Molson Coors Beverage Company

Good day and welcome to the Molson Coors Beverage Company first quarter 2020 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 your touch tone phone. To withdraw your question, please press star then two. Participants can find related slides on the Investor Relations page at Molson Coors' website. Our speakers today are Gavin Hattersley, President and Chief Executive Officer, and Tracy Joubert, Chief Financial Officer. Please note, today's event is being recorded. With that, I will turn the conference over to Greg Tierney, Vice President of FP&A and Investor Relations. Please proceed, sir.

Thank you, Eric, and hello, everybody. Following prepared remarks today from Gavin and Tracy, we'll take your questions. Please limit yourself to one question, and if you have more than one question, please ask your most pressing question first, and then you can re-enter the queue to follow up. To the extent you have technical questions on the quarter, we'll ask that you pick those up with me in the days and weeks that follow. 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 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 as a result 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 www.molsoncours.com. And 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 it over to you, Gavin.

Thanks, Greg, and thanks, everybody, for joining us this morning. It's safe to say that the first quarter of 2020 was unlike any other in our company's long history. We came out of a significant restructuring in Q4 of 2019 that was designed to free up resources to invest back in our business. In the early parts of Q1, we saw mounting confidence and enthusiasm for our plans and for our brands, internally and externally. But in late February, that was interrupted by a tragic shooting at our Milwaukee brewery. And for the past few months, the entire global economy has been disrupted by the continued spread of coronavirus and the efforts to contain it. In a few short months, the landscape for all businesses has changed, not only for our industry, but for all of industry, and so necessarily the metrics by which we measure our business have also changed. What you will see today is that in the short term we are making adjustments and no longer measuring ourselves against the five components of the revitalization plan that we outlined for the past two quarters, which was a demonstration of how we were reapplying savings generated by the restructure. Rather, we are looking at two overarching yet simple metrics. Firstly, taking the necessary steps to protect our employees and to mitigate the immediate business challenges of the coronavirus. And secondly, positioning our business to succeed in the medium and long term as we enter a new normal. That's the context for what we will discuss today. I do think it's important to discuss what we were accomplishing before the pandemic hit in full force. Before the impact of coronavirus became widespread throughout North America and Europe, we were making progress against the revitalization plan. We continued to invest and maintain momentum with our iconic core brands, including continued positive share of segment trends for Miller Lite and Coors Lite in January and February. This provides further evidence that our marketing campaigns, It's Miller Time and Made to Chill, are resonating with new legal age drinkers. And in Europe, we ended February showing total volume growth and growth in our national champion brands, including Carlin. We were also seeing early positive signs around our big innovation bets in the above premium segment. In the US, Blue Moon Light Sky and Sandwich of Gold both started the year off strong. Per Nielsen, for the four weeks ended April 11th, they are both top 10 brands in case share for new products launched nationally this year. And we recently launched Busy Hard Seltzer and Movo canned wine spritzers nationally, both of which are generating significant excitement from distributors and retailers. In Europe, we were growing above premium brands in February with double-digit growth in our craft portfolio. And in Latin America in February, we were growing volume 18% versus the prior year. We also made progress in our organizational restructure. We recently finalized our European organization, which means our entire organizational structure is now set. We are now focused on transitioning all work to the in-state organization. And we have been very successful in starting to generate the expected revitalization plan savings, though in the short term we are using these dollars to protect our cash and liquidity position given the uncertainty in the economy. Despite the early progress in our revitalization plan, Our Q1 results were disproportionately affected by two events. The first was coronavirus, which I'll talk more about shortly, and the second was the horrific shooting at our Milwaukee brewery. While this may have been a passing tragedy for those outside the company, it impacted every employee in different ways. It changed the employee experience in our company forever, and it materially impacted sales to wholesalers in late February and early March. The brewery was shut down for an entire week and when it reopened, it took a few days to get back to full capacity. This downtime affected shipment levels in March, and together with the pantry load that took place during the last half of March, resulted in lower-than-planned distributed inventory at the end of the quarter. This was a major moment in the history of our company. We lost friends and colleagues. People lost a sense of security, and the culture issues that were raised following this shooting must be addressed, and they will be addressed. We've already conducted listening sessions with brewery and corporate employees and hired a new director of diversity inclusion to ensure we have a robust DNI strategy that's anchored in all areas of our business. And we will continue taking meaningful long-term actions to help build our culture and ensure we have a more diverse and inclusive workplace. The second event that materially affected our Q1 results was coronavirus, a pandemic that has changed the world, not just for our business, and our industry, but for the entire global economy. Like everyone else, the full impact and what our new normal looks like going forward is still uncertain. The coronavirus has had and will have a material impact on our business. With the financial impacts of coronavirus still very uncertain, we recently announced that we have withdrawn our financial outlook for 2020 and beyond. This remains true today, as we will not be providing financial guidance on this call. We will, however, provide additional data to help you better understand our business and how it could be impacted by coronavirus. As I mentioned earlier, the savings we continue to generate from our revitalization plan are being used to protect our cash and liquidity position. We expect a significant negative impact to revenue and profit due to the closing of on-premise accounts around the world. In many instances, the on-premise has been reduced to zero. To help give you a sense of how we've been impacted, based on 