Molson Coors Beverage Company

Good morning and welcome to the Molson Coors Brewing Company second quarter 2019 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Mark Schwartzberg, Vice President of Investor Relations. Please go ahead.

Thank you, Gary, and hello, everyone. Following prepared remarks this morning, we will turn the call over for your questions, as Gary said. Please limit yourself to one question. If you have more than one question, please ask your most pressing question first. and then re-enter the queue to follow up. In terms of safe harbor, today's discussion includes forward-looking statements within the meaning of applicable securities laws. Important factors that could cause actual results to differ materially from the expectations and projections contained in such statements are disclosed in the company's filings with the SEC. The company does not undertake to update forward-looking statements, whether results of new information, future events or otherwise. Gap reconciliations for any non-U.S. gap measures are included in our news release or otherwise available on the company's website at moltencoors.com. Also, unless otherwise indicated, all financial results the company discusses are versus the comparable prior year period and in U.S. dollars. So with that, I'll turn the call over to our CEO, Mark Hunter.

Thank you, Mark, and hello and welcome, everybody. With me on the call this morning are Tracey Joubert, the CEOs of our business units, Lee Ryker, our Chief Legal and Corporate Affairs Officer, and Brian Table, our Global Controller. Now, before we begin, I'm sure you all saw the press release that went out earlier this morning announcing my retirement on September the 27th. It's been a privilege to serve as the Molson Coors CEO for the past five years, and I've thoroughly enjoyed engaging with our investors and analysts throughout our journey. This leadership change has been worked through with our board as part of our ongoing succession planning at the executive level. I'm genuinely excited about the future for Molson Coors and proud of what we've accomplished over the past five years. Our goal with the acquisition of Miller Coors and the Miller International business was to create a bigger and better company. In 2015 and 2016 we planned for and executed on this step change and transformed our scale. From 2017 through to today we've delivered on the integration, initial deleverage and synergy commitments made at the time of the acquisition. Despite higher inflation and softer industry demand than anticipated. Along the way we've also strengthened our culture with the introduction of our first choice ambition and bolstered the leadership and capabilities of our people through our commercial excellence and world-class supply chain programs. As we now shift the emphasis to greater focus on top-line growth while remaining financially disciplined, it's an appropriate time for me to pass the baton on to Gavin to lead the company through our next chapter of continuing to energize, premiumize, and modernize our portfolio and to move beyond beer with disruptive thinking. And you're already seeing some of the fruits of this work. Now, while I'm happy to be able to move on to my next phase after a 36-year career and spend more time with my family in the UK, along with the rest of the board, I'm also very excited to see Gavin take over the reins and help successfully drive the company forward in its next chapter. Gavin's been on the executive team for the past seven years and is well known to many of you as the former Molson Coors Global CFO and as the leader of our US business unit for the past four years. He knows our business, he knows you, and he shares my absolute passion for our people, our brands, and our success. Now our time today is focused on earnings. So for the balance of the call today, Tracey and I will take you through highlights of our second quarter 2019 results for our company, along with some perspective on the second half of 2019. And related slides can be found on the investor relations page of our website. After a solid start in the first four months of the year, May and June were challenging, reflecting unfavorable weather and weak industry demand across our major geographies, resulting in a disappointing volume performance in the quarter. Despite this backdrop, we executed our plans for incremental brand investment to drive accelerated portfolio premiumization and innovation impact across our business. Encouragingly, we delivered strong constant currency net sales per hectolitre growth of 3.7% and our share trends improved in the US and were stable in Europe. We also saw strong premium light share growth in the US as Miller Lite and Coors Lite each gained segment share. And this was ahead of the newly launched Coors Lite made to chill advertising which is focused on new drinker recruitment by dramatizing Coors Light's purpose to refresh the spirit through its mountain cold refreshment credentials. We believe this creative platform is distinctive, disruptive and breakthrough. We also through the quarter maintained our focus on cash flow through ongoing cost savings, productivity improvements and improving our working capital. We remain resolute on the ambition to improve our top line through increased investments in our brands, portfolio premiumization, and innovation initiatives, including the launch of our Trust Cannabis infused non-alcoholic beverage portfolio in Canada later this year. We're committed to doing this while maintaining our investment grade credit rating and strengthening our quarterly dividend, which increased by 39% to 57 cents per share in line with our target of 20% to 25% of prior fiscal year underlying EBITDA and is payable for the first time in September. As you know, our first choice strategy has three major components focused on top line, bottom line and use of cash, allowing us to improve shareholder returns. Earn More is focused on improving top line growth and we know our top line performance can improve. Encouragingly, the quarter showed our disciplined pricing across our brands and regions, positive global mix, improved share trends in the US, maintenance of share in Europe, our focus on reshaping and premiumizing our portfolio, and our readiness to spend against this focus. Our US-less discipline is demonstrated by enterprise productivity and cost savings initiatives, all of which remain on track. This includes our work in Canada where we have begun brewing trials in our new British Columbia brewery and recently completed the sale of our Montreal property and are in the early stages of building a state-of-the-art brewery in Long Eel, Quebec. I'm pleased with our progress monetizing and modernizing our brewery footprint in Canada and expect significant benefits from the upgrades we are making to our network including more flexible capacity to meet demand, lower unit operating costs and increased supply chain efficiency. Please remember that the one-off startup costs for the new brewery in British Columbia impacted the Q2 results in Canada. Now more broadly in relation to using less, and as former Coors Brewing Chairman Bill Coors once said, waste is a resource that's out of place. Molson Coors helped pioneer the recyclable aluminum can revolution 60 years ago. and this year we're stepping up our efforts to tackle the global plastic waste crisis. Over the next two weeks we will launch our beer print report 2019 outlining the progress made against our 2025 sustainability goals. With the release of the report we'll also launch a set of additional ambitious commitments to minimize the impact of our packaging alongside the great work that's already underway across our responsibility, sustainability and inclusiveness agenda. and finally, alongside earning more and using less, we continue to invest wisely. As you saw in the quarter, we are investing more behind our commercial agenda, increasing marketing and sales spend on a per hectolitre basis and in absolute dollars in the quarter and first half. You should look for us to increase spending against attractive consumer segments and brands without sacrificing our deleverage and cash return objectives. In other words, we intend to use multiple tools to deliver improving top line performance, namely higher return commercial spend, targeted increases in brand investment and innovation, and a more effective supply chain and minimizing out of stocks. In terms of B leverage, we recently completed the sale of our Montreal brewery for 126 million Canadian dollars, providing us with additional funds for debt pay down. And on July the 15th, we repaid $500 million of senior notes through a combination of cash and new commercial paper. And we expect to continue to de-lever, thereby maintaining and strengthening our investment grade credit rating. So with that context, let me pass over to Tracey.

