Molson Coors Beverage Company (TAP) — Q4 2017 Earnings Call Transcript

Thank you, Phil, and hello and welcome, everybody, to the Molson Coors earnings call, and many thanks for joining today. With me on the call this morning from Molson Coors, we have Tracey Joubert, our Global CFO; Gavin Hattersley, the COO of our U.S. business; Fred Landtmeters, our Canada CEO; Simon Cox, the CEO of our Europe business; Sergey Yeskov, our new International CEO; who earlier this year moved over from leading our commercial teams in Canada; Lee Reichert, our incoming Chief Legal and Corporate Affairs Officer; Brian Tabolt, our Global Controller; and Dave Dunnewald, the Global VP of Investor Relations. Now before diving into results, I wanted to take a moment to publicly recognize a couple of people. Firstly, Sam Walker, who has led our legal and corporate affairs team and has been on our executive team for almost 13 years; Sam is retiring from our business at the end of this month to pursue an exciting opportunity in the public service sector in Colorado. For me personally, it’s a huge change; Sam has been a trusted adviser, good friend, and a constant champion for our Company and everything it stands and strives for. These are big shoes to fill, and we're delighted to have Lee Reichert ready to step into this important role next month. Secondly, I want to recognize Dave Dunnewald, our Investor Relations VP; who has announced he will retire in the first half of this year. Dave celebrates 35 years of service this year and started when our beers were only sold in 18 Western states. For the last 26 years, Dave has led our IR efforts; he has led 113 quarters of earnings calls and has seen our enterprise value grow from less than $1 billion to almost $30 billion. Well done, Dave, and thank you. And best wishes to you as you step into your next chapter. So back to business; and today, Tracey and I will take you through our path to drive long-term total shareholder returns, highlighting fourth quarter and full year 2017 results and discuss our outlook for the business. We're also offering slides to show results on the Investor Relations page of our website. 2017 marked the first full year of the bigger, stronger Molson Coors, and our full year results demonstrated balance and progress against both, our bottom line and top line growth. Integration, synergies, and cost savings were all delivered on or ahead of plan by engaged employees around the world to align with their First Choice for consumer and customer ambition. Our primary focus remained on driving margin expansion and bottom line growth with emphasis on productivity and cost savings, efficient commercial investments, and deleverage to maintain our investment-grade debt ratings. Secondly, we remain focused on delivering an improved top line through our commercial excellence approach, which provides a more sustainable source of profit growth over the medium to longer term. Capital allocation within our business continues to be guided by our Profit After Capital Charge or PACC approach as we seek to deliver total shareholder returns. For the full year versus pro forma results a year ago, we over-delivered on cost savings and free cash flow and optimized commercial spending, delivering a very strong net income growth, underlying EBITDA margin expansion of 77 basis points, and underlying EBITDA growth of 3.7%. We also strengthened our balance sheet by more than $900 million through debt pay down and pension contribution as part of our deleveraging strategy. This was complemented by an improving top line with global brand volume growth of 1% and net sales per hectoliter growth of 2.6%, driven by enhanced revenue management and portfolio premiumization. We also grew market share in Canada and Europe for the year and delivered positive underlying EBITDA in our International business. Across our business, we continue to focus on portfolio premiumization. Above Premium brand volumes increased 6% in the quarter and 21% for the year, with the full year benefiting from the added Miller international volumes. This Above Premium performance also benefited from strong growth across our global craft portfolio. With this strong growth, Above Premium now represents 20% of our total annual brand volumes. Importantly, we also delivered more than $1.4 billion of underlying free cash flow, as all parts of the business drove cash execution and efficiency throughout the year. So if we take a step back from the quarter and the year, our track record over the last few years reflects consistency and earning more, using less, and investing wisely. Our enterprise and regional teams have earned more by energizing our core Above Premium and craft portfolio through existing brands, as well as successful bolt-on acquisitions, with Apple Cider in the U.K. being the most recent addition to our portfolio. We're using less by over-delivering on cost savings and as our lower-cost achieve, which is in part driven by closing two breweries in Europe and one in the U.S.; and we've continued to invest wisely with strong free cash flow generation and deleveraged focus. Later this year, we plan to update you regarding how we expect our approach to capital allocation to evolve as we approach our deleverage targets. I am personally very proud of our achievement in 2017 against the backdrop of complex structural and brand portfolio integration. Highly engaged teams across geographies and functions have executed with brilliance and stayed focused on our First Choice ambition and financial goals. Our integration work streams delivered foundational work to drive future productivity and savings, and our commercial team strengthened their brand portfolio and our customer relationships, which will be key to our success as we play to win every day. And now let me turn the call over to Tracey to give you financial highlights.