2019 numbers, approximately 17% of our North American NSR comes from the on-premise. Pantry loading did create a significant surge in off-premise sales in North America during the latter part of March across a number of our brands, benefiting our STR performance at the end of March. However, this pantry load has not continued into April, and while off-premise sales continue to perform well, we do not expect them to fully offset the loss of the on-premise volume. In Europe, based on 2019 numbers, the on-premise channel accounts for approximately 50 to 55% of NSR, and it's even higher in the United Kingdom, our most profitable European market, where approximately 70 to 75% of NSR comes from the on-premise channel. While we are benefiting from some pantry loading and the shift of consumption to the off-premise, we expect the continued closure of the on-premise trade will have major implications for the performance of our European business in the second quarter in particular. As I outlined earlier in the call, we are looking at two overarching yet simple metrics as we manage the impact from coronavirus. Firstly, taking the necessary steps to protect our employees and mitigate the immediate business challenges of the coronavirus, and secondly, positioning our business to succeed in the medium and long term as we enter a new normal. That is how we have approached decision-making during the pandemic, and these two metrics will continue to guide our decision-making moving forward. So when the crisis started, we took immediate steps to protect our employees, support our communities, and ensure the continuity of our business. We implemented our crisis management and business continuity plans to guide decision-making, and our team have led us through the series of steps we have already taken. We've implemented additional health and safety measures in our breweries and distribution centers, ensuring these federally and provincially designated essential operations can continue operating and we can protect our employees. We have stepped up cleaning, sanitization, and hygiene, and changed business practices to encourage social distancing. We instituted temperature screenings, provided cloth face marks, and made hand sanitizer widely available for all employees who are continuing to work on site. In North America, we created a new paid leave policy, adding up to 80 hours of paid leave to ensure anyone who contracts the coronavirus or is forced to self-quarantine can do so without losing pay or being forced to use their normally allotted sick leave. We are thanking our essential North American brewery employees with a pay incentive of $5 per hour for hourly employees, and $200 per week for salaried employees who are continuing to work on site. And we created a voluntary paid leave program in North America so any employee deemed by federal health authorities to be at high risk can receive paid leave of 60% of their regular wages. And we instituted an unpaid leave program for any employee who doesn't feel safe coming to work. We are also supporting our communities and those most impacted by coronavirus across North America and Europe We are using marketing plans, charitable efforts, and industry trade associations to support service professionals and on-premise locations. We are helping truck drivers across North America and homeless shelters in our communities by providing them with fresh water. We are also producing hand sanitizer to provide to our frontline employees and first responders in our local communities. Consumer buying habits have changed significantly during the pandemic, and so we've also taken steps across North America and Europe to shift how we're marketing our brands. We have prioritized and shifted media to platforms where we expect higher viewership, like gaming, online video, and social media, while suspending on-premise activation and reducing or eliminating other platforms that have been impacted. We have also focused investments against our best-known brands to stay top of mind. With significant economic uncertainty, consumers are turning to big brands they trust, In fact, since pantry loading began in mid-March in the United States, we're seeing industry share trends improve for both Coors Light and Miller Lite per Nielsen. Both brands are seeing better share trends than in mid-March, and both are growing segment share at an increasing rate. We will continue to meaningfully support these brands and look for ways to make them culturally relevant, like we did with Miller Lite's virtual tip jar to support hospitality workers and Coors Light's social activation with Olive, the 93-year-old Pennsylvania grandmother, which generated over 2 billion PR impressions. We also have a diverse portfolio of products, including a strong economy segment. In the U.S., our economy segment STRs, and in particular the Keystone family of brands, are performing well. We've always said that all segments matter, and that has never been truer than today, as consumers seek value in these difficult times. Clearly, this is a less than ideal time to launch new products, and that is why we have delayed some of our new innovations and test and learn launches for the time being to ensure they are best positioned to succeed when they do hit shelves. However, we remain very optimistic about the brands that have launched recently in Vizzy Hard Salsa, Blue Moon Light Sky, St. Archer Gold, and Movo Canned Wine Spritzes. All of these brands have clear points of differentiation and are generating excitement. from distributors and consumers. Beyond the products we have in the market, we are also adapting the way we get them to consumers by accelerating our e-commerce efforts subject to government regulations. We are partnering with a number of alcohol delivery platforms and other click and mortar retail sites to merchandise and make it easier to find our beers online. We are launching new e-commerce tools like a product locator for online purchases. We have also taken a number of financial actions to protect our balance sheet and put ourselves in the best position to weather the storm. We are reducing 2020 capital expenditures by approximately $200 million. We're substantially reducing discretionary spending, limiting new hiring, and have furloughed certain employees within Europe and our North American hospitality businesses. And we're taking a hard look at all of our marketing investments and eliminating anything that will not deliver value in the current environment. We will continue to take additional financial actions if necessary, and our desire is to maintain our investment grade rating. It may be cliche, but these are uncertain times for all industries. We will continue to navigate this challenging time by mitigating the short-term risks and ensuring that we position the business to compete and win in the medium and long term. So while we will continue to evaluate this situation and take all prudent and proactive actions that are in the best interest of the company in the medium and long term, we will not take actions that could have unintended consequences to our future success. Now I'll turn it over to Tracey for our Q1 financial results. Trace?