Thank you, Mark. And hello, everyone. I will speak first to the quarter on a consolidated and regional basis. then to our 2019 outlook and finally to our capital allocation plan. So to recap the quarter, our net sales revenue decreased 2.9% in constant currency. Although we delivered strong pricing in each business unit as well as improving global mix, this was more than offset by volume decline. Net sales per hectolitre on a brand volume basis increased 3.7% in constant currency Our worldwide brand volume decreased 5.6% and financial volume decreased 7%. Our global priority brand volume decreased 4.6%. Underlying COGS per hectolitre increased 6% on a constant currency basis driven by inflation, volume deleverage and increased packaging costs associated with our US bottle furnace rebuild partially offset by cost savings. Underlying MG&A increased 5.7% on a constant currency basis driven by increased brand investment and cycling of G&A benefits from the prior year. As a result, underlying EBITDA decreased 12.8% on a constant currency basis. Our year-to-date underlying free cash flow was $560.7 million, 15% below the prior year, driven by lower underlying EBITDA and higher cash tax payments partially offset by lower capital expenditures and lower cash interest payments. Now moving to our business units. In the US, overall industry demand was softer year on year and net sales revenue decreased 2.9%, driven by a 6.7% decline in sales to wholesalers, excluding contract brewing, partially offset by net price increases. Cox per hectare increased 4.7%, driven by inflation, volume deleverage, and increased packaging costs associated with our bottle furnace rebuild, partially offset by cost savings. MG&A increased 4.5%, reflecting higher marketing investment, focused on our above premium and innovation brand, as well as cycling lower employee intensive expense in the prior year, partially offset by the incremental cost reductions related to the restructuring program initiated in the third quarter of 2018. As a result, underlying EBITDA decreased 8.2%. In the second quarter, we took share in premium lights with Coors Light returning to segment share growth and Miller Light gaining segment share for the 19th consecutive quarter and also holding industry share. Our above premium portfolio has a number of fast-growing brands including Peroni, Sol, Arnold Palmer Spice Half and Half, and Henry's Hard Sparkling, which grew strongly and gained share of F&Bs, according to Nielsen. This growth was more than offset by declines from Linen Kugel's Shandy family and Red's franchise. Blooming Belgian White had its best quarterly volume performances since the fourth quarter of 2017, holding industry share, and Cateline, our new sparkling cocktail offering, has been a top 10 growth brand per Nielsen since early June. In Europe, net sales revenue decreased 2.4% on a constant currency basis due to a 6.5% decline in brand volume, partially offset by strong price increases and favorable mix. COGS per hectolitre increased 7.5% in constant currency. MG&A increased 8.7% in constant currency, reflecting higher overall marketing investment focused on our national champion brands and premiumization initiatives, as well as cycling last year's partial reversal of bad debt provisions. As a result, underlying EBITDA decreased 18.4% in constant currency. We knew we were facing challenging comparisons due to the 2018 World Cup and exceptional summer weather last year, and yet the quarter was still disappointing, driven by unfavorable weather and softer market demand. We remain confident in our ability to drive balanced net sales revenue growth through our strategy of investing behind our national champion brands and accelerating our premium portfolio. Despite stock demand, this strategy is resulting in net sales per hectolitre growth of 4.3% on a constant currency basis in the quarter and protection of our market share. In Canada, net sales revenue decreased 2.9% on a constant currency basis driven primarily by a 5.1% decline in brand volume, primarily due to softness in industry volume, partially offset by positive pricing. Cogster Hectorita increased 7.6% in constant currency, driven by inflation and increased distribution costs, unfavorable sales mix, volume deleverage, and brewery startup costs in British Columbia, partially offset by cost savings. MG&A increased 9.5% in constant currency driven by higher overall marketing investments focused on Coors Light and Molson Canadian programming, our premiumization efforts and modernization of our portfolio through innovations as well as trust startup costs. As a result, underlying EBITDA decreased 25.4% in constant currency. Weak industry demand drove the majority of our volume decals, but premium segment share trends continued to improve for our Coors trademarks and Molson Canadian brands. Coors trademark volume was positively impacted by the successful launch of Coors Slice and growth in Coors Edge, and we continue to realize strong double-digit growth from Belgian Moon and Miller Lite. Also note we continue to estimate trust-related startup costs of 10 to 15 million Canadian dollars in 2019. In our international business, net sales revenue decreased 12.1% on a constant currency basis, driven by an 11.9% decline in brand volume, along with a shift to local production in Mexico. This was partially offset by price increases and a positive geography shift. COGS per hectolitre increased 7.8% in constant currency, driven by inflation and sales mix changes. MG&A decreased 5.3% in constant currency, driven by lower overhead costs, partially offset by higher marketing investments behind our focus brands. As a result, underlying EBITDA decreased 10.8% on a constant currency basis to $5.8 million. Brand volume declined due to higher net pricing on Coors Light in Mexico. and supply chain constraints related to the general election in India, partially offset by double-digit growth in several of our focus markets, including Argentina, Panama and Puerto Rico. Coors Light's volume was down principally because of Mexico, while Miller Light's volume increased mid-single digits across all of our international markets. Moving to outlook, our earnings release details our guidance. We continue to expect 2019 consolidated underlying COGS per hectolitre to increase at a mid-single digit rate on a constant currency basis. In terms of cost savings, we continue to expect a total of $700 million of savings for the three years ending 2019 and plan an added $450 million for the period 2020 through 2022 to be spread evenly over that period. These savings will help fund our investment plans, the cost of achieving the savings and offset input inflation. We continue to expect our international business to deliver underlying EBITDA growth of strong double digits in constant currency for 2019 versus 2018 and we continue to estimate underlying free cash flow of $1.4 billion plus or minus 10% this year. Finally, before I hand the call back to Mark, a few comments regarding our recently announced dividend increase modeling and our approach to brand support. Our next quarterly dividend, declared at $0.57 per share, is payable September the 13th and brings our dividends in line with our target of 20% to 25% of prior fiscal year underlying EBITDA. We ended the second quarter with normal levels of inventory and have shifted to consumption on a year-to-date basis. Recall that Trenton and Fort Worth go-lives last year led to very strong SDWs in the third quarter, contributing to very soft SDWs in the fourth quarter. We have two remaining system go-lives in Albany, Georgia and Irwindale, California, and these remain on track to complete them by year end. The inventory bills will be limited within these brewery orbits. So for the balance of the year, we expect to shift to consumption and anticipate prior year comparisons will lead to a higher STW trend in the fourth quarter than the third quarter. Our third quarter will also reflect the lapping of the favorable resolution of U.S. vendor dispute, which was more than half of the MGA favorability in the third quarter of last year. And we will also be lapping Canada's distribution gains within COGS in the third quarter of last year. Finally, North American industry conditions remain challenging and we'll continue to spend our dollars efficiently while also increasing spending against attractive consumer segments and brands. And as Mark said, we will do so without sacrificing our deal leverage and cash return objectives. At this point, I'll return the call back to Mark.

