Molson Coors Beverage Co (TAP) 2017 Q3 法說會逐字稿

Welcome to the Molson Coors Brewing Company Third Quarter 2017 Earnings Conference Call.

Before we begin, I will paraphrase the company's safe harbor language. Some of the discussion today may include forward-looking statements. Actual results could differ materially from what the company projects today, so please refer to its most recent 10-K and 10-Q filings for a more complete description of factors that could affect these projections.

The company does 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 were made.

Regarding any non-U. S. GAAP measures that may be discussed during the call and from time to time by the company's executives in discussing the company's performance, please visit the company's 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 the company discusses are versus the comparable prior year period and in U.S. dollars, and the consolidated and U.S. segment results are presented versus pro forma results a year ago, which reflects the acquisition of MillerCoors as if it -- and the related financing had occurred on January 1, 2016.

Following the prepared remarks this morning, management will take your questions. (Operator Instructions)

Now, I would like to turn the call over to Mark Hunter, President and CEO of Molson Coors. Please go ahead.

Thank you, Rachel, and hello and welcome, everybody, to the Molson Coors earnings call, and many thanks for joining us today. With me on the call this morning from Molson Coors, we have Tracey Joubert, our Global CFO; Gavin Hattersley, the CEO of our U.S. business; Fred Landtmeters, our Canada CEO; Simon Cox, the CEO of our Europe business; Stewart Glendinning, our international CEO; Sam Walker, our Global Chief Legal and Corporate Affairs officer; Brian Tabolt, our Global Controller; and Dave Dunnewald, our Global VP of Investor Relations.

Today, Tracey and I will take you through highlights of our third quarter and year-to-date results along with some perspective regarding the balance of 2017. Consistent with last quarter, we're also offering slides that show both reported and constant currency results for both the quarter and year-to-date. You can view and follow along with these slides using the link on the Investor Relations page of our website.

At Molson Coors Brewing Company, we will deliver growth and long-term shareholder value through our First Choice for consumer and customer approach, an expanded International business, the delivery of integration savings, ongoing cost savings, a more efficient global organization and our relentless drive for financial performance.

Our focus is to deliver both top and bottom line growth. Year-to-date, we've delivered worldwide brand volume growth, driven by our global priority brands. And on a constant currency basis, NSR per hectoliter is up 2.4% as our portfolio premiumization has driven pricing and mix benefits around the globe. To this point, in terms of progress, Above Premium brand volumes increased 19% in the quarter and 20% for the year. And with this strong growth, our Above Premium brands now represent 18% of our total volumes.

At the same time, we've improved our EBITDA margins this year while investing in the business, with underlying EBITDA margins up by nearly 40 basis points year-to-date. Our 2017 underlying free cash flow generation has been strong. We've begun delevering our balance sheet, and we're generating cost savings ahead of our plan, which has helped to mitigate higher-than-anticipated input cost inflation.

A question I get when I talk with investors is how we prioritize our top and bottom line goals. And the management team and our board address this important point as follows: We first will drive margin expansion and bottom line growth by delivering cost savings, ensuring efficient brand investments and paying down debt. Second, we will drive an improved top line through our Commercial Excellence approach, which provides the most sustainable source of profit growth over the medium to long term. This is our order of priority.

Additionally, we will maintain our profit focus and our continued drive for total shareholder return through PACC, or Profit After Capital Charge, which is our capital allocation tool.

So one year on from the close of the MillerCoors transaction, the bigger, better and stronger Molson Coors is driving our cohesive and distinctive First Choice commercial agenda, an expanded International business, a more efficient global organization and a relentless focus on financial performance, all underpinned by highly engaged employees who are playing to win. And with that as a backdrop, I'll now turn it over to Tracey to give financial highlights.

Thank you, Mark, and hello, everybody. So let's review our consolidated financial headlines for the third quarter versus our pro forma results a year ago, except for cash flow, which is reported on a year-to-date actual basis.