Thank you, Gavin, and hello, everyone. I will first cover the quarter on a consolidated and regional basis, then move to our outlook. With the uncertainty in the current environment, we will be giving additional forward visibility, including some April volume results, and offering a perspective on how we believe we will be impacted by the coronavirus as we move forward. The April results are just one data point and represent only a portion of the second quarter, but do give some visibility to the impact that we're seeing on our business now. We do not expect to continue to give this visibility on future calls. So to recap the quarter, Net sales revenue decreased 8.2% in constant currency. This decline was largely driven by our undershipping position in North America, coupled with the impacts of the coronavirus across the entire business. These impacts include volume declines, estimated net sales returns and reimbursements of $31.5 million, resulting mainly from the return of kegs related to the on-premise channel, as well as unfavorable mix. These impacts were partially offset by higher global net pricing. Net sales per hectolitre on a brand volume basis decreased 1.6% in constant currency, reflecting the impact of estimated net sales returns and reimbursements related to the on-premise impacts of the coronavirus, as well as unfavourable mix partially offset by positive pricing. While we continue to deliver positive pricing in the quarter, our mix was unfavorably impacted by the various market dynamics and consumer shifts caused by the coronavirus. Specifically, the shutdown of on-premise locations, as well as timing of when stay-at-home orders went into place across our various markets, had an adverse impact on geographic mix. And notably, as many of our higher-end products are skewed towards the on-premise, the closure of these establishments had an unfavorable impact on our brand mix. Worldwide brand volume decreased 1.8%, driven by declines in Europe, while financial volumes decreased 8.3%, reflecting unfavorable shipment timing in the U.S. and lower contract brewing volumes. Underlying COGS per hectolitre increased 3.3% on a constant currency basis, driven by volume deleverage and inflation, partially offset by cost savings. Underlying MG&A decreased 2.2% on a constant currency basis, driven by cost savings and targeted spend reductions, partially offset by a slight increase in marketing spend. As a result, underlying EBITDA decreased 15.8% on a constant currency basis. Underlying free cash flow reflects the cash use of $216.6 million, which is $53.5 million favorable to prior year, driven by favorable changes in working capital and lower interest payments partially offset by lower underlying EBITDA and higher capital expenditures. In North America, net sales revenue decreased 7.2% in constant currency. This decline was driven by unfavorable shipment timing in the U.S., including brewery downtime associated with the Milwaukee tragedy and lower contract brewing volumes, coupled with estimated net sales returns and reimbursements of $19 million driven by our KEG return program. We anticipate that the U.S. undershipment position will largely reverse over the full year and expect the U.S. shipment trend to outperform U.S. brand volume trends in the second quarter. North American brand volumes increased 0.4%, benefiting from the timing of trading days this year as well as the March pantry loading in the U.S. Net sales per hectolitre on a brand volume basis decreased 1.3% in constant currency, driven by the on-premise sales returns and reimbursements, as well as unfavourable geographic mix, driven by increased licence volume in Mexico, partially offset by net pricing growth. Underlying EBITDA decreased 11.9% in constant currency due to lower financial volume, unfavorable mix and COGS inflation, partially offset by lower MG&A, cost savings in COGS and net pricing growth. The MG&A reduction was driven by cost savings related to the revitalization plan as well as cycling higher project costs in the prior year related to brewery systems implementations partly offset by a slight increase in marketing spend around our new innovations that occurred early in the quarter, such as Blue Moon Light Sky and St. Archer Gold. This spend was in line with our initial plans for 2020 prior to actions taken to mitigate the impacts associated with the coronavirus. In North America, and particularly in the US, we benefited from pantry loading at the end of March that positively impacted our brand volume, as sales to retailers in the U.S. finished the quarter reflecting improved trends from earlier in the quarter. In the four weeks ended April 24, 2020, in the U.S., STRs were down 14.1%, driven by lower premium and above premium brand trends, with economy brand performance down 4.1% in the four weeks. We continue to see strong STR trends in the off-premise, but these trends are not fully offsetting the virtual elimination of the on-premise sales. We expect the negative on-premise trends to continue while social isolation continues to be practiced and expect that any increase in total off-premise volumes due to channel shifting will not be sufficient to offset the losses experienced in the on-premise. We estimate that this will result in negative trends in volume, NSR, and mix versus our prior estimates and expect those trends to continue at least through the end of the year and in particular in the second quarter. Turning to Europe, net sales on a reported basis decreased 13.4% in constant currency due to lower volumes, lower net sales per hectolitre and sales returns related to the on-premise impact resulting from the coronavirus. Net sales per hectolitre on a brand volume basis declined 5.2% in constant currency driven by unfavorable geographic mix, particularly due to the impact of the higher margin UK business partially offset by net positive pricing. Financial volume decreased 10% and brand volumes decreased 8.5% as a result of the pandemic. Europe's underlying EBITDA reflects a loss of $4.1 million compared to income of $13.5 million in the prior year. driven by gross margin impacts of volume declines and cost inflation, partially offset by lower NG&A expenses as a result of cost mitigation actions taken in response to the coronavirus pandemic. In Europe, brand volumes were down more than 20% in March, driven by closures of on-premise accounts, which began roughly a third of the way through the month. In the most recent four weeks, brand volumes are down approximately 40%. Our relative share position in Europe is significantly higher in the on-premise channel than in the off-premise, so we expect to be disproportionately impacted by the virtual shutdown of this channel and expect share losses during the shutdown period. In the off-premise, our capacity and staffing constraints will result in us not being able to meet the full demand of short-term channel shifts. Based on 2019 results, our on-premise business comprises approximately 50% to 55% of NSR. We are taking significant steps in reducing spending for both capital and expense and have taken steps around cash collections to minimize collection risk. Despite these actions, a prolonged shutdown of the on-premise business due to the coronavirus will have a meaningful impact on European and total company gross margin and profitability. This takes me to our financial outlook. On March the 27th, we withdrew our guidance due to uncertainty driven by the coronavirus pandemic. The pandemic is impacting our business due to on-premise losses across the entire business and disproportionately in Europe. We expect an outcome of lower volume, negative mix and unfavorable fixed cost absorption in COGS while the on-premise channel remains shut down and slowly reopens. But the magnitude and duration of these impacts are still uncertain. Despite this risk, our continued desire is to maintain our investment-grade rating, and as Gavin mentioned, we are taking steps to ensure we protect our balance sheet and put ourselves in the best position to weather this storm. Given the uncertainty, volatility, and likely continued impact of the coronavirus, we continue to monitor and take proactive steps to ensure proper business continuity and adequate liquidity for our company. Therefore, we borrowed $750 million effective March the 13th and another $250 million effective March the 25th on our $1.5 billion revolving credit facility for an aggregate draw of $1 billion as at the end of March 2020. As of April 30th, we have paid back $400 million on the RCF, leaving us with an aggregate draw of $600 million and therefore an additional $900 million of capacity to draw. As we discussed earlier, we already have implemented a number of steps, including reducing our 2020 capital expenditures by approximately $200 million, substantially reducing discretionary spend, limiting new hiring, furloughing certain employees, and significantly reducing marketing investments. In addition, we and our board are actively evaluating various capital allocation options including a suspension, reduction, or temporary elimination of our dividend. Obviously, this is a very fluid situation as governments and companies evaluate the impacts of coronavirus and prepare for the reopening of the economy. Our management and our board will continue to take prudent and proactive actions which are in the best interest of the company, our employees, consumers, customers, and our stockholders as things become clearer in the rapidly evolving situation. Our decisions will be guided by and consistent with the company's overall financial discipline, ensuring adequate liquidity and our desire to maintain our investment grade rating. As we contemplate taking additional actions to navigate this unprecedented environment, we remain mindful of not taking any actions that would have unintended negative ramifications to our business or that would jeopardize our medium or long-term success. So with that, thank you for your time and attention, and I'll turn it back to Greg for Q&A.

