

Our STRs are down 2% and our STWs are down 2.1%. So they are converging. And we duly estimate that our Q3 distributor inventory levels will be in line with the prior year.

Thanks, Gavin. I think the only thing I would add, Pablo, is just connect that to my earlier comments that we've tried to, I think, deliver what we believe will be a measured and sustainable improvement and our overall EBITDA margins, and connect that with our aspiration and our plan to get our top line moving. So, those two things have got to work in tandem.

In terms of the Punch transaction that's pending, have you given ever the percentage of your volume which goes through the Punch A states previously?

We wouldn't intend to disclose that either. I mean, just to give you some context, there's over 100,000 licensed outlets in the UK on-trade of which Punch A represents less than 2%. So, we wouldn't be overly concerned about that.

So, thanks everybody for your interest in the Molson Coors Brewing Company.