Thanks, Tracey. Now, as you know, our earn more focus depends upon extraordinary brands, customer excellence, and disruptive growth. So looking at our brands, we continue to realize strong pricing across our business units, giving us more fuel for brand investment. which is increasing to energize our core brands, premiumize and modernize our portfolio. In terms of our core brands, as I mentioned, within the US we saw strong premium light share growth and we expect this to accelerate where our new Coors Light advertising has just launched and more on that in a second. In terms of premiumization, global mix became positive as a result of our performance in Europe and though package mix in the US trended unfavorably, This was partially offset by brand mix, which was positive for the first time in the U.S. since early 2018. Drivers of our premiumization progress included Starra Pramen and Prava in Europe, Belgian Moon in Canada, and Cape Line, Blue Moon Belgian White, Peroni, Henry's Hard Sparkling, Arnold Palmer Spiked Half and Half, and the sole trademark in the U.S. We also expect Bolton M&A to continue to aid premiumization. and in Europe we recently completed the purchases of Pardubiki People Bar in the Czech Republic and Hop Stuff Brewery in London. Our global brands benefited from yet more strong performance from Blue Moon and Belgian Moon in Canada, Europe and international, with Starra Pramen in Europe and Miller Lite in our international and Canada businesses growing strongly. And in terms of reshaping our portfolio, we're demanding more from innovation. and Hard Seltzers were committed to building on the performance Tracey mentioned, adding offerings in the segment, reflecting our confidence in the Henry's brand and the Hard Seltzers segment. Now, of course, Coors Light is our largest brand and though we are pleased to see its premium light segment share improve in our largest market, that's simply not enough. Our new creative started running this week and Gavin, Michelle, our US distributors and I are excited about Made to Chill, which is focused on new drinker recruitment by dramatizing Coors Light's purpose to refresh the spirit through its mountain cold refreshment credentials. We believe the creative platform is distinctive, disruptive and breakthrough, especially for new legal drinking age adults. Turning to customer excellence, we continue to be a leader in category management in the US as evidenced by a first place result amongst beer suppliers in the most recent annual advantage survey and another first place on-premise result in the most recent annual CM Profit Group Survey. In Central Europe, we're seeing strong growth in both major channels in our Net Promoter Score. And in Canada, we continue to help customers drive category growth as evidenced by our achievement of the Partner of the Year Award with LCBO in Ontario. We're also improving our intensity behind disruptive growth, premiumizing and extending our portfolio to meet the expanding array of consumer tastes and occasions. In the U.S., that includes strong double-digit growth for Peroni, early success with Cape Line sparkling cocktails, encouraging test market performance from St. Archer Gold, a premium light craft lager, Movo wine spritzers, and the pending test of La Colombe hard coffees in select markets, and the strong growth of Solchalada following its national introduction earlier this year. In Canada, Coors Slice, Aquarelle Hard Seltzer, and Bella Amari are performing well. And in international, our portfolio is benefiting from continued expansion of Blue Moon, now available in more than 20 international markets. Disruption also features in our route to market, presenting new service opportunities and revenue streams as we step change our digital and e-commerce capabilities across our business. We're also excited about the disruptive potential of Trust, which remains on track for a national launch of non-alcoholic cannabis-infused beverages when they're legalized in Canada later this year. For those of you less familiar with our partnership with Canada's HEXO, Trust is single-mindedly focused on cannabis-infused, non-alcoholic beverages. We know Trust's portfolio of brands will taste great and be scalable because of its infusion technology and flavoring capabilities within its Belleville Ontario Facility. And Trusty's portfolio will meet an array of consumer occasions. Trusty's CEO, Brett Vai, heads a team that's practiced in the testing, learning, and scaling necessary to make Trust a success. And the combination of Molson Coors' extensive beverage expertise and HEXO's innovation capabilities in cannabis give us confidence that Trust will deliver safe, consistent, and great tasting non-alcoholic beverages to meet consumer demands. On our next quarterly earnings call, we plan to discuss Trussie's portfolio of brands, which is well advanced currently in terms of retailer joint business planning. So concluding on PAC and driving shareholder value, we are intensifying our focus on better top-line performance and are pleased to be returning more cash to shareholders and remain committed to further deleverage, all within the context of our capital allocation framework of strengthening our balance sheet, Returning cash to shareholders and investing in brand-led opportunities through acquisitions and internal investment. So thanks for your time and attention. And with that, I'll turn it back to Mark Schwartzberg.