Eric? Thank you. We will now begin the question and answer session. To ask your question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. As previously stated, In the interest of time, please limit yourself to one question so that others may be able to ask theirs. If you wish to ask a follow-up, you may re-enter the question queue. You may, by doing so, by pressing the star, then one key. Our first question today will come from Andrea Cesera of JP Morgan. Please proceed with your question.

Thank you very much. I was just trying to get, and I hope, sorry, I hope all is well. I wanted to get a sense of the shipments, the STRs for on-premises against at home. Obviously, we got the number for total, and I was just wondering if you have capacity and you have potential for improvement there in the at home. Thank you.

Thanks, Andrea, and good morning to you. I hope all is well with you as well. From an STR point of view, Obviously, the on-premises is virtually shut across almost all of our markets, and we've had some significant skew shifts into the off-premise. I think similar to other beverage companies, our pack mix has shifted quite fundamentally because of the differing shopping habits. And so capacity has been, I would say, strained mostly in the area of 12-ounce cans, and folding cartons. It's not an issue that's unique to our business. It's across the whole beverage segment. So we're working with our packaging suppliers to prioritize SKUs. We're looking at qualifying alternative supplier locations to help out with that. I would say that we've had minimal out-of-stocks in our North American markets because of this, but we're running from an off-premise large pack point of view pretty much flat out in North America. In Europe, we have had some capacity constraints, particularly in the United Kingdom, given that that market has been substantially more on-premise focused with less focus on off-premise. So we have had some out-of-stocks in the off-premise in Europe because we haven't been able to meet fully the demand. I hope that answers your question.

It does, and then thank you very much. Then the other question would be on the marketing spend. I understand that you shifted and some of the discretionary spending may not be realized. So I wonder if you can kind of weave that comment with your cost savings and how we're thinking because perhaps you had excess expenses now for keeping your employees safe and obviously unfortunate for the tragedy and my sentiment and condolences to everyone impacted. So if we should be thinking that the impact will be lower as we progress in the year or unfortunately that some of the things you can change given the timing and some of them are fixed. So just to understand your fixed costs and expense ratio going forward. Thank you.