Our net sales decreased 2.1% due to lower financial bargains, partially offset by positive global pricing, sales mix, royalty volume and foreign currency movements. Our net sales in constant currency declined 3%. Our global net sales per hectoliter increased 2.9% and 1.9% in constant currency due to higher global pricing and sales mix.

Global net sales -- sorry, our worldwide total brand volume increased 0.6%, driven by strong growth in Europe and international, partially as a result of adding the Miller global brands business and also from growth in some of our core brands. Our global priority brand volume increased 2.4%.

Our financial volume decreased 4.8%, driven by the U.S. and Canada, which were adversely impacted by reductions in wholesaler inventories, contract brewing and brand volumes. These volume declines were partially offset by growth in both Europe and international due to added Miller international brand volumes as well as positive organic brand performance.

U.S. net income increased 12.1%, and underlying non-GAAP net income decreased 3.5%. Our underlying results were primarily attributable to lower financial volume, higher brand amortization expense, increased G&A cost and a higher effective tax rate, partially offset by positive pricing and mix, cost savings and lower interest expense.

Our underlying EBITDA decreased 1.2% on a constant currency basis. Our underlying free cash flow compared to actual results last year increased nearly 80%, driven by the addition of the other 58% of MillerCoors cash flow as well as lower cash tax paid for taxes, which were partially offset by higher cash paid for interest and capital expenditures.

We ended the quarter with net debt of $11.3 billion, and we made an additional discretionary contribution of $200 million to our U.S. defined benefit pension plan in the third quarter as part of our deleveraging goal, bringing our total cash contributions to approximately $310 million for the year. We remain committed to investment grade debt ratings and reducing our leverage ratio to about 4x on a rating agency basis by the end of 2018.

Year-to-date, we improved underlying EBITDA by 1.8% in constant currency, with strong NSR per hectoliter growth, and total worldwide brand volume up 1.6%.

And now I'd like to share some regional highlights from the third quarter. In the U.S., we grew underlying EBITDA 0.8% on a pro forma basis in the quarter resulting from increased domestic NSR per hectoliter driven by higher net pricing as well as cost savings and lower MG&A expenses, partially offset by the impact of lower shipment volumes. Overall, U.S. STRs declined 2.9% for the quarter on a trading day adjusted basis, in part because the U.S. volume environment remains challenging.

Our domestic sales to wholesalers declined 7.2% with nearly 2/3 of the gap between STRs and STWs, driven by a reduction in distributed inventories and the rest due to one less trading day this quarter. Distributed inventories were reduced in the third quarter following higher than planned levels at the end of the second quarter.

Our year-to-date U.S. performance was similar to the third quarter with a 2.2% increase in underlying EBITDA, 0.8% higher NSR per hectoliter and a 2.3% decline in STR volumes. Despite the difficult backdrop, we made progress this quarter against our portfolio strategy as Mark will share with you shortly.

Our Canada underlying EBITDA declined 0.5% in the quarter, driven by the impact of lower domestic volume, partially offset by positive pricing and foreign currency impacts. On a constant currency basis, underlying EBITDA declined 5.7% during the quarter. We drove strong NSR per hectoliter growth with a combination of price and mix benefits, but industry volume trends remain difficult declining approximately 2%.

Our market share grew slightly driven by the return of the Miller brands along with the strong above growth -- Above Premium growth from Coors Banquet and Belgian Moon. Our third quarter Canada performance represents a trend improvement compared to earlier in the year as year-to-date underlying EBITDA declined 10.7% in constant currency. Year-to-date NSR per hectoliter grew 2.6% in local currency, reflecting positive net pricing and mix.

Europe continued to produce strong results this quarter with underlying EBITDA at 13.6%, driven by higher volume, positive sales mix and pricing, increased net pension benefit and favorable foreign currency. Constant currency EBITDA increased 10.4% in the quarter. Brand volume increased 9.6% in the quarter, primarily due to the addition of the Miller brands and the transfer of royalty and export brand volumes across Europe from our International business. Even without this incremental volume, we continue to achieve growth from our offering of core and Above Premium brands, which helped drive net sales per hectoliter growth during the quarter.