Thank you, Mark, and hello, everyone. Let's review our consolidated financial headlines for the fourth quarter versus pro forma results a year ago except for cash flow which is reported on a full year actual basis. Also, keep in mind that in the fourth quarter of 2017, we changed our method of calculating pension plan assets used to determine our net periodic pension costs, which favorably impacted our Canada, Europe, and consolidated results. Net sales increased 4.5% due to positive global pricing, royalty revenue, favorable foreign currency movements and starting a $50 million indirect tax provision from a year ago, partially offset by lower financial volume. Net sales in constant currency grew 2.4%. Net sales per hectoliter increased 5.8% and 3.7% in constant currency. Worldwide brand volume decreased 1.1% due to lower volume in the U.S. and international, partially offset by growth in Europe and Canada. Global priority brand volume decreased 1.9%, and financial volumes decreased 1.2%, driven by the U.S. Our U.S. GAAP net income increased from a loss last year to income of $588 million this year; this improvement was primarily due to a discrete tax benefit related to that revaluation of our deferred tax balances which resulted from the recent U.S. tax reform along with favorable underlying performance in stocking and impairment charge for the Molson brands in Canada and an indirect tax provision in Europe reported a year ago. Underlying EBITDA increased 17% on a reported basis and increased 14.3% on a constant currency basis. This strong underlying performance was driven by positive pricing, cost savings, and MG&A efficiencies, partially offset by the impact of lower volumes, inflation, and investments behind our global business capabilities. Results also benefited from indirect tax provision a year ago and higher net pension benefits. Underlying EBITDA margins improved 198 basis points during the quarter. Looking at the full year; net debt of $10.9 billion was more than $600 million lower than at the beginning of the year, despite $280 million of unfavorable foreign currency movements. We also made more than $300 million of contribution to our defined benefit pension plan as part of our overall pension de-risking strategy and deleveraging goals. Underlying free cash flow of $1.4 billion was up 68% from actual results last year. The prior guidance was driven by benefits from timing of working capital at the end of the year, as well as capital expenditure reduction. In the past several years, we had made substantial progress in improving the efficiency of our balance sheet to help generate cash and drive higher cash returns on our assets. As seen on this slide, we have a consistent track record of improving working capital as a percentage of sales in each of the past six years, and we have more progress to make in the years ahead. For the full year, we improved underlying EBITDA by 4.3% in constant currency with underlying EBITDA margin expansion of 77 basis points for the year. Our top line for the year also benefited from strong net sales per hectoliter growth and total worldwide brand volume up 1%. Now I'd like to share some regional highlights. In the U.S., we grew underlying EBITDA 4.9% in the fourth quarter versus pro forma results last year, driven by higher net pricing, cost savings, and lower MG&A expenses, partially offset by cost inflation and lower shipment volume. Overall, U.S. STRs declined 3% for the quarter, and domestic sales to wholesalers declined 1.5%. This quarter marked the 13th consecutive quarter of increased signatory of Miller Lite elevating the brand to the number 3 beer in America according to Nielsen. Coors Light remains the number 2 beer and completed its 11th consecutive quarter of increased segment share. Our Below Premium brand portfolio was down low-single digits and achieved its best quarterly trend since the third quarter of 2009. We also gained share of segment and industry with our Below Premium brand in the quarter through Nielsen led by the Keystone family. Our full year U.S. underlying EBITDA increased 2.7% versus pro forma results last year, driven by 1% increase in domestic net sales per hectoliter, cost savings, and lower MG&A expenses, partially offset by cost inflation and a 2.9% decrease in domestic STR volumes. For the year, we gained market share within the Premium Light and Premium Regular segments as Coors Banquet completed its 11th consecutive year of growth. And in the Above Premium, Blue Moon Belgian White grew during each quarter and continued to acquire incremental customer share. Leinenkugel's was up low-single digits for the year, propelled by Summer Shandy's best volume year in the brand's history. For the year, we also held share within the Below Premium segment which was one of our 2017 goals. Our Canada underlying EBITDA declined 4.2% in the fourth quarter on a reported basis and 8.4% on a constant currency basis, driven by inflation and higher distribution cost, partially offset by positive pricing, lower MG&A expenses and favorable foreign currency. Our brand volumes increased 0.8%, and market share during the quarter was consistent with the prior year with share gains in the Above Premium segment. We also drove the top line with 1% net sales per hectoliter growth in constant currency during the quarter. One meaningful portfolio highlight in the premium segment was flat volume on an absolute basis during the quarter. While this benefited from incremental Miller Lite volume, our two biggest brands reflected sequential improvements compared to earlier in the year. Full year results benefited from improving trends in the fourth quarter, however, full year brand volumes declined 0.5% and underlying EBITDA declined 11.6% in constant currency. Full year net sales for per hectoliter grew 2.2% in local currency, reflecting positive net pricing and mix. Our Europe team continues to grow both at the bottom and top line. Fourth quarter underlying EBITDA grew 239.5% in constant currency, driven by higher volumes, positive sales mix and increased net pension benefits, as well as the benefit of cycling indirect tax provision a year ago. Brand volume increased 10.4% in the quarter, primarily due to the addition of Miller brands and the transfer of royalty and export brand volumes across Europe from our International business. But even without the incremental volume, we continue to achieve growth from our core and Above Premium brands which helped drive net sales per hectoliter growth. For the full year, underlying EBITDA grew strongly, driven by volume growth, positive sales mix and higher net pension benefit, along with cycling the indirect tax provision that was booked in the fourth quarter of 2016 and reversed in the first quarter of 2017. We also grew net sales per hectoliter, as well as our market share as brand volumes increased 10.3% in Europe. For our International business, underlying EBITDA was at $0.4 million in the quarter, a $1 million decrease from a year ago, driven by the loss of the Modelo contract in Japan, the transfer of royalty and export brand volume to Europe and high MG&A from the addition of the Miller International business. This was partially offset by the addition of Puerto Rico and volume growth across several Latin American markets. While we were able to grow organic volumes in existing markets, total brand volume decreased 15.1% in the quarter. Reported net sales per hectoliter increased 6.1% due to the favorable sales mix and positive pricing. International full year 2017 underlying EBITDA of $3.5 million represented a $7 million improvement from a loss a year ago. Underlying gross profit increased more than 50% to $87.1 million, which exceeded prior guidance as our Caribbean team was able to mitigate some of the anticipated hurricane impacts. International brand volumes were up 28.9%, and reported net sales per hectoliter increased 0.8%. While our earnings release provides more detail, I want to spend a moment to share the following financial highlights for 2018. Underlying free cash flow of $1.5 billion, plus or minus 10%, which excludes the recently disclosed $330 million cash proceeds related to resolving a purchase price adjustment. As I mentioned earlier, 2018 free cash flow will be tracking some timing of working capital benefits in 2017. Cost savings guidance of $210 million in 2018 is part of our newly increased 3-year savings target of $600 million, up from our previous target of $550 million for 2017 to 2019; this represents an acceleration of the related cost savings into years 1 and 2 of the 3-year program. We now also estimate that our cost to catch-up synergies for the program will be $250 million, down from $350 million previously due to efficiencies in both capital spending and non-core operating expenses. Delivering on the savings commitments will be particularly important this year given recent increases in input costs such as aluminum and fuel. We currently anticipate an inflation headwind across our company in 2018 that is more than $50 million larger than in 2017, driven by aluminum, diesel fuel, and other factors. Please see our earnings release this morning for specific cost of goods raised guidance by business unit for 2018. Our cost savings remains a way of life at Molson Coors, and as we have previously committed, we will deliver on the current 3-year cost savings program for 2017 through 2019 which we have just increased to $600 million. We are in the process of developing our next 3-year savings program which will be for 2020 through 2022, and we plan to offer details in the first half of 2019. Following the enactment of U.S. tax reform, we anticipate approximately $200 million of transaction-related cash tax benefits in 2018 and substantial benefits in the 13 years after this year as seen in this slide. Beyond this, we expect additional cash tax benefits from tax reform, primarily related to lower corporate income tax rate and accelerated depreciation of qualified assets for tax. Additionally, following the enactment of U.S. tax reform, we expect an underlying effective tax rate in the range of 18% to 22% in 2018. This rate is 6 to 8 percentage points lower than prior to tax reform and reflects a substantial benefit to offset tax underlying income and earnings per share for our shareholders. We currently expect a long-term effective tax rate in the range of 20% to 24%. Please keep in mind, additional definitive guidance from the U.S. government regarding implementation of the recently passed tax reform legislation could impact this outlook. It is also important to highlight that our 2018 results will be impacted by $850 million of underlying depreciation and amortization, which represents an approximate $50 million increase from 2017. This increase is driven primarily by information system and investments in the U.S., including in our order systems, which will make it easier for our customers to do business with us. Additionally, 2018 results will be impacted by the adoption of the new revenue recognition standard, and pension and OPEB accounting guidance, as well as changes to segment reporting related to pension and other post-retirement benefit costs. With these changes in pension accounting, we expect $46 million of Europe pension income in 2017 to move to our corporate results. The new revenue recognition accounting standard became effective for us at the beginning of 2018 and prior year's results will not be restated. Along with some timing change, we currently anticipate that this change will reduce both net sales and MG&A expenses by approximately $70 million to $90 million during 2018, primarily within our Canada segment, with no significant impact on net income. The impacts of these accounting changes are discussed in further detail with Input Note 2 of our 2017 Form 10-K. Consistent with last year, our focus in 2018 will be ensuring that our business generates strong cash flow as we strengthen our balance sheet and deliver cost savings while increasing our EBITDA margins over the next 3 to 4 years. As Mark mentioned, we tend to revisit our 3 baskets of capital allocation priorities later this year which include returning cash to shareholders, strengthening our balance sheet, and growth opportunities such as M&A and brand investments. But in the near term, we will focus further on strengthening our balance sheet while maintaining our annual dividends. And at this point, I'll turn it back over to Mark.