We've got a lot of questions in there, I think, Andrea, so let me try and address them, and if I don't, you can come back again. Obviously, there's no doubt this is a really challenging time for us, not just for our business, but for everybody in our industry. Our focus, as I said right now, is mitigating the short-term business challenges and positioning our business to succeed in the long term. From a sales to wholesalers point of view, the impact of the Milwaukee Brewery tragedy as Tracy, I think, said, was from a shipments point of view in February and early March. And because of that, our inventory levels at the end of March were lower than we would have liked. Subsequent to that time, our supply chain folk have done a tremendous job building our inventories back up again. And I would say that they are pretty much where we would like them to be, with the exception of shortages on some of our large pack sizes where we have some supply constraints from a from a packaging point of view. So we would expect shipments to wholesalers to migrate closer to sales to retos in the second quarter. From a marketing standpoint, consumers are still drinking lots of beer. In the US, 80% of our beer is consumed in the on-premise. And so it's really important that we keep our biggest, most recognized brands top of mind when they're shopping. marketing standpoint, we're taking five clear steps to meet the consumer needs and consumer habits which have developed right now. We're focusing our investment against our biggest, most recognizable brands like Miller Lite, Coors Lite, and Blue Moon. We've re-evaluated all of our creative that was going to market, and we've adjusted it to make sure that it's more culturally relevant. For example, we pulled the highly anticipated March Madness spot, Coors Lite, before it was launched for obvious reasons. We've shifted our media plans towards key platforms where we expected viewership to be higher, like social, gaming, podcasts, online video, over the top, versus cinema and out of home, which is where we might have been before. We've enabled a large percentage of our creative to link to e-commerce beer purchases so consumers can buy their favorite beers from the comfort and safety of their homes. And finally, we've identified opportunities where our brands could meaningfully and authentically provide value. For example, for Miller Lite, we created the virtual tip jar in the first week of isolation. And in Canada, Molson has launched the Raise One For You Local to support local Canadian bars through gift cards by encouraging more virtual happy hours. we will be eliminating marketing spend that doesn't add any value at this point in time, you know, if it's focused on the on-premise or if it's focused in media channels where our consumers happen to be. So, you know, as we were expecting a large increase in marketing spend in 2020, I don't think we can expect that right now.

Thank you. Our next question will come from Dara Mohsenen of Morgan Stanley. Please proceed.

Hey, guys. I hope you're all well. Hi, Dara. I wanted to delve into the U.S. STR result you gave for the first week of April a bit more. Obviously, on-premise is driving the overall weakness, but it's still worse than I would have expected even with that on-premise weakness. Just trying to better understand that performance in terms of what you're seeing by channel in the off-premise in the U.S. in April to help decompose that a bit. And then second, you highlighted the economy portfolio declines were a lot less severe than the premium brands in the April to date number. Is that more just due to channel mix shift away from on-premise or are you seeing trade down within your portfolio in the off-premise channel already? and any forward thoughts on potential trade down, both within your portfolio and from a beer category perspective. That'd be helpful. Thanks.

Thanks, Derek. I'm not sure I'm going to get all of your questions, so if I miss something, just come back at me here. I think the first point is the retail sales which Tracy gave in the U.S. was for the four weeks, not the first week. I think you said first week, but it's actually the first four weeks of April. Obviously, the on-premise has reduced to virtually zero. In the off-premise, we're seeing a meaningful shift into large pack sizes and into brands that consumers know and trust, like Miller Lite and Coors Lite. Miller Lite and Coors Lite's performance has been particularly good as we've headed into April. We saw an acceleration behind Coors Lite and Miller Lite behind our marketing initiatives in 2019 made to chill with Coors Light. The brand has seen sequential improvement in three straight quarters, and Q1 was actually the best share performance in three years, and April has continued on that trend. Miller Lite continues to do really well. We've celebrated 22 quarters in our segment share growth, and it's actually growing dollar sales share in the latest 52 weeks. Our big, known, trusted brands we're very pleased with. The second part was our economy portfolio performance. And yes, we have seen an improvement in our economy portfolio, whether that's Keystone Light, whether that's Miller High Life, Hands, Steel Reserve, or all brands which are doing relatively much better in the first part of April than they were doing before. Did that answer all of your questions, Daryl, or did I miss something?

It does. And then just one clarification, within off-premise, can you talk a little bit about the channel performance in the first four weeks off-premise and the divergence you're seeing from a channel perspective? And then also consumer trade-down, just wanted a bit of a forward look on your thoughts there and if that is likely to be significant in the industry. Thanks.

Well, we've seen a strong growth in the grocery channel, particularly in large format. We have seen in sort of first part of the coronavirus, the C-Store channel did not do as well as the larger format. It has had somewhat of a recovery since then, but it's still not performing as well as large format, which frankly is not surprising given the the impulsive nature of many of the C-Store purchases. Our online sales channel has certainly seen a meaningful surge, as you would expect, and hence we're focusing a lot of marketing activity in that direction and partnering with various online delivery platforms to make sure that our consumers see our brands and that they're top of And we've also launched a product locator to help our consumers find out where our brands are. I hope that answers your questions. Thanks.

Our next question will come from Kevin Grundy of Jefferies. Please proceed with your question.

Thanks. Good morning, everyone. I wanted to wish you well as you navigate through a clearly difficult environment. My question relates to debt leverage and to the dividend. So first, your debt covenant, four times net debt to EBITDA on a trailing basis. You mentioned some of the proactive steps the company is taking around cost and spending. However, based on where we sit today, I was hoping you could comment on your level of comfort with the covenant and what will undoubtedly be a challenging year. And then relatedly, with respect to the dividend, maybe you can put some guardrails around a potential cut or suspension to the dividend. Thanks.

Thanks, Kevin, and thanks for the thoughts. I'll ask Tracy to handle those questions, if you don't mind, Tracy.

Hi, Kevin. So, look, we're aware of all of the current obligations under our credit agreement, and we're in compliance with them. As we said, we are taking a number of actions which will help us navigate the short-term impact to our business and ensure that we have adequate liquidity. So just to reiterate, reducing capital spend by about $200 million. We are substantially reducing discretionary spend. We've limited new hiring. We're furloughing some employees, especially in Europe and some of our North American hospitality areas. And we're also reducing marketing spend, as Gavin just mentioned, ensuring that all our marketing investments are delivering value in our current environments. But we are still supporting our big brands, as Gavin mentioned, and supporting our innovations. This is a very fluid situation. Again, we are monitoring it. We're having discussions with our board and evaluating our capital allocation decisions, which, as we said in our remarks, does include a suspension, a reduction, or a temporary elimination of the dividend. We will, of course, communicate in due course any key capital allocation measures and decisions as they are made.

