Molson Coors Beverage Co (TAP) 2017 Q1 法說會逐字稿

Good day, and welcome to the Molson Coors Brewing Company First Quarter 2017 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.

Thanks, Phil, and good morning, everyone. On behalf of Molson Coors Brewing Company, thank you for taking time to join us today for our first quarter 2017 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 units CEOs earlier today. We will use a 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-U. S. GAAP measures that may be discussed during the call, and from time to time by our executives in discussing the company's 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 U.S. GAAP results. Also, unless otherwise indicated, all financial results we discuss are versus the comparable prior year period and in U.S. dollars.

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

Regarding quarterly results, as Mark Hunter mentioned on our regular earnings call this morning, first quarter underlying earnings were lower than last year, primarily due to higher brand amortization expense and weaker January and February volumes in the U.S. this year, and because we were cycling strong earnings compared to this from last year.

First quarter underlying after-tax income in 2016, for example, increased more than 35% from the year before on a pro forma basis, partly due to the benefit of inventory dynamics and the timing of Easter holidays. We have also made incremental investment this year to strengthen our global business and capabilities. Despite the softer start for this year, however, the volume trends have improved since January and February. We are making great progress on our first-choice agenda in each of our businesses, and we are confident of delivering our full year business plans.

With the completion of the MillerCoors transaction late last year, and the changes we are making to align and enhance our organization, 2017 will be a transition year as we build a larger, stronger company. Consistent with this, our results today reflect increased investments in the building blocks that will drive top line growth, cost savings, profit growth, cash generation, debt pay down and total shareholders returns in the years ahead.

Now as you modeled -- model out your -- sorry, model out our 2017 results and outlook, I wanted to summarize some of the most important changes that we made power or align our financial reporting globally. First, as we discussed on our fourth quarter 2016 earnings call, our financial volume now includes contract brewing and wholesaler non-owned brand volumes. We have historical results consistent with this approach on our IR page -- on the IR page of our website this morning for your reference.

Second, starting in January 2017, European royalty and export volume transferred from MCI to Europe and Puerto Rico transferred from MillerCoors to MCI. Third, we are speaking to underlying EBITDA as the primary performance measure for our business unit results now, unlike previously we spoke to pretax -- underlying pretax earnings, and we also speak to EBITDA on a consolidated basis. This historical information is also posted on our IR website. Fourth, in addition to the Miller brands globally -- sorry, the addition of the Miller brands globally results in brand amortization expense of about $16 million pretax annually, which creates a headwind on our MCI, Europe and Canada businesses. Fifth, in Canada, changing the Molson brands to definite lives in the fourth quarter of 2016 adds about $10 million of amortization expense per quarter through the third quarter of 2017. Sixth, in MCI, we expect the termination of the Modelo contract to Japan at the end of June this year will hinder our performance in this profitable market. We are exploring ways to mitigate the impact of the loss of this contract. And also, MCI will require higher upfront investments as we move away from transitional service arrangements for the Miller markets in the balance of the year.

Last, our underlying corporate G&A expense is expected to be about $50 million higher this year versus last year due to global investments that Mark mentioned and described on the earnings call earlier today.

So with that as a bit of an overview, I now like to open it up for your questions. Over to you, Phil.

(Operator Instructions) Our first question comes from Judy Hong of Goldman Sachs.

So I think people are still struggling to kind of reconcile sort of the underlying trends in Q1 versus kind of the discrete items that you talked about. And it sounds like really comparison issue in MillerCoors from a profitability standpoint and the investments that you made of funds. So -- but I think at the same time, they're still trying to get some color on the phasing of cost saves and the investment, so were there any cost savings realized in Q1?

Short answer is yes. When it comes to sort of thinking up some of those things, I guess, first thing would be on cost saves. When it comes specifically to transaction-related cost savings, we're just 6 months into this process and those are expected to be delivered primarily next year and the following year. Most of the cost savings that we're achieving now are actually preexisting cost savings programs. For example, closure of Eden brewery flow-through and some of the -- some other cost savings that we've had really throughout the business that -- some of which were initiated years ago. So I think just getting started on the synergies is an important point. As far as thinking up some of the other numbers, one thing that might be helpful is as we look at the cost savings, we've talked about $550 million number over 3 years. The synergies, as I mentioned, are back-end loaded in the 3-year time period and other cost savings front-end loaded in that 3-year time period. We've talked about our cost savings target this year more than $175 million that is predominantly preexisting cost savings programs. We would -- we did achieve cost savings in the first quarter, but I would also add that the first quarter is the smallest quarter of the year in most of our businesses and, actually, a significant portion of our cost savings are at least somewhat linked to the amount of sales and the amount of volume and, call it, peak season. So an off-season quarter is not generally where you achieve most of your cost savings, particularly when it's in supply chain.