Yeah, thank you, Mark. Just to remind everyone of upcoming events, we do look forward to seeing many of you at the Barclays Global Consumer Staples Conference, where we will also host a webcast at 10.30 a.m. Eastern Time on Wednesday, September 4th. So with that, Gary, I think we'd like to go to Q&A.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. The first question comes from Amit Sharma with BMO Capital Markets. Please go ahead.

Hi. Good morning, everyone. Good morning, Amit. Mark, congratulations on your promotion, and Mark, good luck with the next phase. Can you just talk about, Mark, what drove the timing of the transition at this time? And then for Gavin, as you look to take over, can you highlight one of the key strategic and many more. Thank you.

really impact the development of our long-range plan and Gavin will have that opportunity. He'll transition with me over the course of the next couple of months through to end of September and then we have our Board of Directors meeting in September and November when we land our long-range plan. So that gave me the chance to do that when I came in for Peter and it will give Gavin the chance to do that and now coming in to step up into my role. It's been an ongoing discussion with our board as you can imagine. I formally retired yesterday but our conversations with the board have been ongoing as you would expect for executive succession. So really that's the timing and as I mentioned in my prepared remarks, 2017, 2018 and 2019 were very clear in terms of what we wanted to get done and it felt appropriate to manage the timing to this level and allow Gavin to drive the next chapter. Obviously, he's going to transition and spend time on his thinking and partnership with the executive team and the board over the next few months. And I know he'll be ready to talk about his thinking later in the year. But Gavin, do you want to offer any kind of quick headlines at this stage?

Yeah, thanks for that, Mark. And thanks, Sumit. Look, I mean, as Mark says, I'm going to spend the next few months leading the planning for 2020 and beyond. And, you know, as of course, as with any CEO, there will be change. We need to consider all options that we can take to maximize the future potential of our business and to create additional firepower to put behind our brands and in order for us to innovate. And that's what I plan to do. Beyond that, I'm not going to get into any more detail.

The next question comes from Brian Spillane with Bank of America. Please go ahead.

Hey, good morning, everyone. And Mark, congratulations on the retirement. and Gavin, congratulations to you on the new role. It's been a pleasure working with you, Mark. Thanks a lot, Brian. Gavin, maybe just to follow up on Amit's question, we've seen across our coverage universe a lot of companies have successfully sort of been able to step back profit growth for the short-term in order to reinvest and re-accelerate growth, right? You've seen it at Pepsi, at Mondelez, Procter or Colgate. So I guess as you're thinking about a three-year plan, is there anything other than deleveraging and generating cash flow, is there anything that would constrain you as you're thinking about sort of the actions that you would take to reaccelerate top line in terms of doing a reset in that fashion?