Kevin, just one point that I'd make is you mentioned a four times debt covenant ratio. At the moment, it's actually less than that. I'll just refer you, sorry, higher than that, sorry. It's 4.25 times. I think if you look at our SEC financial filings, you'll see it laid out there as to the path.

Okay, fair enough. I'll pass it on. Thank you, guys.

Thanks, Kevin. Our next question will come from Sean King of UBS. Please proceed with your question.

Hey, guys. Thanks for the question. Sorry if I missed this, but you referred to estimated keg returns in Q1. Does that account for, I guess, all shipments that are expected to be returned? I mean, is there any way to quantify what continuing overhang there would be in Q2? No.

Yeah, thanks, Sean. Good morning. Look, I mean, the estimate that we've made would cover all of the keg returns that we would be expected to take back. So the $50 million in aggregate between the impact to net sales revenue and cost of goods sold is our best estimate right now. And obviously, we'll adjust that as the actual numbers come through. But When you say an overhang, I would say we've tried to get as close to 100% of what we expect our liability to be based on what we know. Great. Thank you.

Our next question will come from Vivian Azar of Cowen. Please proceed with your question.

Hi. Thanks for the question. Hope everyone is well. You know, Gavin, given your experience in the beer industry, I was hoping that you could offer some historical context as we think about how to anticipate shifts in consumer or purchase behavior when the consumer is under pressure. So just thinking back maybe to the financial crisis, if you view that as a helpful analog, just remind us the cross-category dynamics that you saw between beer, wine, and spirits, and then specifically within beer, how meaningful was the down trading? Thanks.

Thanks, Vivienne, and good morning to you as well. It's certainly an unprecedented time, and we've been through recessions before. I don't think we've been through something quite like this before, but certainly, ultimately, the question is what this will do for consumer behavior. It's not about whether or not drinkers will continue to consume, because they will, but it's about how, where, or what they will consume. The early results and what we're seeing at the moment show that consumers are continuing to purchase beer, particularly during the pantry loading phase of this pandemic. We're seeing a lot more purchases of large pack and we're seeing more on premium and economy versus above premium. I would say craft in particular has been disproportionately negatively impacted. We have got a very diverse portfolio of products, pack types and price points, which are going to help us capture the volume regardless of where the consumer trends actually take us. We're well positioned because we play in all segments. It's clear that the whole industry is impacted. We believe that we've got the segments and the brands and we've got the right approach. Ultimately, we're confident that we've taken the right steps to mitigate the short-term risks and position the company to compete in the long term. We also believe we're still tracking towards the vision laid out in the revitalization plan, despite the current environment. We'll pivot as necessary in the short term, depending on where the consumer trends take us.

That's really helpful. Thank you so much.

Sure. Our next question will come from Bonnie Herzog of Goldman Sachs. Please proceed with your question.

All right. Thank you. Good morning, Gavin. Hope you're doing well.

Hi, everybody. Thank you.

I wanted to touch briefly on Vizi. So it sounds like the brand is doing well based on your comments. But, you know, that said, we are hearing from a lot of our contacts about the tough environment right now for newer brands. This is just in general. Would love to hear your take on how the launch has been potentially impacted by COVID and then maybe what you've done to mitigate some of the unforeseen impacts you've likely had maybe around distribution and marketing of this brand. Thanks.

Thanks, Bonnie, and I hope you're doing well too. Yeah, look, I mean, obviously, it's not the ideal time to launch new products in the marketplace. I'm sure you don't need me to tell you to tell you that. And as a result of coronavirus, we have made some adjustments to our original innovation plan, which we had. We've delayed some innovations, and we're using those savings to protect our cash and liquidity positions. But as far as the seltzer market is concerned, we've got a very clear strategy in hard seltzers. And we think we're being smart in how we execute our first two launches. We're first focusing on Visi as the big bet, and then we're rolling into Coors Seltzer in the fall. This is a huge segment, and it's got plenty of room for multiple brands and solutions. Our approach with Visi is making sure that we come at it with a real point of difference, not just another seltzer, to carve out a meaningful space for ourselves in what's an increasingly crowded category. And that point of difference for us is the first hard seltzer made with acerola cherry, which is the super fruit which is high in the antioxidant vitamin C. And we're confident that this proposition's gonna resonate very well with consumers. We're not gonna share specifics on what our media investment's going to be, but we're in the midst of rolling out a pretty robust campaign which will include national TV in the right spots, digital and social, retail tools and a sampling effort. It's our biggest play yet in the hard SELSA market, Bonnie, and whilst it's still only a few weeks into the launch, we're actually very pleased with the early reads. And we believe that the clear point of difference and the clear point of difference from a visual identity point of view is going to set us apart as a preferred SELSA. As far as Coors Light Seltzer is concerned, we've got that coming towards the back end of the year. We believe that at this time in particular, people are turning to known and trusted brands, and there's a big opportunity for popular beer brands to enter into this space. And we believe we've got the best proposition with Coors for a number of reasons. It best fits to play in the space. We've tested the Coors Seltzer proposition head to head with other beer branded seltzers, and Coors won across the board on multiple levels, whether it was purchase intent, whether it was differentiation, distinctiveness, and so on. Its history of Rocky Mountain freshness and water credentials are a perfect fit for hard seltzers. And we've got a clear point of difference, which is also very important. It's the first hard seltzer with a social mission. And it's one of the top three drivers of liking for consumers. And finally, we've got a great tasting product. So we're particularly excited about that launch as well. Our distributors have done a tremendous job in a very difficult and challenging environment, getting busy onto the floor and into the coolers. And, you know, as I said, we're just a few weeks in, but we're very pleased with what we're seeing.

