Molson Coors Beverage Co (TAP) 2016 Q4 法說會逐字稿

Welcome to the Molson Coors Brewing Company fourth-quarter 2016 earnings follow-up session conference call.

(Operator Instructions)

Now, I will turn the call over to Dave Dunnewald, Global Vice President of Investor Relations for Molson Coors.

Thank you, Andrew, and good morning, everyone. On behalf of Molson Coors Brewing Company, thank you for joining us today for our fourth-quarter 2016 follow-up earnings conference call. Our goal on this call is to address as many additional earnings-related questions as possible following our regular earnings conference call with Mark Hunter, Tracey Joubert, and our business unit CEOs earlier today. We will be using the standard question-and-answer format and we anticipate that the call will last less than an hour.

Before we begin, I will paraphrase our Safe Harbor language. Some of the discussion today may include forward-looking statements. Actual results could differ materially from what we project today. So, please refer to our most recent 10-K and 10-Q filings for a more complete description of factors that could affect these projections.

We do not undertake to publicly update forward-looking statements whether as a result of new information, future events or otherwise. You should not place undue reliance on forward-looking statements which speak only as of the date they are made.

Regarding any non-US GAAP measures that may be discussed during the call, and from time to time by our Company's executives, in discussing our performance, please visit our website, www.molsoncoors.com, and click on the financial reporting tab of the Investor Relations page for a reconciliation of these measures to the nearest US GAAP results. Also, unless otherwise indicated, all financial results we discuss are versus the comparable prior-year period and in US dollars.

So let's get started with an introduction to the team with me on this call. We have Kevin Kim, Investor Relations Senior Manager; Ashley Dunlop, Strategic Finance and Planning Senior Manager; Alex Gouin, Finance Forecasting Manager; Brian Tabolt, Controller; Molly Syke, Director of SEC Reporting and Treasury Accounting; Erik Mickelson, Assistant Controller; Mike Rumley, Treasurer; and Steve Mack, Director of Tax.

Regarding our quarterly results, as Mark Hunter mentioned on our regular earnings call this morning, the biggest news for 2016 was completing our acquisition of the remaining 58% of MillerCoors and the Miller global brand portfolio, which we bought for $12 billion, representing the largest transaction in the Company's history, which made Molson Coors the third largest global brewer. The transaction was completed at a 9.2 times effective purchase multiple including the present value of cash tax benefits.

Additionally, we will drive substantial cost savings in the next three years in the area of synergies. And we continue to expect this transaction to be significantly accretive to underlying earnings in the first full year of operations, which of course is 2017.

The completion of the MillerCoors transaction represents a step forward in the size and strength of our business, and this will drive some significant change in our financial numbers in the near term as we align and enhance our financial reporting. In order to provide more comparable financial information, unless otherwise indicated, all fourth-quarter and full-year 2016 consolidated and US results discussed on this call will be presented on a pro forma basis as if the MillerCoors transaction and its financing had been completed at the beginning of 2015.

For your reference, please note that we have posted these updated full-year 2015 and 2016 pro forma financial statements on our website for our consolidated and US segment results. We also have filed our 10-K filing with the SEC this morning.

As Tracey mentioned on our earlier conference call, we told you last fall that we would provide transaction adjusted earnings per share, which is how we look at value creation from the MillerCoors and Miller global brands transaction. Since then the SEC has provided general direction to the market, reinforcing a bias against non-GAAP measures. To respect that direction, we will provide the components for you to make that calculation on your own.

As we mentioned previously, this metric is calculated as the sum of three numbers -- underlying aftertax pro forma earnings per share, transaction-related aftertax book amortization, and transaction-related cash tax benefits. So, in the fourth quarter these numbers were underlying pro forma aftertax earnings of $98.7 million, plus $9.4 million of transaction-related aftertax book amortization, and $63.9 million of transaction-related cash tax benefits.

And also for your reference, we had 216.4 million weighted average diluted shares outstanding for the fourth quarter on a pro forma basis. For these same measures, same types of numbers for the full year 2016. These numbers were underlying he pro forma aftertax earnings of $936.0 million, plus $37.5 million of transaction-related aftertax booked amortization, and $275 million of transaction-related cash tax benefits. And for the weighted average diluted shares outstanding for the full year on a pro forma basis, that was 216.1 million -- again, for the full year.

With the completion of the transaction and the changes we are making to align and enhance our organization, the building blocks are in place for our Company to drive top-line growth, profit, cash generation, debt paydown, and total shareholder returns in the years ahead. So, with that, Andrew, we would now like to open it up for questions.

(Operator Instructions)

The first question comes from Judy Hong of Goldman Sachs. Please go ahead.

Thank you. Hi, Dave. I just had a few follow-ups to cost savings, again. The $175 million this year, a big portion of that I think you had called out was the Eden brewery closure related. First, I'm surprised that the number isn't higher because I thought that would be something like $100 million on a run rate basis. And then given that the brewery closed in middle of 2016, wouldn't you also get the residual benefit in 2017, as well?