Our year-to-date underlying EBITDA, NSR per hectoliter and brand volumes in Europe grew strongly. Underlying EBITDA for our International business was a loss of $1 million in the quarter, which represented improvement from a year ago. Although the impact of hurricanes presented a significant challenge in several of our high-margin Caribbean markets, Coors Light continued to drive strong volume growth across Latin America, and we have moved off the Miller transition service agreements and established platforms for growth with local partners.

Our brand volume increased 64.7% in the quarter, and our third quarter net sales nearly doubled, driven by this higher volume along with positive pricing, while reported net sales per hectoliter declined about 11.6% due to sales mix changes.

Our year-to-date underlying EBITDA for International improved from a loss of $4.9 million last year to income of $3.1 million this year, with brand volumes up 56.3% and reported NSR per hectoliter down 1.3%. Please see our earnings release for a detailed review of our business unit financial results in the third quarter as well as our latest outlook and guidance targets.

This quarter, we have the following updates regarding our guidance metrics. For the medium term, we continue to expect underlying EBITDA margins to increase an annual average of 30 to 60 basis points over the next 3 to 4 years. For 2017, we anticipate margins being in this range. Also, it is important to remember the cash tax benefits associated with the MillerCoors transaction, which were $109 million this quarter and are expected to be more than $400 million for the full year of 2017.

We now anticipate total capital spending of approximately $650 million, plus or minus 5%, which is updated from $750 million, plus or minus 10%. Our underlying corporate net interest expense of approximately $360 million, plus or minus 5%, is updated from consolidated net interest of $370 million, plus or minus 10%. We have tightened our underlying effective tax rate range to 26% to 28% from 24% to 28% previously. We now expect our cost of goods sold per hectoliter for the International business to increase at a low single-digit rate versus a mid-single-digit rate decrease previously stated.

We have raised our outlook for pension income to approximately $27 million, up from $24 million. And although we are not changing our 2017 cost savings guidance of more than $175 million, we are pleased that these savings are coming in ahead of our original plan because it is helping to cover inflation, particularly related to aluminum, which is higher than our expectations from earlier this year. And at this point, I'll turn it back over to Mark.

Thanks, Tracey. I began this call by outlining our plans to drive total shareholder returns. And while the business environment, especially in North America, remains more challenging than anticipated, we believe our ambition to be First Choice for consumers and customers will generate sustainable returns to our shareholders.

Our regional business priorities are clear and consistent. In the U.S., we remain focused on gaining segment share in premium, growth in Above Premium and stabilizing our Below Premium brand share. As you can see in the slide, this drives our Consumer Excellence approach.

Let me give you some proof points on our progress. In Premium, Miller Lite is well on track to become the #3 beer brand in America. Strong momentum for Coors Banquet continues, as we expect 2017 to mark the 11th consecutive year of annual growth for this iconic American brand. In 2018, Coors Light will relentlessly sharpen and strengthen its message as the world's most refreshing beer, including some exciting packaging changes. Both Miller Lite and Coors Light are powerhouse brands. They gained segment share again this quarter, a trend that's expanded for more than 2.5 years.

In Above Premium, Leinenkugel Summer Shandy had a record-breaking year with volumes up low double digits. We plan to build on this success next year through a number of packaging and Shandy innovations. Meanwhile, the Blue Moon family is widening its lead as a world's #1 craft brand, and Blue Moon Belgian White will continue its growth momentum with new SKUs and a focus on our legendary on-premise orange ritual, which is driving strong velocity and incremental tap handles across the U.S.A.

As per Nielsen, Blue Moon and Leine's families accounted for 22% of the total craft beer volume growth year-to-date in the U.S. In regional craft, Terrapin, Hop Valley, Revolver, Colorado Native and Saint Archer are all growing strong double-digit rates, well ahead of the overall craft segment as we continue to integrate and expand geographically.