Thanks, Tracey. I'll begin the call today by outlining our plans to drive total shareholder returns. Going forward, we believe our ambition to be the First Choice of our consumers and customers will be central to our bottom and top line success. Our regional business priorities are clear and consistent. In the U.S. 2017 industry dynamics were challenging, our teams continue to be disciplined, decisive, and accountable as we continue to deliver long-term profit growth. We've grown underlying EBITDA in the U.S. substantially since 2009 including in difficult trading conditions. And this year exemplified that ability as we grew underlying EBITDA 4.9% in the quarter compared to 2.7% for the full year. We know we have the brands, the plants, and the teams to achieve our goals, which include our growth agenda. Our objective for flat volumes by 2018 and growth by 2019 remains our strategic comparator. While we're not driving for growth at any cost, we will strengthen and expand our portfolio, drive investment efficiency through ROMI, or return on marketing investment, and also through global procurement and the use of PACC. We will continue to earn category captainships underpinned by tools such as Building with Beer as these are all steps to help us and our partners to sell more beer, more profitably. Within our brand portfolio, we'll continue to gain segment share in premium, grow in Above Premium and continue to stabilize our Below Premium brand volume. We'll refresh Coors Light packaging and release new creative over the next couple of months while continuing to build momentum around Miller Lite, the original light beer. Within Above Premium, we'll accelerate our performance by building on solid growth in 2017 from our two national craft brands, Blue Moon Belgian White and Leinenkugel's Summer Shandy, as well as the strong growth of our regional brands including Terrapin, Hop Valley, Revolver, Saint Archer, and Colorado Native. Additionally, excitement from our distributor and chain partners for our 2018 innovation lineup is also apparent with tens of thousands of incremental placements already committed. This whole brand will be launched in April with redesigned packaging supported by an integrated marketing campaign. Alongside Peroni, which is also accelerating, we will have a strong one-two punch in the import segment. Additionally, and just a few weeks ago, we've brought to retail Arnold Palmer Spiked, designed to take share in the valuable hard tea segment and Two Hats positioned to bring new legal-age drinkers into beer. In Canada, our teams are building on improved 2017 momentum. Our consumer excellence teams will continue to focus on gaining segment share in premium, accelerating our growth in Above Premium and craft, and stabilizing our Below Premium brand share. Our number one priority for our brands remains on improving the performance of Coors Light and Molson Canadian by refocused marketing, improved customer promotions, and stronger commercial execution. Above Premium performance will be driven by Coors Banquet, MGD, Belgian Moon, and the Heineken portfolio. In addition to listing and shifting Miller highlights to Canada, we will introduce two further brands from our U.S. portfolio to broaden and deepen our Canadian portfolio later this year. And we're also going out to incremental drinking locations by launching some great-tasting innovation in the non-alcohol segment in 2018, with more details to follow in due course. In the customer excellence front, we'll continue to rollout proven best practice tools such as Building with Beer, and alongside this commercial excellence continues focus on sales productivity, customer 360 initiatives, and joint business planning resulting in strong market impact. Supply chain themes in Canada continue with brewery optimization efforts and productivity improvements as we're just over a year from opening our new British Columbia brewery, and the new Montréal brewery is expected to begin production in 2021. In Europe, the environment remains competitive; we'll continue to use our balanced portfolio approach, drive disciplined retail execution and optimize our brewery network. In 2018, there are a few headwinds that are important to remember when modeling the results for our Europe business. In the first quarter, we will be cycling the $30 million indirect tax provision benefit from 2017. In addition, throughout 2018 we will increase investment behind our brands and commercial priorities to further strengthen our First Choice agenda. And lastly, as Tracey highlighted, as a result of the changes in pension accounting, we expect $46 million of Europe pension income in 2017 to move to corporate results. Our commercial teams will build on our positive momentum this year by strengthening our national mainstream brands, including Carling, our largest brand in Europe, which further strengthens its overall number one position in the U.K. beer market in 2017. For our Above Premium portfolio, 2017's double-digit sales growth reflects the fact that Ice Cold Rocky Mountain refreshment is resonating powerfully with Coors Light consumers in the U.K. and Ireland. Above Premium Staropramen, outside of its domestic market has grown at double-digit rates, and we continue to push the brand into new markets with a clear commitment and quality can deliver growth in the Above Premium segments. To accelerate our growth in craft, led by Sharps and Franciscan Well, we've added further brands to our portfolio and with Cider we're building on strong growth by Carling Cider and Rekorderlig with the 2018 acquisition of Asphalt, a growing Cider brand founded in 1720 with a distinct face, place, and story that supports our premiumization strategy. Our balanced portfolio approach also relies on a continuing commitment to deliver against our focus to become the first choice for customers. We maintained our number one supplier ranking in the U.K. advantage retail survey for the multiple grosser off-premise channel, and also recently achieved a number one ranking in the multiple on-premise channel for the first time. With integration of the Miller International business largely complete and with nearly 4.4 million hectoliters of total brand volume in 2017, our International business has increased substantially over the past year and is now more than half as big as our Canada business from a volume perspective. We'll continue to utilize an asset-light model in select markets and our efforts will focus on global priority brands, Coors Light, the Miller trademark, and Blue Moon. Coors Light maintains strong growth in Latin America last year, and in Mexico passed 1 million hectoliters of brand volume, making it the fourth largest Coors Light market globally. We're currently launching the Miller Lite original white can packaging to more than 20 markets globally, and while still early days, results for this authentic packaging are very positive. Across Molson Coors against a backdrop of integration and challenging market conditions during 2017, we delivered financial and commercial results that demonstrate our balance priorities for bottom and top line growth are working. In 2018, our First Choice focus across regions will continue to strengthen and premiumize our brand portfolio while also deepening our customer relationships. We'll also continue to retain flexibility in our P&L, delivering on our cost savings and remaining laser focused in delivering against our cash targets and strengthening our balance sheet.