The answer is yes, we will have some flow-through benefits related to the Eden brewery closure in the first half of 2017, although the large portion of those were actually in 2016. We also have some year-over-year benefit of the Alton brewery, although that would be in 2016 since we closed it in 2015. So, you're right, there is some flow-through to 2017 on the Eden brewery.

Can you help us understand the $175 million number for 2017, then? It seems like that seems to be non cost synergy related, so most of that really coming from each of the regions. What are some of the big buckets of cost savings from the regions? And then can you just give us the residual impact that you're seeing as part of some of the 2016?

I won't be able to give you complete granularity on that. What I would say is that you have major cost savings programs, actually in all of our business units, so it's not just about the US. We've had some major cost savings initiatives prior to synergies, prior to the transaction in the Canada business, also some in Europe, but especially in Canada. And then a lot of cost savings in the US business, as well, besides Eden. It's not just about Eden. That's just one of the largest initiatives that we have going.

And when you put all those together, plus some synergies -- I mean we're hitting the ground running on our synergies targets, as well. It's just that because those essentially were coming from a standing start on October 11 of 2016, takes some, call it, implementation or prep time to get those under way. Whereas the other cost savings programs, some of them had been under way for a year or more. So, we're seeing savings across the business units in a variety of areas. But I'm not going to provide a lot of specifics because it's actually dozens and dozens of initiatives.

Okay. And the point about the $550 million still in place, it would imply, then, that $175 million would step up a little bit more in 2018 and 2019?

Right. Yes, with $175 million you'd have about 70% of the $550 million left to go and so that's right. And that actually makes a lot of sense if you think about the transaction-related synergies being primarily weighted toward years 2018 and 2019.

Okay. And then the commentary about the cost of goods sold outlook for each of the regions in Tracey's comment, that is inclusive of whatever cost savings you're expecting to generate in each of the regions?

Correct. We've excluded nothing from the cost of goods guidance by business unit, except that obviously the ones outside the US are in local currency.

So, for Canada going up mid single digit, it seems to imply a pretty sizable maybe commodity and other FX translation or transaction-related increase.

Yes, that could be one conclusion you could you draw. However, I think it's important when you think particularly about Canada, the cost of goods line there is nearly twice what it is in the US on a, call it, dollars per hectoliter basis. And that's because the route to market, the market set-up and those types of things are actually quite different there.

Actually the portfolio is different, too, in the sense that we have a heavy or call it a strong import brand set in Canada, and those brands flow through our P&L, including our COGS line, at a very high rate because it not only includes the cost of shipping Heineken over from the Netherlands but also that includes the profit stream for Heineken themselves. So, the cost of goods on those brands are very high.

So, it's those types of things that can also be significant drivers of cost of goods in a market like Canada, aside from input cost changes and so forth. The other thing I would point out is in that in the Canadian market you have returnable bottles. We're seeing a trend toward cans in that market and that tends to result in at least moderately higher costs.

And then the last thing I'd mention is, unlike 2016, when we were seeing relatively easy comps on a lot of global commodities, right now those rates don't look like such an easy comparison, at least at the beginning of 2017. We'll see how it plays out, but that was clearly, call it, a potential benefit in 2016 that we did actually see play through in businesses such as the US.

Judy, the only thing I would add, in terms of business performance with Canada we talked in the prepared remarks about how Banquet's been doing really well, Mad Jack, Belgian Moon, Creemore and Heineken, to add to Dave's commentary.

Okay. Got it. My last question, pro forma underlying EBITDA in 2016 you guys reported was $2.383 billion. That obviously still includes the tax provision in Europe. So, is the underlying EBITDA in 2016 looks like could be more like $2.4 billion, $50 million higher or so, right? And so you would have shown something like a 4.7% growth on a year-over-year basis on underlying pro forma EBITDA with cost savings of roughly $175 million. Is that the right way to think about the business performance at the aggregate level on a pro forma basis?

From a 2016 standpoint, I think you're thinking about the provision in Europe the right way, as in that is a, call it, reduction in financial performance for 2016, because it was in the fourth quarter. It is included in the pro forma. It's not excluded so-to-speak. And obviously depends on how that legal dispute, which, as we mentioned on the earlier call, has been running for more than four years, how that's resolved would determine what that looks like going forward. But the $50 million is our best estimate of the potential liability for that dispute.

Okay. Got it. All right. I'll pass it on. Thanks. Thanks, Judy. Ashley mentioned one other thing. The cost savings for 2017, we're anticipating more than $175 million. Cost savings for 2016, more than $165 million. I don't know if we got that mixed up. I may have mixed it up. But, yes, we get it. Thank you.

The next question comes from Mark Swartzberg of Stifel Nicolaus. Please go ahead.

Hi, Dave, everyone. Two questions. They're both clarifications. One is the numbers you gave us for calendar 2016 pro forma EPS, or I should say aftertax income of $936 million. That number includes international. Is that correct? Or it excludes international? The $936 million that Tracey gave us when she said $936 million plus $37.5 million plus $275 million. We're trying to get to transaction-adjusted EPS. She gave us those three numbers and my question is whether that $936 million includes the Miller international business.

Yes, the $936 million includes a little under three months worth of Miller international results. In other words, the pro formas in 2016 would include actual results from October 11 through the end of the year and then pro forma results prior to that. Yes, the pro forma is built that way.