And Peroni is growing and accelerating this year as we've enhanced the geographic reach of this aspirational import brand through improved market prioritization. In Below Premium, our new packaging types, price points and commercial focus are delivering a significant trend improvement in this segment as per our strategy.

We're also very excited about our brand additions in the U.S. As of October 1, we assumed the rights to import market and distribute Sol, which further strengthens our Above Premium portfolio. And over the next few months, we'll begin to retail new high potential brands with Arnold Palmer Spiked designed to take share in the valuable alcoholic tea segment and Two Hats, which is positioned to recruit new legal drinking age consumers into beer.

We're confident we have the right plans to achieve growth and we'll continue to execute with relentless focus while looking for further build, borrow and buy opportunities for additional Above Premium scale.

Our customers tell us our First Choice approach to sales and supply chain execution is working with 14 supplier awards so far in 2017. We also continued to roll out our Building with Beer tool to new channels and customers, and these are the building blocks for long-term profitable growth for our U.S. business unit.

In Canada, our Consumer Excellence teams will remain focused on gaining segment share in Premium, accelerating our growth in Above Premium and stabilizing our Below Premium brand share. Improving the performance of our 2 biggest brands, Coors Light and Molson Canadian, remains the #1 priority, and we're currently executing upweighted volume driving activities with consumers.

Our Above Premium performance led by Coors Banquet, MGD, Belgian Moon and the Heineken portfolio is accelerating with exciting further lift and shift brand additions planned in 2018. And we're executing a plan to simplify our Below Premium portfolio with the launch of Miller High Life from late in the fourth quarter.

Since the introduction of Coors Banquet just a few years ago, exceptional consumer demand has propelled this brand at double-digit growth rates to become the most successful new product introduction in the past 5 years in Canada.

Our performance across the portfolio will also be driven by customer excellence as we lift and shift best practice sales tools from other regions. As an example, we've started to see improved volume performance from the early retail adopters of the Building with Beer program.

Our supply chain team continues to prioritize efforts on building and planning for the new British Columbia and Greater Montréal breweries. This work will create efficiency and flexibility in our supply chain which we expect to unlock material savings in the medium to long term.

In Europe, consumer and customer excellence is driving the top and bottom line. We'll continue to drive a balanced portfolio approach as we strengthen our national mainstream brands and continue to premiumize by driving our craft portfolio, Staropramen, Coors Light and cider brands along with the addition of the Miller brands and the royalty and export business in the region.

In July, we completed the purchase of Birradamare, a small Italian craft brewery, which provides us another opportunity in Italy and select export markets to build on our strong Above Premium performance. So far this year, our balanced portfolio approach across Europe has resulted in maintaining our share of segment in our mainstream brands as well as generating double-digit growth in Above Premium. One driver of successful portfolio premiumization in the quarter and the last few years is Coors Light's ongoing focus on ice cold Rocky Mountain Refreshment, which is resonating powerfully with consumers. And Coors Light has grown to become our second largest brand in the U.K.

Above Premium Staropramen outside of the Czech Republic is also growing at strong double-digit rates across Europe, such that the total Staropramen family now exceeds 2.5 million hectoliters of annual volume in the region.

Furthermore, in what remains a fiercely competitive environment in the U.K., our First Choice customer approach earned us the #1 ranking in the Advantage survey of multiple grocers for the second consecutive year.

For International business, we'll continue to leverage our strong global brands, partnerships and commercial capabilities around the world and focus our brands on the most attractive segments to grow Coors Light, the Miller brands and Blue Moon.

Our customer teams have successfully rolled out a common segmentation analysis in all of our markets. Coors Light is growing at strong double-digit rates in Latin America. And within a year of acquiring the Miller brands, we are currently launching the original white can packaging for Miller Lite to more than 20 markets globally.