Brian, let me reiterate what I said earlier on, which Mark said as well, is I'm going to take the next few months to flesh out my plan for 2020 and beyond. I'll take the boards through that at the appropriate time. In that, we need to consider the options that we've got that we can put enough firepower behind our brands and enable us to innovate. Of course, that will require some change and That's what I plan to do. Beyond that, Brian, I'm not going to speculate on what that is specifically on this call.

The next question comes from Robert Odenstein with Evercore. Please go ahead.

First, just a housekeeping item. Gavin, do you have a replacement lined up yet? And then second, my more substantive question, and again also obviously congratulations and good luck to both of you. As you kind of look forward to the trust joint venture and the opportunity in cannabis and CBD, can you give us a sense of how big this could be for you, how excited you are about the potential and tied to that how much Thank you for joining us.

As I said, I'm going to spend the next few months focusing on planning for the future, and as part of that process, I'll review the company's structure and its operating model, which includes the Miller Coors CEO role. Beyond that, I'm not going to speculate any further. Mark, do you want to take the trust question?

Yep. Thanks, Robert. So, Robert, I mean, I think we've laid out very clearly our intentions to be on the playing field here, and we announced that over a year ago. and Canada gives us a great opportunity to really test consumers appreciation for an appetite for the range of non-alcoholic cannabis infused beverages that we'll launch. The team that set up that initiative have continued to monitor opportunities for cannabis in other geographies. We're watching very closely the opportunity in the US, particularly around CBDs. Now, clearly there are still some legislative complications, but we anticipate being on that playing field and ideally with our partnership, with a partner that we have in Canada. And we have a team of people who are working on that. So I don't want to get into the details, but I'm giving you the same kind of, I think, The next question comes from Camille Gajvarala with Credit Suisse.

Please go ahead.

Hey, good afternoon and congratulations to both of you. The first one, a quick one, I apologize if I missed it. I believe you gave an EBITDA growth guidance figure for international. Did you also provide that for other regions? and I see that you've shared some of the share figures for Coors Light and Miller Light. Can you provide some details on what volumes did for the two of those combined? Thank you.

Hi Camille. We don't give EBITDA growth guidance beyond MCI. We did that because we went through some very significant restructuring as we acquired the Miller International business and We wanted to remove some of the complexity around that. That's why we gave the guidance last year and into this year, and we've reiterated that guidance for strong double-digit EBITDA growth on a full-year basis for our international business. With regard to our major brands, again, we don't give specific volume detail. You can pick that up from the Nielsen data in the marketplace. But we're very encouraged, in particular, by the Miller Lite performance. I mean just to give you an indication in the last four weeks in particular and recognizing that kind of July the 4th timing is a little bit complex but Miller Lite in absolute terms is up single digits and absolute volume growth in the US so you know Miller Lite has got very good momentum behind it and we're very excited about the opportunity for Coors Lite to shift its trend and again through July we've seen the Coors Lite trend improve to kind of low single digit volumes so Me and June were clearly challenging from an overall industry perspective, but it looks like normal business has been resumed as we've come through July, which is encouraging.

The next question comes from Judy Hong with Goldman Sachs. Please go ahead.

Thank you. Good morning. So I would also echo my congratulations to both of you. And Gavin, I don't want to focus too much on this topic, but I did want to clarify just one comment that you made about Looking at all options and potentially increasing additional firepower, which to me sounds like maybe even some brand or asset sales on the table. So first, I just want to clarify that. And then secondly, to Tracey, just free cash flow guidance for the full year really implies a big step up in the back half of the year. I think by my math, around $300 million improvement in the back half. So can you walk us through the drivers of that improvement in the back half?

Hey, Judy, look, I don't want to say anything more beyond what I've already said, right? I'm not going to get into speculation now, but as I said, I'm going to spend the next few months working the plan, and I will look at the company's structure and operating model, and we'll take it from there in the months ahead. Tracey, do you want to pick up free cash flow?

Yeah, hi, Judy. So, look, the first half of this year was very soft, as we said in our We certainly expect the second half performance to be better than the first half, so that's one of the drivers of the pre-cash flow. In addition, we expect to see continuing working capital improvements and benefits coming out of some of the actions we're taking around working capital. And then finally, as we're paying down our debt, we have lower cash interest payments And so those are the big drivers towards our continuing commitment to our guidance of $1.4 billion plus or minus 10% for the full year.

The next question comes from Steve Powers with Deutsche Bank. Please go ahead.

Thanks. I guess first and foremost, thank you for your contributions, Mark, and congrats to Gavin. I'm not sure who of you will want to take this one, but I just love it if you could expand a bit more on something you've talked about in the past, just in terms of what's changing with the hiring of Michelle on the marketing side, both in terms of how creative is being reshaped and reprioritized, but also any changes in terms of how you may be sizing and reprioritizing marketing investments across different initiatives and dollar terms. I guess if you have anything to share on this front as well, I just love any If you've noticed any increased engagement with distributors as you travel around and discuss some of the new go-forward plans with them. Thanks.