Got it. That's great. So, the 12 month number is obviously higher when you factor in all of international for 12 months. Okay. Great.

Yes. Sorry, Mark, said another way, prior to October 10 there's no Miller international results included.

Great. Okay. That clarifies. And then I'm on page 7 of the press release where you called out this impairment on the Molson brands in Canada. And I think that $40.7 million is a pretax number, and then you gave us this $37.5 million number in calendar 2016 for incremental amortization, which we've heard before. But what I'm trying to ultimately get at is what you think that incremental amortization number will be on a calendar 2017 and per annum basis, inclusive of the impairment that you've undertaken here with the Molson brands. What is that number, is my question. What's that all-in number?

Let me put some headlines on it and if Brian needs to clean up any of the account, he'll do that. On a full-year basis, switching the Molson brands in Canada to definite lives will result in additional, call it, non-cash amortization expense of $40.7 million per year. Now, that started in the fourth quarter of 2016, so we only have, call it, three quarters of step-up in that comparison for 2017.

Yes, that's right. I think if you also take into account that $40 million is based in Canada, so if you do want to tax effect that then you'd want to be utilizing the Canada statutory rate, which is approximately 26%. So, to have apples-to-apples you would need to tax effect that at the $37.5 million.

So, yes, it is a pretax number and, yes, it is in Canada.

So my questions is, okay, let's say the aftertax number is $30 million, just round numbers, and then we have this $37.5 million you talked about in the past which -- or I should say pro forma for calendar 2016. So, what I'm inclined to do is take $30 million and add $37.5 million and say that's the, quote, incremental amortization stemming from -- or maybe it's not all deal related. But the point is, incremental amortization versus what you've had historically of $67.5 million, that second line in the calculation of transaction-adjusted EPS. Is that the right way to think about it or it's not how you're thinking about it?

Yes and no. Those are both incremental pieces of amortization or amounts of amortization that will affect our results going forward. However, we do actually put them in different buckets because the $37.5 million of incremental amortization that goes into the transaction-adjusted EPS calculation is specifically deal-related and that's why we are comfortable making that adjustment. The $30 million is amortization and the deal related amortization is related to MillerCoors, the $37.5 million

The $30 million-ish -- actually, let me step back. The full-year annualized $40.7 million number, which I think is similar to $30 million number you're using for a 2017 overlap, that's in the Canada business related to the write-down of the Molson Coors brand and that is not deal related. We actually do look at them a bit differently. They're both non-cash but other than that we look at them differently.

Just to add, I think that's one of the reasons why in Tracy's remarks we indicated that starting in Q1 we'd focus a little bit more on EBITDA on a consolidated level as well as on a BU level because there will be a lot of noise, to your point, right?

Yes. The EBITDA focus helps. But to be super clear here, the $30 million is not going to be an add-back, in your minds, correct -- that relates to the Molson brands? In your minds it's not an add-back. It's not going to be included in what is in calendar 2016, the $936 million or the $37.5 million. It's just not an add-back.

That's correct.

Great. And then I think this came up on the last call but it gets to your point, Kevin. You had this $50 million number in Europe that hit both the revenue line and the pretax income line. And for some reason you didn't add that back when you calculated underlying non-GAAP EBITDA. So, am I right in saying that's what you did not do? And why didn't you, if that's right?

No, you're right. In terms of the add-back, it is included in our underlying results. That's why, just given the treatment that we had under here, we wanted to have Simon highlight what the underlying results would have been excluding the tax provision. Does that help?

What I'm getting at is, you said underlying EBITDA non-GAAP was $405.1 million. And when I look at the Europe business, the pretax income number that goes into that $405.1 million, didn't add back the $50 million. So, one could draw the conclusion that you did a lot more than $405.1 million on an underlying basis.

I think that's a fair conclusion, Mark, but you guys would have to do that math because we didn't strip it out of our underlying results.

And why didn't -- only because it's relating to a legal -- it's relating to a conflict. It's not the day-in and day-out cost of running a business. Why didn't you add it back?

We have -- and you wouldn't be aware of this, of course, but we have very specific guidelines based on historical practice of what we will and will not strip out of underlying results. And anything that's related to our ongoing business, generally speaking, we're just not going to strip that out. And this does relate to ongoing business over the past four years. So, that's why.

Got it. Okay. Very helpful. Thank you guys.

The next question comes from Brett Cooper of Consumer Edge Research. Please go ahead.

Hi, guys. A few quick ones. This may be in the 10-K which I haven't gotten through. You guys had pension income of, I think, $24 million. Can you give us what the pro forma number was for pension either income or expense in 2016?

Let me see if the accounting team has an actual pension number, or Mike.

Brett, I think the full-year 2016 number, the guidance that we provided, which would be an actual number, not a pro forma number, was a $17 million expense. Is that what you're looking for?

$17 million or $18 million of expense.

That's 16?

$17 million of expense in 2016. And that's on an actual basis so that would include 42%.

Actual expense, I got $19.4 million, or thereabouts.