I wanted to revisit the synergies and reinvestment; you had an impressive quarter in terms of flow-through, surpassing what you initially indicated at the Analyst Day. I was hoping to understand how we should anticipate the cadence for 2018 and whether this margin was merely a catch-up, considering the more challenging environment you faced in the first nine months that required defense. For the full year, you used to have it within that guidance. Is there anything that has changed to explain the additional $80 million beyond your original expectations? How should we view the range you provided regarding investment? Additionally, how should we consider your initial thoughts on stabilizing volumes in the U.S. for 2018 as you gain more clarity going forward?

There's quite a lot in there so let me try to answer. If you look at our overall cost savings and synergies, we cleared out very clearly our 3-year exploration, and that transformation was one that had increased following the initial synergy assumption. So we increased synergies, and we accelerated those to get us the $550 million over 3 years. We've now increased that number from $550 million to $600 million. And we've made very good progress in year 1. We actually managed to accelerate some of the savings from years 3 and 2 and to year 1, which was very encouraging. That was important because as we came through 2017, some of the inflation assumptions were actually more negative than we'd anticipated, particularly around aluminum and fuel. So it was important that we over-delivered. And there's no real change that we think about allocation of savings within our business. Clearly, we're not going to give a formula because it's important that we retain flexibility to use those cost savings as we see appropriate. But obviously, the offset inflation, which was driven principally through commodities, any volume deleverage we're seeing. We're also using some of those cost savings to focus on our global growth and efficiency initiatives. So we set up the next cycle cost savings in our business and things like global shared services and supply chain infrastructure changes are taking place in Canada as a couple of examples, and then a proportion flows through to the bottom line. So that's the way that we tend to look at our cost savings. And alongside those, obviously, as we intimated, we continued to retain flexibility in terms of our overall MG&A to ensure that we deliver EBITDA margin expansion the bottom line improvements. I think the second part of your question, related to the U.S. and I think Gavin and I have been very clear that stabilizing our volume in the U.S. is a strategic imperative ahead of moving into absolute growth that the business and volume terms have declined for the best part of 10 years. Our intent is still to deliver this on 2018. If industry volumes are softer than anticipated it may take a lot longer to get there but it doesn't change this strategic imperative. And we'll make sure we do that in a manner that allows us to grow even though margins and overall EBITDA. In other words, we're not chasing stabilization and growth at any cost but growth in a measured and balanced way I think the team demonstrated our ability to do that if you look at our EBITDA performance in the U.S. in the fourth quarter and on a full year basis.