The scaled up International business requires upfront investments to grow our brands. And as indicated earlier this year, our MG&A will be higher this year, funded by step change in gross profit as we lay the foundations for accelerating top and bottom line growth from 2018 onwards. We expect our gross profit to be at the lower end of the 2017 guidance range of $90 million, plus or minus 10%, principally due to the impact of the hurricanes in the Caribbean.

We expect this impact of approximately $3 million to $5 million to flow through to the bottom line this year as we continue to invest in our brands. Clearly, for 2018, we have plans to offset these negative impacts and continue to drive top line growth and improved profit performance from our International business.

So in reviewing our performance in the third quarter as well as year-to-date, we're building traction against our strategic priorities as indicated by delivering growth in global brand volume, net sales per hectoliter and underlying EBITDA margin.

In the fourth quarter this year, we anticipate less significant distributor inventory dynamics in the U.S. than we saw in the third quarter along with a favorable comparison in Europe as we cycle a $50 million indirect tax provision in the fourth quarter of last year. Despite challenging market conditions in North America, we remain on track to deliver our 2017 business and financial plans, exceed our original cost savings targets and cash flow goals as well as maintaining our investment grade debt ratings.

One year on from the close of the MillerCoors transaction, the bigger, better and stronger Molson Coors is driving our cohesive First Choice commercial agenda, an expanded International business, a more efficient global organization and a relentless focus on financial performance, all underpinned by highly engaged employees who are playing to win.

Now before we start the Q&A portion of the call, just a quick comment. As usual, our prepared remarks and slides will be on our website for your reference within a couple of hours this afternoon. Dave Dunnewald and Kevin Kim will be available via telephone or email to assist with any additional questions you may have regarding our quarterly results.

At this point, Rachel, we'd like to open it up for questions, please.

(Operator Instructions) The first question comes from Andrea Teixeira with JPMorgan.

I wanted to explore more the free cash flow guidance. I know you capped it, but some of the components were actually more favorable so I was wondering if -- what led you to be more conservative. And if that's related to the commodity pressures that you saw throughout the beginning, I mean, the first 9 months, so if you can help us, like, reconcile, again the free cash flow guidance.

Andrea, thanks for your question. I'll let Tracey pick up the specifics. I would just remind you that we've already increased the free cash flow guidance as we've come through this year. So Tracey, do you want to just talk about the components and the cash flow performance?

Yes. Andrea, so free cash flow has got many factors that drive us and so for that reason, we do talk to our free cash flow guidance in the sort of plus and minus ranges. So this quarter, we have reduced our CapEx guidance to $650 million, plus or minus 5%. So we've reduced it and also tightened the range. This is partially due to identifying ways to achieve our cost savings and synergies while spending or investing less in our breweries and in our [RT] space as we continue with our integration plan.

So other than that reduction in CapEx, there are other factors that obviously go into free cash flow. Earnings is one of them, but also a big driver is our working capital. So for example, December is a big collections month. And depending on the timing of our collections, that will play into our free cash flow. So we have got a strong track record of delivering our free cash flow. Year-to-date, our free cash flow delivery has been very strong, which has actually helped us to make an incremental $200 million contribution to our pension plan. So we're very comfortable with our free cash flow guidance, and we are confident that we will be within that range.

The next question comes from Laurent Grandet with Credit Suisse.

There was a large difference between sales to retailers and sales to wholesalers in the U.S. this quarter. So are you back to a right level of inventory at wholesaler level? Or are you low and we should expect, I mean, a bump in Q4? And in general, what in your view, is the right level of wholesaler inventory level in the most days?

Yes. So let me ask Gavin to pick that up against a backdrop of what's an ongoing aspiration to try and shift to consumption. So Gavin, do you want to just talk about some of the specifics on as we've come through Q2 and Q3 and how we see the balance of the year?

Sure, Mark. Thanks, and good morning, Laurent. The distributed inventory was reduced in the third quarter because we had higher-than-planned levels at the end of the second quarter, which is something we called out on the last conference call.

Distributed inventories at the end of the third quarter were actually in line with prior year levels. And that's for sure helped us improve our service to our customers as we've had almost 50% reduction in out of stocks compared to the last year.