That was really helpful. Thank you so much for all of that.

Sure. Our next question comes from Loren Granbet of Guggenheim. Please go ahead with your question.

Yes, good morning, Gavin and Tracey. I hope this finds you in a healthy shape. Got a question on all the extra costs. You mentioned all the actions you took to protect your employees, increase social distancing and raise pay, amongst others. Could you please give us, at least directionally, the total financial impact it has in the quarter by segment in Europe and the U.S.? ? And if those actions are just one-off in nature, we should think those extra costs will just be lifted once we return to some kind of normality in the second half of the year. Thank you.

Thanks, Lauren. Thanks for the questions. Obviously, as I said, one of our top priorities is protecting our employees and ensuring that they're safe. So in many respects, Most of those costs will, as life gets back to a new normal, disappear. The thank you pay bonus, for example, will be removed at a point in time when we believe it is appropriate. We took steps in Europe and in North America to ensure that our employees that were higher risk either of a certain age or who had pre-existing conditions were given the opportunity to stay away from work and not be disproportionately financially impacted. In the United Kingdom, there is actually a program where 80% of their pay is reimbursed by the government. So the impact in the United Kingdom for for the folk that have stayed at home is not as impactful as, for example, in the United States. So I've rambled a little bit there. I think the answer to your question is no, there won't be permanent negatives forever. They will only be there for as long as we believe it's necessary. Our number one value that we launched We launched new values in January. Our number one value is people first and that's how we're making all of our decisions. I think obviously our social distancing practices will remain in place for quite some time but the cost of that is relatively low. Our breweries are big. There's a lot of space in our breweries and I think the fact that we put in all these policies fairly early on in the process has certainly gone a long way to make sure that we've mitigated any impact from a supply chain point of view.

Thank you. Thank you.

Our next question will come from Brian Spillane of Bank of America. Please proceed with your question.

Excuse me. Good morning. Gavin Tracy. Hope you all are well. Just wanted to follow up, I guess, on Kevin Grundy's question about the balance sheet and the dividend. And Tracy, I think if we're thinking about liquidity and cash needs, I believe you've got a maturity, the September maturity, right, coming due, which is, I think, $500 million later this year. So I guess if we're thinking about that maturity, the liquidity you have now, right, you still have about $900 million in the credit facility that you could draw. Is the decision on whether or not you touch the dividend really predicated on – maintaining investment grade and terms around refinancing, avoiding things like steps and other things? Or would touching the dividend really be just a function of, you know, it's a bad year and you're going to need the extra cash? Just trying to understand what the decision tree would be, the need to touch the dividend, and then again, how your comfort level around that September maturity.

Okay, Brian, good morning. Thanks. I'll ask Tracy to answer that question. But just to create one quick point is it's not 500 million U.S. dollars, it's 500 million Canadian dollars. So it's somewhat less than that in U.S. dollars.

Yeah, so roughly sort of 357 million U.S. equivalent. So, you know, as we mentioned in our prepared remarks, Brian, we'll continue to monitor and take steps to ensure proper business continuity and adequate liquidity for the company. We are actively evaluating our capital allocation decisions with our board. As it relates to that $500 million Canadian note that comes due this year, that's a capital structure decision that we will make in consultation with our board as we get closer to the maturity of this debt and then make further decisions. You know, the conversations that we're having with our board around capital allocation does include that, you know, what we mentioned around the dividend. And again, I just want to say that we'll communicate that in due course as soon as any decision is made. But just a final point. I mean, we are aware of all the current obligations, you know, under our credit agreement, as I said, and, you know, we are in compliance with them and we'll continue to take the actions needed because we do have a continued desire to maintain our investment grade rating.

Thanks, Tracy. Thanks, Kevin.

Thanks, Brian. Our next question will come from Bill Kirk of MKM Partners. Please proceed with your question.

Hey, thanks, everyone. So I think Coors Seltzer was originally set to launch in July. So I guess the question is, if COVID pressures somehow ease or begin to ease, would there be a willingness to pull what is it, delayed launch forward again and do it again in July, or is it now definitely in the fall?

Yeah, hi, Bill. Thanks. Look, based on what we're seeing in the marketplace, I think you can safely assume that it will be in the fall. In other words, I would say based on what we know right now, we will not be bringing forward the launch. We'll keep it as to where we've moved it to now.

Okay, thank you.

Our next question will come from Rob Ottenstein of Evercore. Please proceed with your question.

Great, thank you very much. I'd like to kind of first circle back to the U.S. and just make sure I didn't miss anything here. You gave us some April numbers in terms of down volumes, I think 14%, I believe. Can you disaggregate how much of the impact of pantry loading is or deloading at this point hit the April numbers to give us a little bit better sense of what the ongoing rate is in April? Obviously, there's a negative mix impact there. Can you maybe perhaps touch on what the pricing environment is today? The industry has had really good pricing discipline for the last number of years. Is that staying in there? And then just kind of circling, kind of finishing off with the U.S., if you could then contrast Canada, which hasn't really come up on the call or in the press release, Is Canada looking kind of better or worse than the U.S.? Thank you.