Steve, let me split that into two. Gavin can talk specifically about Michelle's leadership impact in the business and the reaction we're seeing from our distributors is the second part. On the first part, To be fair, over the course of the last, I would say, 24 to 36 months, we've been driving our commercial excellence approach very rigorously across our business. And that has set a very clear expectation about improved capability, more pace, more breakthrough ideas right across our organization. And I'm very encouraged by what I'm seeing across our broader marketing leadership group in Europe, international, and our Canada business. Both Gavin and I were not happy with our performance with our marketing in the US and that's why we made the decision in the middle of 2018 to make a change. Clearly it took us a little bit longer than anticipated, but I would say that the wait was well worth it with Michelle's addition to the team. And Gavin, do you want to just talk about what you've seen really since February and how you're looking at the focus on our marketing in the US business unit?

Yeah, Marcus, thanks, and thanks, Steve. Look, I mean, there's a number of things I can say. Firstly, I think you can see an increased pace with how we're doing our marketing. You're going to see us target investment behind brands and ideas where we see the greatest returns, particularly in a world where consumer retention is at an all-time high, and we need to have the right ideas, and when we have them, we'll put money behind them, and You know, a fine example of that is the work that we've done on one of our newer brand launches, which is Cape Line. And we've grown our innovation pipeline quite heavily to attract these new consumers. We're shifting a greater percentage of our investment to the above premium segment with big increases on brands such as Blue Moon and Peroni. And we're going to continue to invest strongly in Coors Light and Miller Lite. And I'm very excited about our new Coors Light creative. And we have very strong messaging behind Miller Lite. Michelle has also continued to shift spend to digital and non-traditional media to reach those groups of consumers who now spend their time away from more traditional channels. As far as Quizlight is concerned specifically, it gained a little bit of share of segment in Q2 of 2019, which is the first time it's done that for quite some time, and and obviously we're not where we want to be at this point in time. We know that focusing back on cold refreshment was the right thing to do and shifting that message to cold refreshment has improved trends but it's obviously not enough. Michelle has worked and moved very quickly to launch this big new campaign that feels very distinctive, it feels fresh and it's unlike anything else you've seen in Bureau. I hope you've all had a chance to see it. The May to Chill platform Talks in a language which resonates with young people and it builds on occasions that we believe is only going to grow into the future. It launched yesterday and quite frankly I don't know that I've experienced as much excitement from the distributor network since 2005 around this. But you'd know it's day three and whilst we're excited about it, now we need to execute against it. But the level of excitement I've felt is very strong. So summarized, we're changing where we're marketing, we're changing who we're marketing to, and we're changing the pace at which we're getting things done. And I think if you talk to our distributor network, they will concur with that as far as marketing is concerned.

Thanks, Gavin. Steve, just to kind of put a full stop on this, I mean, if you look across our business and look at the range and pace of initiatives that we now have in marketplace, it's stepped up dramatically in the last 24 months. and I covered many of them in the script. If you just look within the US and take Capeline, Arnold Palmer, Spiked, Henry's Heart, Sparkling and the Sol family of brands, just over 24 months ago, none of those existed in our portfolio. By the end of this year, there will be millions and millions of cases of volume. So take that as, I think, indicative of what has been emerging and what will continue to emerge in our business as we further ramp up with innovation and the pace of premiumization right across all of our business units.

The next question comes from Andrea Teixeira with JP Morgan. Please go ahead.

Thank you, everybody, and congrats and best of luck to both of you, Mark and Gavin, in this new chapter. So my main question is on the U.S. volume trends. So I was hoping to get more details on the Tracey's comments about the timing of STRs and STWs. So if you're effectively calling for about mid-single-digit decline in the third quarter because obviously you had a bigger shipment decline in the second. And can you also let us know if the goal live in the two other plants that you're planning in the third quarter in the back end of the year could impact the shipments in the quarters? Thank you.

So Tracey, do you want to just kind of reiterate the comments you made through the script and then Gavin, if there's any additional detail on the back of that?

Yeah, so at a high level, you know, we are expecting our STIs and STWs to really converge on a full year basis. And then the comments around Q3 and Q4, so if you remember, we had a very strong STW quarter in Q3 of last year as we ramped up the inventory for our go-lives at our Trenton Brewery and our Fort Worth Brewery. and that resulted in very high days of inventory at the end of September which then led to a very soft shipment quartering Q4 of last year as the inventory levels came down. And then this year we do have two remaining go-lines in Albany and Irwindale but the build will be limited to distributors only within those brewery orbits so it's not nearly as widespread across our distributor network as the Trenton and Fort Worth breweries were. So, Gavin, I don't know if you want to add to that?

No, Tracey, that was perfect.

The next question comes from Sean King with UBS. Please go ahead.

Hi, thanks for the question. I guess with respect to the MG&A increase, how much of that was brand building spend, and should we expect the 2Q pace of MG&A growth to continue in the back half? Was any of that brand building spend weighted to Q2 for campaigns that go live in Q3?

Yes, so we don't break out our specific marketing spend, Sean, but I think I indicated on our Q1 call that we expected to step up, particularly in Q2 and Q3, the weight of our spend because they are the critical two quarters in the year. So we've delivered on that promise in the second quarter. and we anticipate continuing to step up our spend in the third quarter of this year and confidence is growing in terms of the quality of the work that we have and the premiumization of the portfolio. So expect us to continue to really deliver on the commitments we've made and you should see that as you've seen in the second quarter and the third quarter as well.

The next question comes from Laurent Grandet with Guggenheim. Please go ahead.