I'd also make a point that the third quarter STWs were negatively impacted because we had 1 fewer trading day in the quarter. So year-to-date, our trading day adjusted domestic STRs are down about 2.3, and our domestic STWs are down 3.8. And on a full year basis, we would anticipate that these numbers would converge as we expect distributed inventories to -- compared to the prior year increase a little bit by a day or 2 in support of the go live of our Golden system ordering tool early next year.

Having said all that, we do expect full year domestic STWs to be slightly below our comparable STR change because the buildup at the end of 2016 was larger than our expected buildup at the end of '17. So a lot of detail there. I hope that answers the question.

The next question comes from Vivien Azer with Cowen.

So I wanted to take the opportunity to revisit Canada and cannabis in light of Constellation's deal announcement earlier this week. So a 2-part question, if you don't mind. Number one, your current assessment of kind of Canadian cannabis in terms of potential risk factors and how you're thinking about potentially supporting the business next year from an investment standpoint. And then secondly, your appetite to explore that market.

Vivien, let me pick that up. And obviously, being based here in Colorado, we are very familiar with cannabis as it's been legalized here. And clearly, this is something that, as the whole legal landscape continues to change, we're actively working to understand. We have a team of people working on that. We're looking at the potential impacts and/or the opportunities associated with it. And we're developing a range of responses. Those will be discussed across our executive team and our boards. And there'll be more to follow in due course.

I don't have any statement beyond that to make at this point in time. I think the important thing is to make sure we don't get caught up in some kind of adrenaline rush. We're very thoughtful, very purposed, and we're very clear on how we want to respond to both what could be challenges and what also could be opportunities, so more to come in due course.

The next question comes from Robert Ottenstein with Evercore.

Your U.S. revenue per hectoliter I thought was pretty impressive given a tough comp on that number. And you came in better than your primary U.S. competitor. Just wondering if you can talk a little bit about the drivers for revenue per hectoliter in the U.S., price mix and how, perhaps, you're improving your revenue management practices?

Thanks, Robert. And I'll ask Gavin to talk to the specifics. I mean, again, just a couple of context points. Gavin and the team are driving for, obviously, a very disciplined approach in our U.S. business. And then clearly, we've made some changes in terms of our whole price promotion approach as we've come into 2017. So I think they are important context points. But Gavin, do you want to talk about specifics in how you and the team are driving the NSR per hec?

Right. Well, I mean, Robert, as you know, a number of different factors go into our domestic NSR per hectoliter. We've got things that we've talked about in the past like equity drawbacks and freight and fuel revenue adjustments, which we make. And then, of course, there's frontline pricing and price motions and sales mix.

I mean, in the quarter, sales mix was actually negative because of the success that we had behind our Economy strategy. At the same time, we had tremendous progress on Blue Moon Belgian White, which continues to grow and grow strongly. It's one of the few large craft brands in the country that is actually growing. And we had a record performance from Leinenkugel's Summer Shandy. So pleasing progress on our Above Premium portfolio. And as Mark said, we've put a constant focus on our revenue management initiatives, and that's an ongoing effort.

Yes. I mean, I think the only thing I would add to that, Gavin and Robert, is that right across our business, our building our capability around pricing and revenue management is central to our whole Commercial Excellence approach. And if you look at the U.S., Canada and Europe, you're seeing very solid progress when you look at how we're managing one of the critical components of our top line, and that's our revenue per hectoliter. So I feel pleased with progress, and we'll continue to focus in that area.

The next question comes from Judy Hong with Goldman Sachs.

So Mark, I think in your prepared comments, you commented that management's priority is first to focus on generating cost savings for bottom line growth. So in light of what seems to be a much tougher industry environment for volume in the U.S. market, I just wanted to hear from you sort of what you are doing differently to generate more bottom line growth in the near term, and obviously year-to-date EBITDA growth is relatively modest.