Thanks, Robert. Good morning to you. So several, let me unpack what you said there. So from a mixed point of view, obviously on-premise to off-premise has negative mixed implications for us. In terms of Canada and how they're performing relative to the U.S. in the first part of April, pretty similar, quite frankly, Robert. Not a number that's terribly dissimilar to the 14% which Tracy mentioned. Canada actually had its best share performance in the first quarter in quite some time. We launched Molson Ultra nationally in Q1, and it's producing a much better better result than the brand which it replaced, which was Molson Canadian 67. Miller Lite continues to grow strongly in Canada, strong double digits with the functional message of carbs and calories. And Belgian Moon is growing strongly. So Canada actually had a reasonably good or one of the better first quarters that we've had for some time. From a pricing point of view, pricing in the first quarter in the U.S. was pretty similar to what it's been for the last three quarters. So it's holding up. Mix was relatively flat. And we do have some negative in NSR per hectare in the United States in freight and fuel as we pass substantial savings across back to our distributors in line with our freight and fuel program, which took the freight and fuel per hectolitre number down by about 50 basis points in the US. Obviously, we've got the keg return negative hit in the US, which is impacting our NSR per hectolitre. That's about 100, 110 basis points for unusuals in total. Canada pricing has held up well from a frontline point of view. Frontline is about 2.3%. 260 basis points. And then I think the final part of your question was the impact of pantry loading in March versus what happened in April. Obviously, we had the timing shift of Easter, so the numbers got a little bit difficult to compare between March and April and even within April. I would say to you that the strong performance in the off-premise, I mean, it still continues, but it's It's just not enough to offset the loss of 100% of the on-premise business. I hope that helped, Robert.

Certainly, I understand that. Would you think that if you maybe took out the pantry deloading instead of being down 14%, maybe you were down kind of mid-single digit? Does that sound about right?

Robert, look, I'm not going to try and, on this call, unpack that to that level of detail. All I can say to you is that in March, with the initial pantry load, we had, you know, Fourth of July kind of week performance, and obviously that has not continued, and we don't expect it to continue. But, you know, performance has still been good in the off-premise.

Great. And I actually just got a question from a large shareholder asking me to ask you what's going on with promotions. In a lot of industries, the promotions have been reduced significantly. Is that happening in the beer industry as well?

Well, as it regards the large packs, I mean, we're not promoting large packs because we're, as I said earlier on in the call, we're actually, you know, we've got a little bit of hand-to-mouth from a from an input material, packaging material basis. So from our perspective, we're not promoting large packs. I can't speak for our competitors, but from our perspective, we're not.

Great. Thank you very much.

Our final question will come from Lauren Lieberman of Barclays. Please proceed with your question.

Great. Thank you. I just wanted to know if you could help us at all when we think about COGS per hectolitre, anything that you can offer us on fixed versus variable costs. I know we'll have to sort of manually play with some assumptions in terms of mixed dynamics, but just anything that you could offer to help us on fixed versus variable costs in the COGS slide.

Right. I'll ask, obviously, Tracy to answer the cost of goods sold question. Obviously, there are some impacts within Costa Good Salt, which are somewhat unusual in nature. We're not treating them as unusual, but they're one-off of nature, which is all the extra steps that we've taken to protect our employees. But, Trace, do you want to get into COGS in more detail?

Yeah, so, I mean, a couple of drivers. You know, we did mention that our COGS was up 3.3% in constant currency on a consolidated basis. I mean, the big drivers were around the volume deleverage. which was around 200 basis points of that. And then in addition, you know, this quarter, we did have the keg returns and the on-premise reimbursement program, as well as some finished goods obsolescence, which drove higher COGS. It was roughly around 90 basis points. And then we did see some inflation, and that was partly offset by some of the cost savings. I do want to just remind you from an inflation point of view, you know, we do have a robust hedging program and it's a multi-year program.

We will position.

Yeah, so look at stock producing. And since that ethanol is used by our CO2 suppliers, there are expected shortages in the markets, and we're monitoring this very closely. However, we do have secondary sources in taste, and as yet we have not had any disruptions to our supply. And we also are collecting as much CO2 at our breweries as possible so that we can be self-sufficient. But at this point, no disruptions.

Okay, great. And then the final piece, sorry, was just in the release, there was a mention on tax and the possible $100 to $200 million tax expense in the second quarter. So anything you could elaborate on there or a sense yet of cash component of that, whether it's in the second quarter or through the year?

Yeah, so look, we're still doing a full technical and legal analysis of the tax regs and to really understand the full impact and the implications for cash taxes as well as the timing. And so the $100 million to $200 million that we mentioned in the release is a P&L impact and it relates to the periods from 1 January 2018 right up until March 31, 2020. So that estimate considers the full range of impacts, but again, we're still doing some of the legal and technical analysis, and we'll be able to give more in Q2. Okay. All right. Thanks so much.

Thank you. That will conclude our question and answer session. I would like to hand it to Gavin Hattersley for closing remarks.

Thanks, Eric. And look, I know there may be some questions we weren't able to answer today, so please follow up with Greg if you have them directly. And then Tracy and I look forward to talking with many of you as the year progresses. So stay safe and healthy, everybody, and thank you for participating in this morning's call.

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