Yes, so just under $20 million on an actual basis for last year. We did not prepare a pro forma pension number. At the beginning of every year you're going to have pension accounting adjustments, things like how the assets performed, what happened with liabilities, what happened with discount rates, and so forth. We have not done a pro forma that we can provide you.

But, just to be clear, that's flipping from a, call it, roughly $20 million expense last year to a $24 million income in 2017. Do I have that right?

Yes. And discount rates in the UK dropped significantly. And we also have essentially some, what I would call, purchase accounting related to MillerCoors. And between the two of those pieces we flipped from a bit of pension expense last year to an estimated $24 million of pension income this year.

Okay. And sorry if you guys gave this, I might have missed it. Did you guys give a global corporate expense guidance number on the call?

No, we did not give it on the earlier call. We have a lot of moving parts in our organization right now, partly related to integration. And when we have a firmer view on how those all interplay, then we anticipate giving you some, call it, corporate G&A guidance closer to the middle of the year.

Okay. Can you give us what Canada volumes were in the quarter excluding the addition of the Miller brands?

Not specifically. What I can tell you is before we -- you can take the Canada volume that we gave you, and when we owned the Miller brands before, that would have been a year and a half or a little more ago, those Miller brands, primarily Miller Genuine Draft, represented approximately mid single-digits percent of our Canada volume.

Okay. One other on inventories in the US, I just want to make sure we have this clear. Even if I give you guys credit for the leap day, I get that inventories were, call it, 450,000 barrels higher at the end of 2016 versus 2015, given differentials in growth. Are you guys saying you and your distributors are comfortable with that level of inventory and thus STRs and [SGLEs] should grow or decline in line with one another this year? Or should we expect some drawdown in inventories this year?

Taking that forward, yes, if you run the numbers on STRs versus STWs, what you'll see is you'd probably back into a number somewhat similar to what you're talking about. And what we found was, through a bit of extra inventory, only a couple of days, Gavin said, two to three days, it helped us improve our year end in January service levels, reduced out-of-stock, and particularly given the reduction in inventory that we've done over the last several years, we think actually that may be a good level for us.

Now, it is a bit higher than a year ago, call it at the end of 2015, but at least at this point that looks like a good place to operate around year end. Having said that, as we move through 2017, we may decide that we need to work a little bit small changes in our distributor inventory strategy. And we'll work with our distributors if anything needs to change but at this point we're comfortable with the way we ended the year.

Last one. Can you just remind us -- I was going back through some old things -- the temporary distribution cost reduction in Canada in the first quarter of last year, was that an overlap issue or is that a difficult comp as we go to first quarter.

Wow, test my memory -- a year ago. As I recall, that was not a timing issue between early 2015 and late 2014. So I guess you'd say, yes, that, in isolation, would be a comparison item. Probably not the only one but that would be one.

Okay. Thanks, Dave.

Thanks, Brett. One thing, Brett, I was going to add, if you look at the pension amortization improvement that changed in the pro formas, actually that should give us a MillerCoors tailwind of about $30 million, $10 million in each of the first three quarters of 2017, because that pension change started, as we talked about earlier, in the fourth quarter of 2016.

The next question comes from Stephen Powers of UBS. Please go ahead.

Hello. Can you guys just walk through the benefits you received just from a tax perspective in the fourth quarter? I'm just trying to normalize or back out the special items in the underlying tax rate, just to bring it back up to a more normal level. What were the big benefits?

Tax benefits in the fourth quarter, on a pro forma basis, the tax rates --?

In the fourth quarter in our results we did have, if you will, an accounting event related to a valuation allowance in Canada. And that valuation allowance did have a favorable impact to the fourth quarter ETR.

We also had a change in our tax rates, as well.

Yes, good point. That was Steve Mack adding. We had a reduction in tax rate, specifically in Croatia, which helped as well.

Okay. So that benefit carries forward, the other one's discrete -- is that fair?

That's a fair way to look at it, barring additional changes in tax rates or valuation allowances, yes. Other stuff could change, yes.

Okay. And then just going back to the conversation you were having with Mark earlier in terms of the go forward, I get the move to EBITDA, I think that makes sense. I realize all we're talking about is non cash. Where do you want consensus to go in terms of how we all model this? It seems like from an EPS perspective is your intention for us to still maintain the transaction-adjusted cash EPS number? Or should we abandon that and go to just the more normalized one now that you've taken the direction from the SEC?

We'll adapt to the regulatory environment as needed. From our standpoint we see transaction-adjusted EPS as a good representation or a good metric to help people value our Company. That's why a number of investors and analysts asked us to provide it in the first place. But it will be up to you whether you continue to add those three numbers together to calculate it yourself. That's what we plan on providing for at least the foreseeable future unless there's some change in the regulatory environment.

Okay. But to be clear, all else equal -- and, granted, there's a lot of moving parts -- that transaction-adjusted number would come down by $30 million tax-affected given the amortization flow-through from Canada?

Canada's a headwind of $30 million, yes.

So that would impact GAAP, adjusted GAAP, and the transaction-adjusted, all, in pennies, the same way.

It would. And so would the reduction in pension expense. That would be about $30 million in the first three quarters that's in the US, as well.