So the margins that we saw in the fourth quarter there, you see as real, a real improvement over time in the cadence of the synergies? You saw more synergies heading into the fourth quarter? Or they were pretty much balanced throughout the quarters?

There were reasonably balanced. And I think what we've said is we're not going to update on a quarterly basis on cost savings and synergies. We'll do that on a full year basis, and we've now giving you an updated guidance and expanded our cost savings aspiration. The thing to bear in mind is, I think, in 2017, inflation give about $60 million to $65 million ahead of what we anticipated, and we think inflation will grow by about another $50 million as we go into 2018.

So maybe to build on Andrea's question a little bit, I think we're all impressed with a strong profit and cash performance exiting '17, the raise having objective to better than expected free cash flow for '18. I guess my first question is a bit more detail on where you are sourcing that cash productivity outside from. It sounds like working capital timing played a role. But I'd love also some more color on what drove the decision to spend a bit less than expected on CapEx. And any more color on marketing promotional investment trends that you may be able to offer, that'll be great.

You covered full sense of the P&L and balance sheet there, Steve. Tracey, do you want to pick up some perspective on Steve's question?

Yes. Looking at our free cash flow, which includes CapEx, it remains a priority as we work to fulfill our deleverage commitment to rating agencies. For 2018, we're guiding around $1.5 billion, give or take 10%. A few points to note: First, regarding CapEx, we started addressing this in the latter half of last year. While identifying cost savings and synergies, we managed to spend less without compromising these initiatives. This led to a reduction in our CapEx guidance for 2017, and we're continuing to see reductions in 2018 based on efficiencies and the cancellation of some projects. It's important to clarify that these changes are due to efficiencies, not timing. Additionally, cash taxes will present some challenges in 2018. As a reminder, last year we bolstered our balance sheet with over $300 million in pension contributions, which allowed us to receive a tax refund. However, this year we will incur cash taxes, which will impact us. Also, working capital timing can be tough to forecast, especially in our European business unit where collections at year-end can be unpredictable due to the number of customers across different countries. In 2017, we experienced strong cash collections at year-end, which is another timing factor to consider for both 2017 and 2018 free cash flow. I hope this is helpful.

I believe the other point you raised was about our marketing and general administration spending, especially in the fourth quarter. As we've consistently stated, we will maintain flexibility in our commercial investments, and we are diligently working across our business to enhance commercial investment productivity. This is primarily driven by the Return on Marketing Investment model, which is becoming increasingly effective in the U.S. and has now been expanded to Canada and the U.K. Our focus is on maximizing returns from every existing dollar. Additionally, the procurement initiatives we've undertaken have provided us with more flexibility for our marketing expenditures, and we are actively utilizing this in real-time, quarter by quarter.

I wanted to circle back to the U.S. and get your assessment of some of the strategic moves that you made in 2017 and, in particular, some of the price investments that you made at the low end of the portfolio. Would love kind of a postmortem on how that played out relative to your expectations, in particular as it relates to brand interaction across kind of value or economy and Premium Lights?

Thanks, Vivien. Gavin, do you want to pick up specifically and everybody of the portfolio strategy across the three major segments and what was delivered in 2017?

Sure. Thanks, Mark, and good morning, everybody. Vivien, the first thing that I would say is from a pricing point of view, actually our pricing was pretty similar, actually was slightly up in Q4 versus Q3, notwithstanding the success we've had with our economy strategy. And as Mark said, when we came into our flat by '18 growth, by '19 mantra, two years ago we had three building blocks which we're focusing on and economy was just one of them. We wanted to halt the decline rates in economy and we wanted to hold share; and as we headed out of the fourth quarter, actually we've done better on both of those dimensions, we've more than halved the decline and we actually grew share in the fourth quarter, Keystone played a part of that and so did Hams. Premium Lights was the second building block; and there we needed to gain share and obviously, our job in 2018 is to accelerate share. As Tracey said, we gained share of segment for both, Miller Lite and Coors Light in the fourth quarter for the 13th and 11th time, respectively. And then importantly, our Above Premium and as you talk about strategic building blocks, this is where we laid a strong foundation for '17 for action and execution in 2018, particularly around sold, which we're launching on the 1st of April and Arnold Palmer, which we spiked half-from-half which we launched a couple of weeks ago and then building on the growth of the four craft companies. And then we also launched Crispin Rose a couple of weeks ago, and that's off to a really solid start. And at the same time, we turned around both Blue Moon and Leinenkugel's, which had a difficult 2016, and both of them grew strongly in 2017 as Mark or Tracey said. Does it cover it for you, Mark?

Yes, Gavin, that's clear. Vivien, the only thing I will add and I think it was behind your question; are there any unintended consequences of our focus on Below Premium, and that's something we are monitoring them carefully. We don't believe that the work we've done on Below Premium is having an impact on other parts of our portfolio. The economy drinkers are our Below Premium drinkers in the U.S. are very, very loyal; and our job is to ensure that we compete effectively in that segment for those loyal drinkers. And as we come into this year, we're also looking to ensure that LDA to 24 drinkers join the beer category through the introduction of our Two Hats brands. So we're being very careful about the interaction between the segments and our pricing relativities. And I think we feel pretty good about the strategy and effectiveness of that strategy through 2017.