We've talked about the cost to capture on those -- or the cost to capture those $550 million of synergies, and those are essentially one-time, either operating costs or capital spending, and that totals $350 million, and split about half OpEx and half CapEx. Nearly all, or perhaps it'll end up being all, of the OpEx will flow through special or other non-core items. The CapEx, obviously, is not on the P&L. But then, there are also some additional costs related to capturing synergies that are really ongoing. So there are changes in the organization. There are things like world-class supply chain, where we have begun to essentially rework our supply chain and make it more efficient. Costs in that area are a cost to capture synergies over time, but they are ongoing. And so we have the $550 million is after we've netted -- or is a netting of those costs, which are only moderately -- they're relatively modest set of costs here. This is not a -- in other words, if you look at the $550 million as a net number relative to those things like world-class supply chain, the gross number would only be moderately higher than that, that's not a big difference, but we wanted to make you aware of it. And we did have some of those costs in the first quarter. We did not -- we're not going to break those out separately, but that's an important thing to consider. We also have some additional costs in the first quarter related to the new growth initiatives that, Mark, I think, described in quite a bit of detail earlier. So there's one other thing that I wanted to mention as far as thinking things up. If you look at the U.S. performance in the first quarter and you look at the STWs and STRs, essentially, there's a 2 percentage point difference in those. Gavin talked about the -- talked about how inventory -- inventories were a bit lower in the first quarter and that 2% difference between STRs and STWs essentially reflects that inventory adjustment in the first quarter. Well, that 2 percentage point alone is -- could explain all of the decrease in U.S. EBITDA in the first quarter.

Okay. So if I could follow-up on one of your comments. So the cost to capture the synergies are -- that happen in Q1. I know you're not disclosing exactly how much that was, but would you say that, that number was actually greater than whatever cost savings you captured in Q1?

I don't think I'll get that level -- to that level of specificity, but I would say the cost to capture was a relatively modest number in the first quarter. And the first quarter -- go ahead.

The cost to capture, I meant by these incremental investments that are flowing through your P&L, not the one-time items.

Yes, that's what I meant.

Okay, okay. Because if I look at the schedule 10 or whatever that you said that backs out the one-timers, it seemed like there was really not that much of the one-timers that you backed up, which basically means that there wasn't much of the activities that took place in Q1, specifically, to capture those savings that you would be backing up?

Yes, actually, if I remember right, the one-time acquisition and integration costs we backed out was $19 million -- $19.0 million in that regard. So, that's a substantial number in a small quarter.

Okay. And that would equate to sort of half of the $175 million -- sorry, $350 million that would be captured as one-time operating expenses?

Those are OpEx costs to capture, yes. And the $350 million, of course, is over 3 years, but I think you know that.

Yes, yes, all right. And then the Miller International piece. So I guess, when the deal closed, you gave some financials around the volume and revenue contribution as well as EBITDA. I think that equated to something like 3.5% of contribution. Is it fair to just take those numbers and assume that those are kind of what came in Q1 and your overall volume was up 2.1%, but really your underlying volume would have been down more like 1.5%, if you X out the acquisition benefit?

I think, given the seasonality of the business, for example, the Miller global markets are all over the world, call it, roughly 70 countries. In a lot of those countries, this is off-season. So what I would say is, yes, we did get a nice influx, if you will, of volume in terms of royalty, export and otherwise. Volume in our -- in various of our segments. Trying to sort of straight line that off of the guidance, we did before and applied to the first quarter, probably wouldn't get you to a good number, but we did get a nice influx of volume there. As far as earnings, I'd say that those are -- that's work in progress when it comes to -- sorry, driven by setting up revs to market, we're working with some transitional service arrangements in various markets, so that's one of those factors that's really in a state of transition at this point.

Got it. Okay. And then just lastly on free cash flow, so $1.1 billion now you're saying -- or plus/minus 10% now you're saying it's at the high end, so closer to $1.2 billion plus. And that's all related to the cash tax benefit going up or is there anything else that's moving that number?

Yes. So we -- that's a good question. It was primarily driven by the change in cash tax benefit, the acceleration of those within the 15-year period. There are a lot of moving parts in our free cash flow calculation, so I don't want to say that, that was the only factor, but that was definitely the largest factor involved. And the -- I think one important to think about there -- one important point to think about that is how that acceleration of the cash tax benefits happened. Essentially, what you have is the biggest portion of the step-up in value and the, call it, depreciation or amortization for tax around the transaction is amortization. And that's $9 billion or $10 billion that we're amortizing straight line over 15 years, that's all that's allowed under U.S. tax law.