Steve, just to add, in terms of how the components of getting to transaction-adjusted EPS, we would not make that adjustment for the incremental brand amortization in Canada as well as the pension adjustment. So, the two adjustments that we would provide on a quarterly basis for the script and possibly on our earnings or on our IR website would be the transaction-related amortization for this particular transaction, as well as the cash tax benefits -- right, Dave?

That's true. Those other factors, Steve, you mentioned would affect the base EPS number, however.

Correct. Okay. I think we're all aligned. Okay. Thank you very much.

The next question can comes from Bryan Spillane of Bank of America. Please go ahead.

Good afternoon everyone. I think I just want to try to wrap up some of or summarize some of the questions that have been asked previously in terms of just trying to think about a bridge from where we landed pro forma in 2016 to the items we should consider for 2017. Maybe as a starting point, if I look at the pro forma adjusted operating income for 2016, it would be $1.615 billion, right? -- if I just add back the charges and gains? And that's just off the schedule in the pro formas.

And if that's the starting point, I'm going to add -- again, assuming there's not going to be a change to the provision -- back $50 million of the tax provision that you hit that you took in Europe. I'm going to take out $30 million of incremental Canadian amortization. On the pensions, I've got the swing from a $17 million expense to a $24 million income, so that's roughly $40 million. And then, again, thinking about bridging from the pro forma, is the $30 million tailwind on MillerCoors pension, is that in addition to that $40 million swing in pension or is that inclusive of it?

It is inclusive.

Okay. So, we've got a $40 million pension swing. And then I've got to then take from that -- those are some of the more mechanical things -- and then from there I would just take $175 million of cost savings, whatever I think is going to happen with FX, whatever I think underlying growth is, whatever I would think you're going to spend back, the savings, and then something for COGS inflation. Those are the big moving parts in terms of getting from pro forma 2016 operating income to what we would forecast for 2017. Am I missing something in that bridge?

Based on all of the publicly available information, no, I think those are the pieces that I would focus on. Obviously, things can happen but those feel like the big buckets.

Okay. And then foreign exchange, I don't know if you mentioned it on the call, but in our model it looks pretty benign right now based on spot rates, but had you said anything about just how you think FX currency translation affects things this year?

Broadly speaking, at least the current rates, it didn't look like a big difference on a year-over-year basis. We'll see how it plays out. In other words, we've seen puts and takes. Certain currencies in Europe versus Canadian dollar and so forth, but just didn't look like a major factor based on the current rates.

Okay. And then one other factor as I'm thinking about just bridging to a 2017 forecast, again, off of the pro forma in 2016 is international. I got a little bit confused in the answer you gave to Mark Swartzberg. If I'm looking a the pro forma, is there Miller international profits for November and December in that pro forma, so we're adding 10 months incrementally to it, or is it not in at all?

There are two and a half months of Miller global brands performance results included in the 2016 pro forma.

But it's not in the pro forma first three quarters, it's not in at all?

Correct, nothing.

Okay. So, that would be another, whether we thought you'd make money or lose money, factor we'd be having to plug in to bridge from 2016 to 2017.

Yes, that is a good additional add. I would say at this point we're still in the process of setting up supply chains and route to market and all that sort of thing for some significant markets for Miller global brands. It's a bit, some resolution that we need in that area, as well, in the month moving forward.

Okay. And then interest expense was a little higher than I thought it was going to be. Is there anything that's floating or variable within, as we're thinking about interest expense for 2017 and forward?

Hi, it's Mike, it's the Treasurer. Obviously we have our term loans which are floating. So, if you looked at our current mix, approximately 20% of our outstanding debt is the floating rate variety. Clearly you can see what LIBOR rates have done and that's flowing through in any adjustments or projections that we're making for interest expense for 2017.

The primary reason why we put a plus/minus 5% around there is our mix will potentially shift over the course of the year. We don't know exactly what Fed actions are going to be taken and we show currency in there, as well.

All right, that's helpful. And, Dave, D&A to use for 2017, should we use the pro forma D&A? Or is there something else you can point to that we should use for depreciation and amortization in 2017?

The best number we have is pro forma because it would include the adjustments going forward, as well.

Okay. I think that was all that I had. I don't know if there's anything else you wanted to add.

Ashley's mentioning that the Molson brands incremental is not in the pro forma. So that would be for Q4, included in Q4 but not in the first three quarters of 2016. So, just you'd want to adjust for that, as well, in addition to what's in the (inaudible).

I'm sorry, say that again. Oh, right -- you've only got, $7 million in the fourth quarter?

Yes, exactly. We just have a small amount. Molson brand moving into definite lives in the fourth quarter of 2016.

Yes. That's the $30 million incremental headwind as part of that bridge.

Yes, that's right.

All right. Thanks, guys.

The next question comes from Vivian Azer of Cowen. These go ahead.

Hi. Good afternoon, guys. A little bit of a change of pace. I really appreciate all the very smart questions that have preceded me. I actually wanted to circle back to my question on the first call. I didn't really understand how the change in the distributor funding, how that doesn't change how you guys realize price mix. Because when I think back to the second quarter and the 60, 70 basis points of net revenue per hectoliter growth that you guys posted, when we were together there was a lot of pushback, benchmarking that relative to ABI who I believe did a 1-8.