So a question about the revenue per barrel performance in the U.S. So in the quarter, up 1.4%. If you could break down rate versus mix. And then as we think about 2018, you obviously called out some of the inflationary pressure you're seeing on the cost structure. So should we see a year where your revenue per unit is going to be below your cost per unit? Or is there sort of an attempt to get more pricing in the marketplace as the inflation creeps up.

Okay. So Gavin, do you want to pick up on just on the construct of revenue per barrel in the U.S.? And then Tracey, do want to pick up on 2018 inflation, avoiding any guidance as per Judy's question?

Judy, as you say, we generated 1.4% the fourth quarter, which was about 20 basis points higher than in the third quarter. If you break it out between sort of net pricing, that was about 180 basis points, and mix was negative 40 basis points. And that negative mix was entirely associated with the packaged mix as it relates to some of our packaging strategies, primarily in Keystone Light. From an overall pricing point of view, I would just point out that 2017 pricing was actually slightly up over 2016 full year pricing, about 10 basis points. As for as 2018 outlook is concerned, Judy, as Mark said, we don't guide there.

Yes. And then Judy, just in terms of the cost per hectoliter guidance for the U.S., so our guidance is to be up low single-digit for 2018. As Mark also mentioned, the inflation that we are expecting in 2018 is across Molson Coors. This will be more than $50 million higher than what we saw in 2017.

Could you provide some clarity on the recent industry data? It has been somewhat confusing, particularly with the beer institute showing STWs down high-single digits in December, while the IRI data appears very positive for January and Nielsen's data is not as encouraging. Can you share your insights regarding the December shipments and the situation in January, either for your business or the industry as a whole?

Assuming your question pertains to the U.S., I'll have Gavin provide the details. One thing to keep in mind from our performance perspective is that our underlying strategy is focused on consumption. Within our business, there are significant change initiatives currently in progress. Our combined ordering system, known as VPNS, successfully launched a couple of weeks ago, and we expect additional initiatives related to VPNS as we move through 2018 and into the first quarter of 2019. Gavin, could you help clarify the differences across the various sources of industry data for December? Is that feasible?

That's really tough, Mark. I'm trying to draw a line between all of these different industry sources this quite difficult, Robert. I can tell about us. As Mark said, we said on the third quarter called that we're going to take shipments up a little bit or inventories up a little bit in the fourth quarter. So we did that. We took our inventories up by about a day, which is in line with what we said. And that would've positively impacted shipment volumes by about 120 basis points. So it explains most of the difference between the 3 and the 1.5. I mean, I really can't comment on why industry shipments down in December; that's probably a question you should direct at our competitors. From a Nielsen and other market sources, our share remains pretty consistent with all of those sources. And I think we discontinued giving guidance on January some time ago so I'm not going to give any input into that.

The only thing I would add, Gavin and Robert, again if you take a step back, the U.S. industry, beer industry continues to be the largest global profitable in the margin to expand because even with volumes under a little bit of pressure continues to premiumize, so continues to be a great place to compete. And it's probably not something that we get too concerned about in terms of some of the short-term trends and volatility that we see in volume line.

It has been a while since the stock has been that much up, I mean, during the course, so congrats on the good quarter. So I'd like to dig a bit more in term of the tax benefit and the cash redeployment. So the press release provides no information on how the company intends to reinvest tax savings. Could you please tell us how you're planning to redeploy coming from a better tax rate. Do you see a part to invest specifically Coors Light and also the new brands like Sol Arnold Palm?

Let me take the second question part of your question first, and Tracey can talk about the tax benefits and cash uses in our business. I mean, if you look at a horse our organization, our total marketing spend is close to our marketing spend is close to $1.5 billion. We spent close to $1 billion in the U.S. behind our brands. Their view is that we have the flexibility to support the development of our portfolio. So as we bring new brands in, we continue to drive productivity and efficiency in our commercial spend, and we'll invest a rate that we believe will drive the maximum return. That's through in the U.S., Canada, and our European business, and I think we've demonstrated our ability to continue to make that happen. So don't expect any kind of material increase or ballooning of commercial investments as we go into 2018. We'll be working our existing dollars very, very hard to drive further productivity and efficiency and impact improvements. Tracey, do you want to talk to tax benefit and cash deployment?

Yes. Looking at the updated guidance regarding our transaction-related cash tax benefit, we are expecting approximately $200 million in cash tax benefit. This is lower than our previous estimates prior to the tax reform, primarily due to the cut in the corporate tax rate. However, we are overall benefiting from the tax reform. While I won’t provide all the specifics at this time, you can see that for 2018, we are now guiding to an underlying tax rate between 18% and 22%, which is significantly lower and will be advantageous for us. Regarding the use of tax benefits, as Mark mentioned, we are focusing on reducing our debt and strengthening our balance sheet. We will continue to generate free cash flow to pay down our debt and sustain our investment-grade rating. As we move into the latter half of the year and approach our deleveraging targets, we will discuss capital allocations.

Mark, two questions, both on U.S. Understand your about price/mix outlook for '18, but can you talk about the industry price environment? If everybody is facing inflation, is there appetite within the industry to take adequate pricing? And then second, just on U.S. volumes, really good to see the discipline on investment and yet being able to grow EBITDA margins. Now if industry or let's say volume weak for the industry for the category, do we still have enough confidence that you continue to grow EBITDA margins with that weaker volume environment?