And so you guys should be able to calculate that reasonably precisely that will be just moderately below the $275 million average for the combination -- average $275 million per year of cash tax benefits that we've talked about for that 15-year period. That $275 million includes amortization and depreciation though. So if you know the amortization piece, it's just moderately lower than $275 million, and you can actually run an estimate of that based on the $9 billion or $10 billion and apply a U.S. tax rate. In our pro formas, for example, we use 38% tax rate, so you can use that. Then what you're left with is the depreciation and this is what changed. This is why the cash tax benefits have accelerated. Essentially, as we dug into purchase accounting, our accounting teams and our tax teams found that the depreciation -- almost all of the depreciation of $1 billion to $2 billion worth of fixed assets is going to happen in the first half of that 15-year time frame such that you have an acceleration of the depreciation for tax related to the transaction. What that did was, for example, in 2017, you saw an increase from, not the average of $275 million of cash tax benefits, but actually $390 million in, call it, the first year out of the blocks.

Now this -- the timing or the flow of these cash tax benefits is reasonably smooth, so you already know about the amortization straight line. The depreciation, it's all in the first half of that time frame, call it, 7 or 8 years and the bulk of it's in the first 3 to 4 years. And so to a question on the earlier call, is that $390 million going to drop off to $275 million next year? The answer is, not in any that we can tell. Actually, the first 3 to 4 years of cash tax benefit should be well above the $275 million, and probably in the near term, look more like the $390 million than the $275 million. So I just want to make sure you get a sense of that. These things don't tend to move around all that dramatically. Now it is subject to some additional purchase accounting, which will -- the big decisions and heavy lifting around that have already been done, but we'll see whether or not there are any, call it, adjustments that need to be made going forward. And obviously, you have to take into account some of the discussion in Washington around U.S. tax reform and how that could affect any of this, but we don't know, we're not going to speculate what that might look like, but it's something to be mindful of. So anyway, that's a little more texture around the cash tax benefit. Did that help?

Yes.

Our next question comes from Laurent Grandet from Crédit Suisse.

A quick question on the operating expenses even though you just, I mean, add up a piece of information here. So what I ask during the call, okay, so in first quarter, you've got about $25 million additional spend here, which moved kind of the SG&A spend from $26.8 million to $28 million. So really for a company that is in cost-cutting and saving or synergies, it doesn't -- I mean, the direction that we were thinking you'd be doing. So should we think of this as a one-off, you just mentioned $19 million in the quarter? Should we think of this as a pattern for the year or for the next 2 years, this year and next year? I really would like to understand when, basically, I mean, operating expense will start to decline (inaudible)?

Sure. So the $25 million of spend, I assume, that's just looking at the corporate G&A, if you will. Because if you're talking about interest or any of the other line items, then that's going to be a much -- it's a much different answer. I think the actual G&A expense in corporate is not as great as that $25 million, and we'll see if Ashley would come up with what the total corporate MG&A increase was on an underlying basis and then we'll speak to that. So when you're talking about the $19 million, that actually is one-time OpEx that has been excluded from our underlying result. And so that would -- unless there is a piece of that -- unless your $25 million is not an underlying number, then none of that would be in that.

So another -- and let me give you the broader view. So, yes, we are in -- as a company, we're in a cost-cutting mode, absolutely. We intend to achieve our cost-cutting and synergies targets, including related to the transaction. At the same time, however, we are making our company larger, stronger and more capable. And so that does include some additional costs, including some of the areas that Mark talked about earlier.

Okay. So what do you mean by -- I mean, I'm sorry, I mean, just a clarification here in terms of front-loaded additional expense? I mean, should we think about the first 2 years or should we think about this year or should we think about the first half of this year?

Yes, okay. So the expenses like the $19 million that we're take out of underlying, we've excluded those from underlying because we believe that those are either not ongoing in the business or they're non-core or what have you. So there's not an ongoing feel to those expenses and so those are short-term, as they should be. And then the other spending, for example, to set up our centers of excellence, in some cases, moving expenses from business units to the corporate center here, investments not related to cost-cutting, but related to growth for our new growth initiative, Kandy Anand's group, those are ongoing. And you have seen some incremental costs in those areas in the first quarter.

Our next question comes from Vivien Azer from Cowen.

So Dave, I don't know whether you're going to be able to answer this or not, given your answer, I think, to Judy's question earlier. But if I look at the Canada business, can you give us a sense of what the underlying volumes did, like ex the Miller brands?