You guys cited three drivers for the disconnect in a period where there was greater level of price intensity or promotional intensity. One was obviously your portfolio mix. Number two was your reliance on the third-party manufacturing, the contract manufacturing, that you do. And the third that I recall Mark calling out was that ABI was on a 50/50 split and you guys were 70/30. So, how does that not drive a change in terms of price mix realization going forward when you guys move to 50/50?

That's a good question, Vivien. There haven't been very many times but there have been some times in the past when we've mentioned this difference in approach to price discounting. on that call you're referencing, we mentioned that was one factor. I must say it was a relatively small one. But it really depends on how much front-line pricing we're taking versus how much discounting back off of that we're doing, and that can have an effect on, call it, profit sharing between us and distributors.

But moving from the 70/30 discounting model to 50/50, which is more of the industry standard, will give us an opportunity to align our interest with our distributors. And we are making those distributors whole from a revenue standpoint right out of the gates. So, there's no issue there.

And then, really, beyond that, what impact 50/50 versus 70/30 would have will depend completely on how what the balance is between front-line pricing and discounting. And we don't know what that's going to look like in the future. But what we do know is that our interests are going to be more aligned than ever with our distributors on what promotions we're going to be running and when and how deep and on which brands.

Okay. Fair enough. And as I think about the shape of 2017, in particular around investment spending and brand reinvigoration initiatives, how should we look at that, given that you're doing marketing on Miller High Life, packaging upgrades on Keystone, newer enhanced media on Coors? How should we think about the flow of that?

I think the way to think about that is we've got a US business that spends nearly $1 billion a year on marketing and sales spending and that's even without marketing and sales overhead. So, we have a high level of spend already. What we have said very consistently is what's important to our brands is the quality of spending, not the amount, not the sheer tonnage, so-to-speak. On the economy brands in particular, the firming of our economy portfolio and improving those trends relative to a declining segment, but not really trying to necessarily grow them on an absolute basis, those kinds of improvements in our economy brands will not be driven by any significant change in advertising spending.

Now, we are improving the advertising behind Miller High Life, and we already were spending advertising dollars behind that brand; redoing the packaging on Keystone brands. Milwaukee's Best, for example, is a relatively low-cost, mostly one-time expense. So, that should not be a driver of a change in our marketing and sales spend of any significance.

Okay. That's fair. Last one from me is on Canada. What gives us comfort that this market gets better? Mark was pretty darn clear about driving better execution, better results in both the US and Canada. And when I hear you guys say that softness is in the Western part of the country, and, forgive me, but I look at marijuana incidents across Canada, and British Columbia is by far the highest rate of incidents in the country. I'm still having a hard time understanding why that business gets better in light of a transition to a fully adult use market.

Okay, fair question. As we look across all of our markets globally, right now the evidence around marijuana impact on beer and actually other alcohol beverages is not really clear. We see pluses. We see minuses. And the time frames, at least for broad-based legalization, of marijuana look relatively short. So, we don't know exactly how that's going to play out. I would call the data inconclusive at this point.

What we do know is that we can drive improved trends behind our brands through better execution. You've seen that in the US where in the last two to three years we've improved advertising, not by spending a bunch more money but by actually improving advertising and retail promotions, improving our customer scores, being number one on the Tamarron survey in the US. And, okay, the results show share gains for several quarters running in our two largest brands. So, some good results there.

In Canada, we've made a lot of great progress in the last two to three years improving the cost structure, improving our portfolio. We've got a very strong above premium portfolio now in Canada with the Heineken brands and the FEMSA brands as well as some of our own brands, like Mad Jack, in the above premium. And we've done a good job of improving the advertising behind brands like Coors Light and Molson Canadian in a relatively recent time frame. And that, plus the extra effort and focus we're putting around execution with around Fred Landtmeters and our new Head of Sales, Sergey Yeskov, it is about execution. It's about up and down the street improving how we operate as a business in Canada. And if we can do that, we'll be making the best of the situation regardless of what happens with adjacencies.

That's fair. Thank you so much.

(Operator Instructions)

The next question comes from Robert Ottenstein of Evercore. Please go ahead.

Hi, Dave. I'm not sure if you answered this, but in terms of the marketing investment, are you suggesting on an absolute dollar basis that for 2017 will be roughly flat?

Since we don't give guidance on marketing and sales spend on a forward basis -- sometimes we give a little bit of texture but we did not this time -- no, I would not say that specifically. What I would say is our -- we get the question a lot -- you talk about achieving significant synergies and then some may need to be reinvested back in the business. Is that driven by a major change in marketing and sales spending? And our answer to that question is we already have a very high level and an appropriate level of marketing and sales spend, really, in all of our geographies. And it is about the quality, not the quantity as far as driving results in our portfolio.

Got it. Can you give us any sense in terms of just quarter by quarter modeling, more second quarter, third quarter, anything like that, just in terms of timing of the marketing investments?