Hey, good morning, everyone. And Mark, I wish you all the best for your next chapter. And Gavin, I mean, congrats on the new role.

Thanks, Laurent.

My question is about Europe. So first, it was the U.S., then the U.S. and Canada, and now Europe is even down. So I appreciate the World Cup did impact negatively these year numbers. But assuming, let's say, I mean, 200 to 300 basis points of impact, and correct me if I'm wrong, you still leave us with about 3% volume drop in Europe. So could you please give us more color here and how we should think about Europe going forward? And also, I mean, how do you see the recent change of Premier League sponsorship away from Carling to Budweiser impacting your commercial agenda in the UK? Thank you.

So let me ask Simon to pick that up. Simon's traveling internationally at the moment, but I think he's on the line. So if this works, then Simon, do you want to pick up that question?

Yes, Mark. Thank you very much. Well, we've been on a consistent run for a while now in Europe in terms of our growth. We've tried to do that through a balanced agenda of volume, pricing, and mix. That hasn't worked this quarter because ultimately the volume line has been disappointing. I think we'd be the first to admit that. But the volume line was really fully impacted by wet and cold weather in May and June versus actually very dry and warm weather this time last year. And as you say, we also had the World Cup to lap. If you look at our pricing and our mix components, it remains consistently good as we've had for many quarters now. So all of the top line list is very much driven by the volume and the volume is very, very heavily impacted by the weather, which is actually a much bigger driver in our estimation than the World Cup mapping. So I actually remain very, very confident that our underlying momentum is very much in line with our previous quarters and that this quarter was an aberration due to What was effectively a market demand? And I would also point to the fact that we haven't changed our share trajectory. So if you look at our last few courses of growth, they've been consistent. They've been driven by a mix of volume and price and mix. Whereas in this quarter, we have just seen some very, very soft volumes. So I remain confident that the underlying strategy is working, the investment behind our brand is working, our premiumization agenda is working very nicely, as evidenced by the mix. and to answer your question about the future, if volume demand comes back into more normal and for our group of markets that is a sort of slantish market outlook, then I would be very, very confident that we will continue to post those net sales revenue growth trends and in July it looks like the market will be back to its normal sort of overall performance and in July we will continue to grow our revenues. so in summary I would regard it as an aberration and I think we'll get back on track for the balance of year providing that the market volume stabilise and there's every reason to believe they will.

And Simon, any comments around the Premier League? We've got the second part of his question.

Yeah, sorry, I realised that was a two-part question. Yeah, look, the Premier League sponsorship worked very well for us. We are very highly associated with Football with Carling Transcription by CastingWords to a more broad appeal rather than just a football-based appeal.

Thanks, Simon. The next question comes from Vivian Azer with Cowan & Company. Please go ahead.

Hi, good morning, and my congratulations to you both.

Thanks, Vivian.

So, Gavin, this is something that we've discussed off and on over the years, but as I look at Longer-term U.S. beer industry volume trends. I fully appreciate the commentary about bad weather in May and June, and I heard you guys that July is more normalized. But if I look at the data that your largest competitor offers for the U.S. industry, it looks like 2015, down 30 basis points, then down 100 basis points, then 130 basis points, and 180 basis points. And it seems to me that there is some bigger structural challenge What I want to hear from you is that as you think about establishing this next three-year plan, are you assuming that this industry is steady state or is it better to assume that there's going to continue to be more structural degradation for the beer category? Any other thoughts just around the health of the category and how you can operate against that backdrop would be helpful. Thank you.

Thanks, Vivian. Look, I mean, I think it's safe to say that competition for consumers' attention is really at a high level in the United States, and obviously the beer category, the beer industry needs to evolve quickly, and it needs to keep pace with consumer preferences, which are rapidly changing. I would point to seltzers. Alcoholic seltzers is a more recent example of that, and a large part of seltzers' growth is coming from outside of the beer category, specifically wine and and Spirits. And so for us, that means that we need to keep focus on that evolving space. And as I said, it means two things for us. It means a much faster paced innovation pipeline and it means recruiting and focusing on new drinkers with our core brands. And so you'll see our plan both here in the United States and globally embracing these new categories and and focusing in on the above premium. And as Mark said, we've been very successful with Arnold Palmer, Sparkton, Henry's and Cape Line, all of which will be delivering millions of cases to the beer category by the end of the year from outside of the beer industry. So I think innovation is essential, above premium is essential and catering to consumers' different needs is essential and we're going to focus on all of those areas as we go forward.

Hey Vivian, it's Mark here. I mean, the only thing I would add to that is just making sure that we continue to keep the balance in focus between both volume and really the value growth of the U.S. beer industry. Consumers are clearly changing tastes and most of the demand in the marketplace is emerging in higher price above premium space. So actually the total revenue for beer in the U.S. has continued Thank you very much. stabilizing and energizing our core brands by accelerating the pace of premiumization and that is our agenda. It's an agenda which is on the tracks and I know that Gavin will look to accelerate that over the coming months and years ahead.

The next question comes from Kevin Grundy with Jefferies. Please go ahead.