Let's see, ex the Miller brands. Not specifically because that is part of our -- it's now part of our business. We're going to carve the Miller brands out, specifically. But I would say that, actually, we had good performances in brands like Banquet and some of -- a lot of our Above Premium brands. We're making progress on Molson Canadian, although that brand and Coors Light, they were down in the quarter, but we did see share gains. You could tell it was a challenging quarter from an industry standpoint. And -- yes, so not a specific number, no, but I would say, we feel good about our Canada performance in the quarter. And we're going to continue to make progress on those 2 big brands that I mentioned.

(Operator Instructions) Our next question comes from Brett Cooper from Consumer Edge Research.

Question for you. I guess, first one on MCI. When do we get an update -- you guys are guaranteed $70 million in EBITDA for that business, is that right?

Yes, on a trailing 12-month basis, that is the purchase price protection that we have.

And has that been finalized?

No, that's work-in-progress.

And then -- I mean, am I wrong to think that you should be getting in calendar '17, you guys should get $70 million in EBITDA for that business? Or are some of these transition agreements going to eat into that $70 million and then you can get back to that at some point in the future, how do we think about that?

Yes, I think it's most useful to think about this in 2 different ways. 1, you have the purchase price protection of $70 million that's trailing 12-month EBITDA, that's using -- or it's, how do you say, derived with or driven by the business and market setup that SABMiller had in each of those 17 markets during that time frame. So you can use -- let's use South Africa as an example. So they had a large business in South Africa that they -- where they produced and sold the Miller brand and various of the Miller brands. And they had like 80% or 90% -- call it, north of 80% share of the South African beer market. And so big business to run those Miller brands through, including infrastructure both at the front-end of the business and in operation. And so that gives you a -- how do you say, the advantages of scale. When we take the brands on, we don't have that structure in a place like South Africa. So we are in the process of -- yes, in some cases operating under TSAs -- in a number of cases, we have new partners, new routes to market, new supply chain and so forth. And in some of those markets, we're not going to have the same scale that SAB had. That's a different economic model from what they had in a place like South Africa. In some other markets like Canada and U.K., yes, we have great infrastructure and we'll -- we can run the Miller brands through our existing business and that's great; we have good scale. But in most -- the vast majority of the markets, we do not have a great deal of scale. And so the second way to look at the Miller global brands is in the context of how we're going to manage those brands going forward and that's being developed -- partially, it's been developed, but it's also being developed as we go forward. And it's likely to look quite a bit different from what SABMiller had, in -- at least in a lot of those markets.

Yes, and Brett the only thing I would add to Dave's comments is, when you look at the MCI business, you know this, obviously, but we typically look at asset-light model in most of those markets. So that's one thing to consider.

Okay. Again, I mean -- so you don't want to answer the question whether you can -- whether in '17, you're going to have $70 million in profits on those businesses?

Right. What we can say is that in some of those markets, we'll have less scale, and in most of those markets, we're going to have a very different setup from that they had. And -- but, no, we're not going to give like a forecast of what Miller global brand's profit looks like.

Okay. Then -- so another component to just sort of trying to make sure I'm thinking about this right. I mean, if you guys opt -- and this is a point, too, I think, what Judy was talking about, but if you up free cash flow to 1.2, a good chunk of that was the benefit on cash tax. I mean, tell us, at least from my seat, right, that your expectations or belief in underlying operation is unchanged. I think you've said that. And if I then think about the first quarter had a weaker January and February, I guess relative to your plan, am I reading it right that you guys have confidence you can make up for that weaker component of it and still deliver, basically, the operations that you guys anticipated when you were going to the planning cycle at the end of last year?

Yes. I'd say broadly speaking, you're thinking about that in the right way. We didn't say specifically that we're -- that nothing else changed in the free cash flow build up. I know you didn't say that anyway. I think the main thing is the cash tax benefits were the primary driver of that change. Lots of other things could change between now and year-end and either way, as Mark said, we are very confident of our operating plan for this year. And that includes, I guess, you'd say dealing with soft January, February and inventories at wholesale in the U.S. a bit lower, call it, a negative impact there this year versus a positive impact last year. And -- but we said we would shift to consumption in the U.S. business. And so that means that if, in fact, we say on that strategy to the end of the year, then the inventory challenges in the first quarter would even out by the year-end.

(Operator Instructions) Our next question comes from Bryan Spillane with Bank of America.

Couple of questions. First, I don't know if you gave this or not, but depreciation and amortization for the full year came in a little bit higher -- or lower in the first quarter than what we were modeling. Can you give us some sense of what we should be using for depreciation and amortization?