Not specifically because, again, we don't give guidance. But let me at least give one thing for you. Last year, you may have noticed a significant difference in the quarterly phasing of marketing spend in the US business. Fourth quarter of 2015 we heavied up on brands like Coors Light and Miller Lite. We had a lot better ad creative to run, and particularly against some high-quality football properties in that time frame.

When we rolled into 2016, you may have noticed a more smooth, or whatever, spending or phasing of our marketing spending. It's because we had what we thought was very high quality investable Coors Light, in particular, advertising throughout 2016. So, it was a more even flow through the year in 2016 than we saw in the year before.

And for 2017 you're not giving us any indication.

Not specifically, no. But we are rolling into 2016 with what we think are very high quality advertising campaigns behind all of our major brands, as well as some top-drawer retail promotions, as well.

Great. And can you give us any sense of timing on the $175 million cost take-out in 2017? Is that any particular quarter or first half, second half?

No. The actual timing -- well, okay, the short answer is no, we're not going to give specific quarterly timing. What I would say is that these types of cost savings programs, it really depends on the type of cost savings program, when it tends to be realized within the year, but I can't give you specifics.

Great. And then you had an interesting comment on the call this morning on the $275 million or greater than $275 million cash tax benefit that you no longer think it's going to be straightined. It's going to be more front-end loaded in the first two years. Is it still 15 years? And in terms of order of magnitude, are we talking more like $300 million in the first two years, or $400 million? Just order of magnitude in terms of how that may differ.

I'm glad you asked that because we obviously talked about that a lot over the last -- over a year, close to a year and a half. Let me take it in two pieces. But first the umbrella. We still have a high confidence level, as high as ever, about achieving an average of more than $275 million of cash tax benefits per year for the first 15 years following the completion of the transaction. So, 15 years has not changed.

What has changed is the straightline amortization of the intangibles -- actually that has not changed. In the 15-year time frame we still have the bulk of the step-up in value of the assets for the other 58% of MillerCoors, still is primarily intangible. And those are amortized on a straightline basis over 15 years.

However, what we've found as we've gotten into the purchase accounting around the transaction and some of the tax planning associated with it is that the depreciation of hard assets -- property, plant and equipment -- actually is more accelerated than we expected. And so that piece of it, which is only about 10% of the total step-up in value, is relatively accelerated within that 15-year time period. So, essentially you're seeing an acceleration of depreciation but the amortization is exactly what we talked about. And that depreciation is primarily in the first half of that 15-year time frame, first several years if you will.

And have you given or considered a new NPV for the total value? Presumably if it's accelerated the NPV has gone up. Is that fair?

From the standpoint of value of cash tax benefits we applied what I would call a very conservative discount rate in the first place. And, yes, I suppose accelerating it would tend to make that even more attractive.

Okay. Can you just repeat the assumptions, just remind us of those assumptions for the NPV value?

Sure. If you did the math on the step-up, you'd get to roughly 8% or so discount rate. The cash tax benefits are predicated or based on a 35% federal statutory tax rate in the US. I know there's been some discussion nationally about that going forward. Don't know what will happen, but just wanted to emphasize that.

Okay. And the NPV, just as a reminder, was $2.4 billion?

Thank you. The actual number that we calculated was $2.4 billion on a gross amount of $3.75 billion roughly. In other words, if you take $275 million times 15 you get around $3.75 billion of gross investment.

And while we're on this topic and you have your team with you today, if the federal tax rate goes from 35% to 20%, would it be fair to say that your effective tax rate would go down substantially but probably not too much impact on your cash tax rate, given that the value of the $275 million a year declines? Is that the right way to look at that? Or do I have that wrong?

I think you're thinking about it in the right way, Robert. Because approximately 70% of our pro forma pretax earnings come from the US which does have one of the highest statutory tax rates in the world, 35% on a federal level, that's a major driver of our effective tax rate. And if that were to drop by 15 percentage points, that, all else being equal -- and it's hard to tell whether or not all else would be equal -- that could have a large impact on our effective tax rate as a Company. And that's the book side.

The cash tax rate, you're right, the way you're thinking about it I think is correct in that, while in all likelihood -- again, everything else being held equal -- would have some additional cash tax benefit from it. The cash tax benefit of the reduction in the tax rate would be less than the effective or book tax rate reduction because of the cash tax benefits related to the transaction, which are based on a 35% tax rate. So, lower tax rate, but there could be some diminution or reduction in the value of the cash tax benefits. But you'd pick up some additional benefit, though, on the cash taxes on the rest of our income.

There's a lot of moving parts in tax reform, because the implementation of tax reform isn't likely just to be a simple reduction in the US rates. There's all sorts of --.

Is there any --?

There's discussions on how you're going to treat interest expense. There's discussions on how you're going to treat CapEx. So, how the cash tax impact is going to be at this point in time is probably too early to tell.

Right. But we've gotten this question a number of times so I just want to get it out there. If the effective rate goes down to 20%, is there or is there not any provision that's being discussed that would impact the validity of that $275 million tax shield, take it away? My understanding is that it's just less effective because you have less taxes to go against but the whole concept and the idea of it remains valid. Is that right?