Okay. So Gavin, if you're just going to tune in here and if I miss anything, please share. Certainly, on the price/mix piece, I'm going to comment on the industry level. We're going to play our game that will drive our portfolio, and we'll continue to work very hard to ensure that we offer great value to consumers it's appropriate to our brand equity while premiumizing our overall portfolio. And that's consistent with the U.S., Canada, and our European business, that's very central to our business. But I mean, overall, the U.S. volumes in your question around EBITDA margins, we are very clear about what our number 1 priority center business, which is to deliver on our EBITDA margin, development as per our guidance, improve our bottom line and generate strong free cash flow. And then secondly, certainly, over the longer to medium term, really start to see improvement in our top line through strengthening and putting our portfolio and strengthening our customer relationships. I think specifically within the U.S., if you look at our EBITDA margins, they've improved sequentially and consistently over the last few years, and we believe now with the MillerCoors part of our of the bigger Molson Coors, there's further opportunities to enhance our EBITDA margins as North American supply chain shared services and the global procurement, which have all got to a great start in 2017 continue to pick up pace through 2018 and 2019. So even against a tough industry environment, driving productivity in the business, and securing some of the benefits of integrating as part of Molson Coors still gives us headroom to continue to expand our EBITDA margins. Gavin, I don't know whether I missed anything there or if any builds on that?

No, that was a very comprehensive, Mark. I have nothing to add.

I have a two-part question about the synergies from 2017 and the outlook for 2018. Mark and Tracey, can you help me evaluate the performance? As I see it, your consolidated EBITDA grew by $100 million for the year. The synergies of $255 million look good, but U.S. EBITDA increased by $50 million while Canada decreased by $24 million, resulting in a total decline of $60 million over the past two years. Corporate expenses rose by $85 million, which makes the numbers appear favorable primarily due to a substantial increase in Europe, where EBITDA rose by about $170 million for the year, which seems to be a one-time accounting effect. If we exclude Europe, EBITDA for the year decreased and was somewhat sluggish. The notable positive from 2017 is the $50 million increase in U.S. EBITDA. However, with synergies at $255 million, that’s only a 20% realization. Canada appears to be problematic, and I wonder if Fred can comment on the margins that have declined there for two consecutive years. Additionally, Europe’s significant increase looks like a one-time event, so I doubt we can expect Europe to grow its EBITDA margin next year. Corporate expenses seem to remain flat based on your guidance. Could you comment on that? Also, I have a second question for Gavin regarding our STRs. Looking at your STRs, down 3% for the quarter, it would be helpful if you could break that down by the growth in Above Premium in the U.S., mainstream, and value. I ask because the data suggests that mainstream declined by about 3%, while value increased by about 3%, even though mainstream is about 2.5 times larger than value. Could you comment on any channel differences among these three product groups that might have distorted this data? Let’s start with the cost question first. Thank you.

Thanks, Pablo. You've asked a couple of detailed questions, so I'll aim to cover the key points. Regarding your analysis on EBITDA, I believe it's not entirely accurate. Our European business has shown strong performance in terms of both top and bottom lines, with growth in volume, pricing, effective cost management, and solid EBITDA performance, which was positively impacted by a one-time tax provision. Even after factoring that out, we continue to see commendable performance. From my viewpoint, our European business exemplifies what we aim to achieve across all of Molson Coors, showcasing substantial improvement in our bottom line, alongside a well-rounded strategy for top-line growth through volume, premiumization, and pricing. There's been some undervaluation of our European performance. In the U.S., despite challenges in the market, we are actively working to turn around our overall volume and refine our portfolio. Gavin and his team have done an excellent job in enhancing our EBITDA performance. As I mentioned previously, I believe there is still potential for further expansion of our EBITDA margins now that MillerCoors is integrated into our global structure. Regarding Canada, I appreciate your remarks. We are in the process of revamping that business, and I was pleased with its performance in the latter half of 2017. We've shown signs of improvement in our top line, solid volume, a return to growth in market share, and better pricing. Our approach is to deliver balanced results today while simultaneously positioning for productivity enhancements in our cost-saving programs from 2020 to 2022. We are utilizing some of our cost savings and synergies to counteract inflation that exceeded our expectations, and we are investing in shared services and a top-tier supply chain, as well as in our commercial excellence capabilities. My focus is to strike a balance between current performance, which we achieved successfully in 2017, and setting our business up for the future. Therefore, I don't agree with your assessment of our EBITDA performance. Gavin, would you like to provide insights on the relative performance of the main segments within the U.S.?

Right. Sure, Mark. Without getting into specific detail by segment from a performance point of view, in Above Premium, which is where we're putting a lot of emphasis, we grew Blue Moon Belgian White, we grew our core partners and we grew Peroni very strongly. And as I said earlier on, we got a nice platform coming into 2018 with solid and Arnold Palmer and the ones I just mentioned. Our economy portfolio, probably heard of our best performance in 8 years, primarily driven by the success of Keystone Lite. And Mark correctly said that doing extensive analysis on the performance of Keystone Light, and it's having a no material impact on our mainstream brands. It under indexes in terms of going from those two brands, and some markets actually provides a Halo. So we're very pleased with the economy portfolio. And in Premium Light, as you said, has been challenged in 2017. And Miller Lite's performance actually the fourth quarter is slightly greater than in the third quarter, and Coors Light challenge for us and we're putting a lot of effort behind it to revitalize it, mostly around the road most refreshing beer. We know that it works it works before. It provides a meaningful product benefit for us. It's shown significant growth in equity, and we probably moved a bit too far away from it. So you see of the world's most refreshing beer in a meaningful way as we head into 2018. Beyond that, Mark, I don't think I should give any more specifics.