Let's see. Yes, I would direct you to the pro formas. If you take out accelerated depreciation and amortization charges related to the changes in the business, on other words, underlying, you should end up with something not too far off from the pro forma -- or let's just say, the best proxy I can think of is the -- what's in the pro formas, which was $735.6 million -- $735.8 million, Kevin corrects me, which is fine. $735.8 million of underlying depreciation and amortization in the 2016 pro formas. Now we are making some changes in our business as we go forward here, and so there will -- and our CapEx run rate is higher this year than, call it, the longer-term pro forma run rate that we've had. And so putting additional assets and service could increase depreciation, for example, moderately as we move forward, but we'll see that how that plays out. That's it for the pro forma.

But as a starting point using the $735.8 million from last year is kind of the best we can go with it in terms of a starting point for this year.

Yes, I think -- that's the best proxy you have, as I mentioned, subject to some incremental assets being layered on in some of the businesses because of the higher CapEx.

Okay. And then I guess, you've highlighted EBITDA here in this press release and -- which is great. Are -- is it going -- is EBITDA going to be included in management incentives going forward? Or is it still going to be -- I think it's pretax income and free cash flow are kind of the 2 sort of profit type and cash flow measures you're using.

Yes. Not at this point. Not this year, I guess, is what I would say. We look at that every year, and we may decide to make a change in the future. At this point, right, we have -- what I would call it, key elements very much akin to or close to EBITDA in free cash flow, pretax profit, those types of things.

Okay. And then I know there has been a lot of questions around savings and expenses. And so I just -- at a very high level total company level, if you took cost savings in the quarter and netted them against these incremental investments that are in the underlying EBITDA, was the net of that, like, positive or negative?

Yes. I don't think -- no, I don't think. We don't want to be -- we don't want to get to quite that level of granularity, particularly in a small quarter. What I would say is that we are very confident of our $175 million -- more than $175 million cost savings for the year. I would say the cost to capture against that, that was not carved out of underlying results is a relatively modest number.

I guess, what I was after is, it's the other expenses like for a [coffee's] organization or some of the other things you've talked about. I think that's the piece that from the outside looking in that we all are having a probably more difficult time dimensionalizing.

Yes, and that's fair. So what you saw was in the -- so Kandy Anand's organization is in corporate. If I recall the numbers correctly, you saw about a $15 million increase in corporate. His organization is a relatively small organization, so it's not -- it's by no means the bulk of that number. Let's call it a fraction of that -- small fraction, okay? Yes, so I wouldn't overplay Kandy.

Okay. And then last one for me. I think, just in trying to calculate what the volume, the leveraging cost in the first quarter in the U.S., I was coming up with, like, between $20 million and $25 million. And all I did was simply take your COGS per hectoliter in the quarter was up, I think, like 1.9%, then the net pieces were some inflation, some savings and then the deleverage. So if you just assume -- I just assumed that the deleverage was kind of netted you close to that 2% number and then just did the math off of what the shipments where? Is that a fair way to calculate it or is there something else I'm missing there?

That's okay. I like to keep things simple, though. And the simplest way I can think about that sort of thing is volume was down 4% in the first quarter. And if you multiply that times the gross margin, I think it was $45 per hectoliter, it gets you around $30 million, maybe just south of there. And so unless we're making significant adjustments in the business, which is tough to do in a short time period, plus we're trying to get the growth by 2019 anyway, that's a proxy for the impact of lower volume, which would include some -- which would include the pure volume impact, volume deleverage related to fixed costs across the supply chain could increase that slightly and maybe put you slightly over $30 million, but we don't give a specific number around that one.

Okay. But that sort of -- if you plug, you take out the volume deleveraging, I think is a bigger cost than I think people were sort of recognizing, as they were kind of examining the U.S. this morning?

Absolutely. Yes, just the inventory piece alone was around $16 million. And then if you add, okay, not inventory related just lower FTRs, that's another, call it, $15 million or $16 million there as I've just sort of outlined. I think you will...

Our next question comes from Pablo Zuanic from SIG.

So can I just ask, Dave, on that question just to follow-up. So my question is very simple. In this quarter, you had -- for the year, you're guiding for $175 million of cost savings. We are assuming that about 1/4 of that was realized this quarter or less based on seasonality, but we didn't see the EBITDA growth. So I'm going to ask the same question in a different way, I guess is that, in the first quarter, the gross savings did not flow to the bottom line and EBITDA was flat to down. Why should we assume that, that algorithm will change in the next few quarters? Can you just maybe high-level answer to that question?