Thanks. Good morning, everyone. I was going to stick with the topic of Spike Seltzer, but also more broadly on innovation and disruptive thinking. Some of these topics have been touched on earlier, but specifically with Spike Seltzer, how do you plan to compete in the category? It's obviously growing rapidly, albeit with little product differentiation. What's sort of the strategy there, and how are we defining success at this point, or how is the company defining success? And then more broadly... And Gavin, maybe you can pick up on this as you sort of assume leadership here of the company. What do you think the company needs to do better as an organization to become faster and more in tune with changing consumer taste? When you look at the companies and the brands that are leading in Seltzer right now, as an example, much smaller than Molson Coors. So what do you think needs to be done here so that the company can become quicker and more responsive to changing consumer taste? Thank you.

Thanks Kevin. Do you want to pick those up Gavin? They're kind of opposite sides of the same coin.

Yeah sure Mark, thanks. Look I mean there's no doubt Kevin that seltzers are big and they're here to stay and we think that the reason for that though is that they tap into two big consumer trends which have evolved. One is better for you trends and the other is consumers looking for an alternative taste for beer. And whilst Henry's is performing well, I mean it's growing at triple digits, it's off a small base and You know, therefore, we've built a deep innovation funnel that we're looking at. Some of this focuses on consumer white spaces against those consumer trends, and Cape Lime would be a fine example of that. It's the first better-for-you option with a stronger flavor base. And, you know, from a Cape Lime point of view, I'd like to point out that at the same stage as the evolution of white chlorine and truly several years ago, Cape Line is actually performing meaningfully better than those two brands were at the same stage. Again, we've only had it in for a few months, but the early signs are very good. And on top of that, we need to more squarely go after the seltzer space with new and unique points of differences in the marketplace. And obviously for competitive reasons, I'm not gonna get into exactly what we plan to do from that aspect, but watch the space. As far as the innovation pipeline is concerned, I think you've used the right word, right, which is pace and speed. And I think everything that we've done over the last four or five months since our marketing leadership change has demonstrated that we can do that, we're capable of doing it, and we are doing it. And there's multiple examples which we've talked about in the past. We also have two of, I mean, we've had the number one new FMB in both 2018 and 2019 with Arnold Palmer Spikedon and this year in Cape Line. We're moving quicker, we're taking smarter risks and you're quite right, in this fast-changing environment, we can't afford to let others pass us by. I think you will see us move with pace going forward and from a competitive point of view, I'm not gonna get into specifics of that other than what we've made public, which is Movo, which is a line of wine spritzers, hard coffee beverages and our test market on St. Archer Gold, which has shown Great potential in its four test markets.

Just to add to that, Gavin and Kevin, if you look more broadly, Coors Slice is the number one new item across major retailers in Canada this year. Prava has been a remarkable success in the UK marketplace. I think there's demonstration in terms of what we've already taken to market and what's in our pipeline that the organisation is already Let's call it through integration and well on track for picking up the pace and driving a significant step change in the number of initiatives that we have from an innovation and premiumization perspective across all of our business units. And you'll see more of that to come.

The next question is from Priya Ori Gupta with Barclays. Please go ahead.

Great, thanks so much for squeezing me in. First off, Mark and Gavin, congrats to you both. Tracey, just as we think about your leverage trajectory, should we still be thinking about 3.75 times on a net basis by year end, and where should that ultimately settle out sort of in 2020 and 21? and then specific to getting to the year end target given the cadence of your debt maturities, should we just expect your cash to build on the balance sheet or would you look for incremental debt pay down opportunities given that you don't have anything maturing over the rest of the year?

Thanks. Yes. So just in terms of the optimal leverage ratio, we haven't given that. I mean our focus is maintaining our investment grade rating. and then in terms of what we're expecting for the end of this year, so we expect to be below four times by year end and we will continue to focus on deleverage into the future within our capital allocation strategy. At this point we are not looking to pay down any additional debt beyond what our debt program is, so there's no sort of prepayable that we will be making. but that would mean that towards the end of the year we probably will have a higher level of cash on our balance sheet getting ready for the next debt that we need to pay down.

The next question is a follow-up from Amit Sharma with BMO Capital Markets. Please go ahead.

Hi, thank you so much for taking the follow-up. Gavin, just a quick question on pricing in the U.S. AVI talked about or confirmed pricing in April. Can you talk about how you view that? Is there any plan to maybe take advantage of that to push through another off-cycle pricing for you guys?

Nice try, Amit. I'm not going to give forward pricing guidance. I can talk about what happened in the second quarter, which is that we grew net sales practically to 3.6% with front line at 3.9% and and total mix was negative by about 30 basis point. But our brand mix was actually positive for the quarter and that is reflective of our above premium efforts. Beyond that, I'm not gonna get into future pricing strategy. I can't do that.

This concludes our question and answer session. I would like to turn the conference back over to Mark Hunter for any closing remarks.

Thanks Gary and thanks to everybody for joining us. Today, obviously, we had some unexpected news for you, which we've chatted through, and Gavin and I look forward to catching up with you over the course of the next couple of months. Just as a sign-off from me, as I mentioned earlier, it's been an absolute privilege to serve as the Molson Coors CEO, and I've thoroughly enjoyed engaging with our investors and our analysts over the course of the last five years. I will see many of you up in Boston. and you're allowed to ask me questions as well as Gavin questions when we get together in a month or so time. But thanks for your time and attention today and we look forward to connecting with you over the course of the next few weeks and months. Thanks everybody.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.