Yes, that's correct, Robert. Right, it would just be a reduction in the tax rate. This is how it works -- you step up the value of the intangible assets and the tangible assets to fair value, and then you amortize or depreciate the value of those assets over 15 years or, in the case of PP&E, less. And the cash tax benefit of that amortization or depreciation is dependent on the tax rate that's applied to it.

If the tax rate's lower you could have less cash tax benefit. But again, you'd be also reducing the cash tax rate, if you will, on all the rest of our income too. I think Mike Rumley makes a good point, though. There are so many different puts and takes and so much speculation around this, who knows what's going to happen. But we will adapt and pay close attention to what's going on because it could have significant effect on us as a Company, including our tax.

But the most likely scenario, forgetting the interest deduction which may or may not be retroactive, it seems the most likely scenario is a significant impact on the effective rate and a modest impact on the cash tax rate. Is that fair?

The relative impact, the way you're thinking about it I think is right, that piece in isolation. But we'll leave the speculation -- not the speculation, but the outcome to others.

Understood. Thank you very much. Appreciate it.

And we have a follow-up from Judy Hong of Goldman Sachs. Please go ahead.

Thank you. Thanks for taking a follow-up. Just a few quick ones, again. So, the $1.1 billion free cash flow guidance, I just want to clarify that includes the incremental CapEx related to the cost synergy capture. So take half of the $350 million and then you would just front load that for 2017 and 2018. Does it also include the non-CapEx portion of the cost synergy, the cost related to capturing the synergy?

Yes, you're thinking about it if the right way. But also it is good to think about the cash operating expense that would also be associated with capturing synergies.

But the $1.1 billion would include that, right? That includes both the incremental CapEx plus the operating expense to capture the synergies.

From a cash perspective, the cash operating expense actually is not included in the $1.1 billion.

Okay. So just the CapEx portion, incremental CapEx portion.

Yes, just the CapEx piece. We adjust underlying -- there may be a few operating expenses that don't qualify for underlying treatment, in which case those would not be stripped out. But most of them probably would be.

And then the pension contribution, the $100 million to $120 million is all in. So, that includes the remaining 58% of the MillerCoors pension that's incremental plus the GBP24 million of pension contribution in GB. So, that's all-in pension contribution.

It is all-in, yes, that's right. There's nothing excluded.

Okay. And then I don't know if you gave us this number, I may have missed it, but the run rate D&A we should be using in 2017 to just get to the comparable EBITDA number every quarter, every year, what is it?

Pro forma plus some incremental amortization for the Molson brands in Canada would be about an incremental $30 million in 2017 that was not included in the pro formas.

So, take the $851 million and then add back the $30 million of Canada?

Whatever the pro formas are. The only other thing we've talked about is the incremental $30 million of amortization in Canada.

Judy, just so we're clear, for our full-year 2015 basis, if you look at the pro formas, let's say the $851 million you were pointing to, you would have to also adjust for the, let's say, $115.6 million for the other D&A. So, for underlying basis the D&A you should be using would be closer to the low $700 millions range.

That sounds about right. Some of the pro forma numbers -- it depends on whether you've got any accelerated depreciation or that sort of thing included. Just want to make sure you adjust for that.

Okay. Got it. So $851 million minus the $116 million plus the $30 million, roughly.

Sounds about right.

Okay. Last question. On the pro forma volume you gave us on page 21, you gave the total worldwide beer volume pro forma of 95.959 million hectoliters.

Yes.

That compares do the 94 million you gave us before and the difference is Miller international?

Miller international would not be in 2015. You'd have a little bit in the fourth quarter of 2016. But we did make a number of adjustments to our volume policy, I guess you'd say. So, you should see higher financial volume in the most recent numbers versus what we reported a year ago. You'll see the addition of contract brewing and wholesaler volume. And then we back those out to actually calculate worldwide beer volume.

(inaudible) change the volume number as opposed to just moving from one bucket of financial versus others?

I didn't hear the first part of the question, Judy.

I'm just wondering what changed from the 94 million to the 95.959 million. And you're saying the adjustment to volume wasn't just moving from one bucket to another, it actually raised your total worldwide beer volume.

The short answer is a change in the policy in how we calculate worldwide beer volume. The numbers that we put in the release this morning are comparable from year to year. But there are differences. For example, in some geographies we were using sales to retail. Now we're using sales to wholesale as a build-up of the financial volume. So, sorting out all those details, I can do it offline with you, but it's not primarily about the Miller international brand.

Okay. Now everything is on the sales to wholesale basis?

No, not entirely, no. You can get all the changes but not specific numbers attached to them in the footnote to that table which goes through some of the changes we made. But, yes, that's something I'd probably prefer to do offline as far as specifically -- here's a change in this business unit, here's a change in another business unit, and so forth.

Okay. We can maybe follow up. Okay. Thanks.

The last question today will come from Vivian Azer, a follow-up, from Cowen. Please go ahead.

I'm actually all set. Thank you so much.

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

Okay. Great. Thanks, Andrew. And thanks, everybody, for your interest in Molson Coors and for joining us today. If you have any additional questions that we did not cover during our time today, please call Kevin Kim or me on our direct lines or at the main number here at Molson Coors, which is 303-927-beer or 927-2337. Thank you again and have a great day.

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