Yes -- no, absolutely. So we're dealing with challenging comps, particularly in the U.S. and in Canada from last year, much stronger performance last year related to things like, in the U.S. we had cost of goods down, Kevin, it was at 5%, I think?

Yes.

And this -- first quarter this year, cost of goods is up. Last year, we were benefiting from, for example, noticeably lower Midwest premium, the cost of storing aluminum before it's delivered to us and some other things. So I guess point 1 would be comps. Point 2 would be seasonality. And so our cost savings are in some measure, as I mentioned earlier, some measure linked to sales, production, particularly in supply chain and so there's a seasonality component to them. And then third, I'd say particularly from a synergies standpoint, we're just getting started. We're 6 months in to the transaction and the capture of synergies. Some of these synergies programs will take more than a year to get off -- not off the ground, to get completely underway. And so that's why we talk about the synergies being delivered, primarily, in 2018 and 2019. Those are the headlines, so I guess, that I'd provide at this point.

Pablo, just another -- Pablo, if you may keep in mind, so if you think about, kind of, we talked about the bad debt provision in Europe of about $11 million. In Canada, we've highlighted since the Q4 call the incremental brand amortization, and I think Mark spoke to that also. And then the other bucket there that was a headwind during the quarter was this $8 million hedge loss in corporate associated with the Europe bonds that we issued. So those are a few things to keep in mind and that obviously does impact pretax.

Okay. That's useful. Just following up on those 3 points, comp, seasonality and synergies. So -- okay, the comps were tough, but as the year progresses, your cost picture is not necessarily improving, right? You have these pressures from oil, from petrol, and you're not changing your cost savings guidance -- I mean, your corporate -- cost (inaudible) to increase guidance. So are we still going to be facing that, that's a concern. And related to that, you have this issue that your pricing is not being enough to offset the higher cost, right? So I'm going to have -- I'm going to ask 3 questions related to your 3 points. On the comps front, I'm not so sure if I can get comfortable, because the year doesn't necessarily get better in terms of your cost outlook, in terms of the headwinds that you faced unless your pricing gets better. In terms of seasonality, I understand, so what that means is that I shouldn't take the $175 million and divide it by 4, but a lot of your other headwinds are also larger as you got more volumes. And then #3, on the argument that synergies are not kicking in yet.

At the end of the day, you gave us guidance for $550 million over 3 years. That's an average of $183 million per annum, whereas synergies or cost savings from before, the guidance for this year is not too far from the $183 million, it's $175 million, right? So I know you're trying to help us here and trying to answer the question, but I think a big question out there with a lot of people, it's -- this quarter scared a lot of people because the thesis that MillerCoors would be unable to transfer this cost savings that are seemingly conservative will not be able to transfer to the bottom line, that thesis was proven right today in the first quarter, right? And we didn't see any of it. And here we are trying to get comfort that over the next few quarters, things will improve from that point of view, but again on the comps, seasonality and synergy argument, to be very honest, I can't see very comfortable that things will get better.

Yes, that's fair. Thanks, Pablo. When I think about comps, essentially, the way I think about them is on a year-over-year basis. And so the -- for example, the Midwest premium right now looks a lot more the way it looked last October than it did last February. And so that comp actually does get easier. And assuming nothing changes between now and later in the year, which is it could, but that comp actually would get easier unless something changes. And, yes, some commodities may go up as the year goes on. We don't know what's going to happen with those, but we do know that we will face difficult comps in the first quarter and, I can -- as I say, we'll see how it plays out.

From a seasonality standpoint -- actually, seasonality does matter, not just from a cost saving standpoint, but from a margin standpoint. If you look at our both gross and operating margins in a big business like the U.S. and compare those margins in the first quarter with, say, the second or third quarter, you'll notice a big difference. And that's -- that is seasonality. We have more scale, so to speak, in peak seasons and so that affects how much money we can earn, of course, but also how much money we can save, particularly in areas like supply chain and procurement. So think about how much more -- well, you don't know, specifically, but anyway I'll just tell you, we buy a lot more materials to drive the business in the second -- related to peak season than we do in an off-season time like January, February. So those -- I think, actually, seasonality will be a factor. And some of these synergies and other cost savings, they do take some time to get off the ground. We need to renegotiate procurement contracts; some of those need to expire, some -- maybe some don't, but that needs to be done. And then world-class supply chain is just getting off the ground. So we had the expenses right now related to that program getting off the ground, but we have relatively few, if any, savings at this point related to that program specifically.