Okay. Thanks, Gavin.

I want to extend my congratulations to Dave. You have dedicated a lot of time and patience in addressing our questions over the years, and I truly appreciate that. I wish you all the best in your retirement.

Thanks, Bryan. It's been my pleasure.

I have a clarification and a question. Tracey, when you mention the $50 million increase in COGS for 2018, does that account for any effects from the increase in amortization and depreciation? Additionally, I believe a change in pension accounting may reclassify some of the $27 million of pension income from COGS to below the operating profit line. I would like to know if that figure is net. My question is for Mark and Gavin. We’ve noticed more investment and activity in the fitness beer category with the introduction of Corona Premier, and we are also launching our product. I would appreciate your thoughts on that segment as you increase investment in it, especially how it relates to Premium Light beers and how that trend is developing. Thank you.

Yes. So the incremental $50 million inflation that I quoted incremental above 2017 inflation as we saw is not just COGS. It's actually COGS and G&A, and it's across all of that business units that is primarily driven by commodity inflation so aluminum and diesel fuel would be the main drivers, but it's across all operating segments. Then in terms of the pension changes so what I may be refer you to is our 10-K is actually up on our website now. We've got quite a detailed layout in tables and expeditious if you want to refer to footnote 1 and footnote 21 in our 10-K, that's detailed the change in methodology. And in footnote two, actually details the changes around the safety accounting standards. So Bryan, if you want to have a look at that and maybe come back to us after the call, we can break that down a little bit further for you.

Okay. Thanks, Tracey. And Bryan, just on your second question on this new segment that you invented the fitness beer category, I think I know what you're referring to. The good news is a few years descriptor, we have the original fitness beer we just called Miller Lite. That's what we're doubling down on. We continue to believe that continuing to focus on both Miller Lite and its very clear functional benefits and Coors Light and its very clear lifestyle benefits the best way to respond to interest in what you've described as fitness beer. The other thing that's of interest is quite significant crossover between some of the alcoholic seltzers that have come into the marketplace, and fitness or light beer and it's important that we offer bread across our portfolio. So across Miller Lite and Coors Light, we'll continue to strengthen their equities. We'll compete more assertively with Henry's Hard Sparkling, and we'll have the right products for 2018. And then, obviously, some of the metric and imports kind of play into that space as well, and the introduction of Sol becomes very important for us. So we believe that there's more than enough on our plate and we've got to be choice will about ensuring that we deliver real focus behind our portfolio. And against the two big light brands, Henry's Hard Sparkling and Sol, we've got the right portfolio to compete effectively and that space if I'm defining it correctly.

I wanted to solve on two things; first is just commentary on the commercial effectiveness and efficiency in the fourth quarter, just how much of that is one, can you talk a little bit about distinctive efforts there? And two, things that were planned versus real more sort of real-time adjustments in the second half of the year as you saw that the industry volumes was soft, that was one area of question. And the second was just dimension of the incremental placement and visibility you have from your distributors. So was that primarily on Sol and the Arnold Palmer? Or is that incremental description of our new placement from some of what I'll call it legacy existing portfolio? Thanks.

Okay. So the second part of your question; Gavin, do you just want to pick up on the success on the placements the teams have been driving as we come into 2018?

Yes, absolutely. Thank you, Mark. We have tens of thousands, actually hundreds of thousands of placements for our innovation brands. You mentioned Sol and Arnold Palmer spiked half and half, as well as Easy, which is our entry into the tea category aimed at attracting new drinkers to our economy portfolio, particularly 21 to 24-year-olds who have largely moved away from beer. We have specifically designed tens of thousands of new placements for that. Additionally, we have increased presence for brands like Blue Moon and Coors Light.

I think you invented a new brand there, Gavin.

I got caught up between Arnold Palmer and Two Hats. Arnold Palmer is the tea and the lightly flavored light beer to recruit new drinkers.

Dave, really been a pleasure working with you. So thank you, and Sam, too, thank you. My question, Tracey or Mark, is on the $330 million return of purchase price on the Miller International business, which I think was assigned a value of the $700 million. So in its face, it seems like this proportionally you're getting less to EBITDA, but it might mean that you simply thought you were getting a lot of working capital you didn't get. So I'm just trying to understand what was the basis for the return to the $330 million? Is it more working capital amount of EBITDA? Looking for some more detail there.

Let me simplify this. The $330 million we negotiated is essentially an adjustment to the overall acquisition price of $12 billion. When we agreed to acquire the Miller brand internationally, we recognized there was a significant assumption made regarding EBITDA, which was unclear because the Miller brands were intertwined with the rest of the SAB business. We started with an assumption and later set the purchase price adjustment based on the trailing 12-month EBITDA. We initiated that process and entered negotiations with ABI, feeling that this adjustment makes sense when considering the overall multiple we paid in relation to the EBITDA stream. The positive aspect is that the Miller brands are now fully integrated into our business and performing well, especially with significant growth potential in Canada and Europe. Additionally, it's important to remember that our international business model differs because we share margins with partners and distributors, so the comparison isn't straightforward. However, think of this as an adjustment to the acquisition cost, which has now reduced to less than $11.7 million. Given the multiple we paid for the EBITDA we acquired, we are very pleased with the results of that negotiation.

Yes, many thanks for facilitating things today. Many thanks for your interest in the Molson Coors Brewing Company. We look forward to catching up with you in our next call and obviously, our Investor and Analyst Meeting we'll be having in New York in June of this year. So thanks for your interest in the company and look forward to speaking with you soon. Bye, everybody.