And then on the pricing environment, you're right. Your point is well taken that we're getting a bit less price in the first quarter than we got last year. We were right around 0.5% of net price in the first quarter. And then there was a partial offset for mix. I think Gavin's covered the mix piece where we don't have a tailwind from Above Premium brands right now, but we have a lot of programs to work on that going forward. But basically, if we just look at pricing across the category, it looks -- it doesn't look significantly different from a year ago. And I'd say, we feel good about it. We don't know how it will play out in peak season, that's obviously important. But at least, at this point, we feel comfortable with where the pricing environment is in the U.S. business.

Right, and that's good. I'll ask you a very few quick follow-ups and maybe I could do an offline also, but -- so If I'm looking -- I'm trying to look at normalized P&L statements by division, right? So today, the U.S. EBITDA by division, which is a great piece of information, so if I take your EBITDA and the D&A that you're showing us there, will I get to an underlying normalized EBIT for each division or would that be wrong? I mean, so a straight answer would be yes, but am I missing something there?

Yes, you would because there is -- the key is to use underlying depreciation and amortization. That's ...

Is it not what you're giving us?

Well, if you look at the pro forma statements and just look at the depreciation and amortization line, you -- there will be some accelerated depreciation in that line related to closing the Eden brewery. If you look a little ways, 2 or 3 lines below that, you'll see adjustments to get to EBITDA or something like that, that's a number you'd want to subtract from the depreciation and amortization line above that to get to an underlying D&A number. So we can walk you through that offline, if that's not making any sense.

All right. The last one, the last one. And again, every company will be different in the way, the choices they're making in terms of disclosure and I respect that. But I think it would help a lot of people, particularly me, that if you could give us all the pieces to build an underlying pro forma P&L in terms of, what was the gross margin. Because the gross profit I'm looking at for MillerCoors is nowhere I would call it an underlying gross profit, right? And the same thing for EBIT because it's very hard to judge. I mean, today I think you were penalizing partly, because your deal-related amortization went up, so your EBIT was distorted, right? Of course, at EBITDA level that doesn't matter. But if you could give us another line full P&L by division, that would help and even for the company has a whole. A lot of companies do that, I mean, Mondelez did that yesterday, for example, in the press release. But, again, each company will be different, I understand that. And the second point I would make is that, it would be nice if you could give us the trailing numbers in terms of the pro formas per se the second quarter of '16, third and fourth because we -- at least we can project from that, right? I mean, I'm still trying to figure out why the D&A number, which again you just say is not underlying, why the D&A number for MillerCoors went so much down from 1Q '16 to 1Q '17, right? We are all in the same boat here, right? We're just trying to get to the bottom of things, understand the company better. And right now, we just don't have all the pieces, but that -- those things would (inaudible).

Okay. Yes, thanks, Pablo. Thanks for the help on the buildup. We'll see what we can do with that. On the trailing pro forma for the other quarters of 2016, those are on our website right now. So you have pro forma consolidated numbers, full set of numbers there. And obviously, we can answer any questions offline you have about that. We also have a pro forma set of income statements for MillerCoors on the website right now that you can see as well along with the complete set of notes to help explain those. But as I say, we're happy to help with any additional questions about that.

Even I mean -- please don't misinterpret me, but maybe spending time on putting that pro forma ex items P&L for all of us would be, perhaps, just as useful or even more than holding this 1-hour conference call. But that's just food for thought.

Our next question comes from Jeff Kanter from UBS O'Connor.

I know that you said earlier -- and this kind of piggybacks on what Pablo just said. But you said, "I like to keep things simple." So I'm not on the sell side anymore and I've known you for a long time, but this conference call, the prior one, the press release, is anything but simple. If anything, all 3 have destroyed shareholder value, given where your stock is and what not. And I mean, it's down 20% since the deal was approved or whatever and it's just been a horrific performer, so all 3 of your goals to keep it simple are failing. Your -- and so my question is, do you care how you communicate with The Street? Because your company is failing miserably at it.

Yes, okay. Well, I appreciate the frank feedback. I've been through a lot of transactions, big and small, especially a lot of big ones. And yes, it does tend to come with some complexity around things like pro formas and comparatives and that sort of things. And so usually, the first year or so after transaction, it is tougher to gain clarity in that type of situation, and so I can feel that with you. So do we care? Yes, we absolutely do. We've got a hard-working team here that's -- and I don't mean Investor Relations. I mean, it goes across financing, including in all the business units and across the globe. And, yes, we're trying to make it as simple and transparent as we can. But there definitely is more noise now than you would have seen without the biggest transaction in the company's history. And we're going to stay at it. We're going to continue to drive for simplicity, and things that will help you guys, how do you say, judge where we're going and how we get there.

Yes, because when I looked at the release and some of your shareholders -- this morning, like, when we looked at the release, right, the whole angst going into the quarter was, oh, the top line, the top line and pot smoking and all this other stuff. And every -- the consumption data, which kind of matters, was better than expected. The top line was better than expected. Nobody really knew what happened with the EBITDA, but true to the matter is nobody knows how to model your company anyway. But it's just -- it's almost like all 3 events, press release and the 2 calls, snatch defeat from the jaws of victory. And I think if you -- if Mark works to tighten this press release, tighten the conference call, get rid of this conference call, which does nothing but confuse people even more, I think it would be well served and where so people could focus on what's right rather than getting caught in the weeds. Just my 2 cents.

Okay. Again, I appreciate the feedback, Jeff. Thank you.

Our next question comes from Laurent Grandet from Crédit Suisse.

So I mean, for a -- not a big deal, but as you mention it 2 or 3 times. I mean, I just wanted to have some confirmation here. You mention that in Japan, you will lose the Modelo franchise from this July. How big will that be? I mean, probably not very material, but just wanted confirmation because you mentioned it 2 or 3 times.

Yes, no -- and the change in the business so we wanted to highlight that for you. The Modelo contract in Japan, we're not going to put a precise number on it, but I would say that, that contract was important to our Asia business. It is of importance to the MCI business, although less so now, now that MCI is nearly twice as big with Miller brands. But it's -- but that is a profitable market for us within the MCI segment and so it's something to be aware of. From a consolidated standpoint, it's relatively minor.

(Operator Instructions) Our next question comes from Bryan Spillane from Bank of America.

Dave, quick one. On the -- in the first quarter last year, in MillerCoors, the COGS per hectoliter were down a lot. I think if I calculated it right off the pro formas, it was down like 5% or 6%. So again, this gets into the first quarter and people -- kind of how EBITDA came in versus expectations. Can you just remind us -- and maybe you said this before. There has been so much said so far. Why were the COGS per hectoliter so favorable in MillerCoors in the first quarter last year versus the first quarter the year before?

Yes, primarily -- the primary driver that I can recall was a moderate increase in distributor inventories, but bigger than that was actually on the cost of goods line, we're benefiting from a number of commodity reductions, if you like. 1, Midwest premium that I mentioned earlier is not very hedge-able and so tends to, how do you say, be more volatile. And that had come down around a year before that. And so we were still benefiting from the flow-through of that lower Midwest premium. Aluminum was lower, heating oil was lower, think about oil prices around that time. So a variety of commodities is the biggest answer and then a bit of inventory, call it, volume leverage around inventory that we benefited from last year and saw the opposite of this year.

Okay. And I mean, I guess I can do the calculations, but the math in terms of order of magnitude, those comparisons normalize, I guess, right, beginning in the second quarter?

Looking at -- let's see -- actually, do you have the MillerCoors growth and earnings Q2 through Q4 of last year on an underlying basis? We'll get you that, a progression of the MillerCoors earnings last year, but the answer is yes. And it happened -- it was in -- that was true in Canada as well.

Okay. Because that's -- I mean, I think, when you think -- again, we've spent a lot of time talking about what happened in the first quarter, but I think we all mismodeled the first quarter because there was an outsized gross profit benefit that you had in the U.S. in the first quarter because the COGS were unusually low. And that piece of it, if I'm just looking at the math here, and that's like $50 million or $60 million.

It rolled over.

Yes. So it's just like -- yes, so just starting with the wrong base to begin with is -- you take that and the volume deleveraging, and that's the story, that's why it's so different and it has less to do with how much savings flow-through versus what was invested.

Yes, I think that's the right way to think about it, Bryan. I mean, we are in an off-season quarter, which means that relatively modest changes that might not even move the needle or wouldn't move it much in, say, the second or third quarter, drive some percentage change differences that are a little more eye-popping.

Bryan, the only other thing I would add is, if you look at, obviously, our biggest business unit in the U.S. and COGS per hectoliter guidance, we did reiterate that to your point, right, so as we did with most of our other business units, so that's just one thing to keep in mind, especially with Dave's point about the seasonality of our business.

Right. It's a phasing thing. It's, you're going to -- in the end, if you look at it over the full year, it's going to look a lot more normal. But this quarter had a steep sort of climb over the prior year.

Yes. We had a steep hill decline from a comps standpoint, absolutely.

(Operator Instructions)

Okay. I think we're in a good place, Phil. Thank you.

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

Great. Thank you, Phil. And in closing, I'd like to thank all of you 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 927-2334. Thank you, again, and have a great day.

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