And then just one clarification on the STW and STR, kind of piecing together all of the things that Gavin said, are we expecting in the fourth quarter that STW to still be below the STR?

Okay. So let me just start with the second question. Gavin, do you want to just come back to Judy just on her question on STW expectations in Q4?

Sure. Okay. Mark, thanks. Look, Judy, I mean, as I said, we would expect to be closer to shipping to consumption for the full year as we -- so those 2 will converge in the fourth quarter. So put simplistically, STWs will probably be slightly better than STRs in the fourth quarter, yes.

Okay. Thanks, Gavin. And then Judy, just on your first point, I mean, just to clarify, I didn't say cost savings was our #1 priority. What I said is when you look our drive to improve both our top and bottom line, clearly, our #1 priority is to make sure we're delivering on the bottom line, both from EBITDA margin expansion, absolute EBITDA growth and free cash flow focus. And clearly, getting our top line moving is a priority -- second priority because it's the best source of sustainable profit growth over the medium to longer term.

So both of those things have got to work in tandem, but we've got to make sure we deliver on our bottom line financial performance. I'm encouraged by the fact that if you look at our cost-saving plan, the 3-year cost-saving plan of $550 million over the 3 years, we're off to a great start in 2017, and that's coming in stronger and faster than we'd expected. We're not going to update that cost savings guidance at this stage. If there was any update, we would do that as we kick off 2018.

So continuing to look for more efficient investments to drive our synergies to further take costs out of the business to drive productivity and efficiency behind our marketing expenditure is all important. And again, I reiterated on a number of occasions that myself and the management team are ensuring that we're retaining flexibility in our P&L. But if trading conditions are slightly tougher than anticipated, we've got the ability to flex our P&L to protect and develop our bottom line. So there's quite a lot in there. But hopefully, that gives you a sense as to what we're really driving against as a leadership team.

The next question comes from Mark Swartzberg with Stifel Financial.

Also a U.S. question and certainly for you, Mark. Perhaps, you too Gavin. Can you give us a sense of the budgeting dialogue as you head into '18? And I'm particularly, of course, interested in the more discretionary items in marketing and other things that influence the top line as it does seem like flat is not a likely outcome in spite of the benefits you'll get from Sol and Arnold Palmer. So

just trying to get a sense of how you're thinking about spending and whether that flat objective is still what you're thinking about.

So if I get behind your question, Mark, I think what you're asking is, are we going to spend a level irrespective of the impact that just drives flat volume. And again, I've been very consistent that we're not driving for flat volume and growth in the U.S. at any cost.

We've been very clear that, that strategic ambition is, I think, very, very appropriate. We want to get our business back into growth in the U.S. Clearly, that was assumed against a backdrop of U.S. industry volume, which was probably closer to flat. U.S. industry volumes are not as strong as that.

So it may take a little bit longer to get there. It doesn't change our strategic intent in the U.S. and you've seen a couple of indications of how we want to build out our portfolio with Sol and Arnold Palmer. We continue to work on other initiatives that hopefully will flow through as well in due course.

So just coming back to the specifics of your question, we'll spend a level that's appropriate to build our portfolio and also continue to drive strong financial performance in the U.S. So Gavin, I don't know whether you'd want to add any additional color around that.

No, I don't. Thanks, Mark.

So Mark, hopefully that answers your question.

The next question comes from Bryan Spillane with Bank of America.

Just wanted to follow up first on Mark's question just around volume and maybe Judy's question as well. Can you -- in the third quarter, with the volumes coming in, presumably STWs came in below what you were originally planning, was there much that you did during the third quarter to offset the volume shortage?

Or did it all happen so suddenly there wasn't much you can do to adjust and it would have been even much more leverage if there was more volume? Just trying to get a sense if there was any remedial actions you took in response to the volume declines, then I have a follow-up.

Yes. So, I mean, I think it's fair to say as we've come through both Q2 and Q3, industry demand in the U.S. has been more sluggish than was anticipated. And again, we've been consistent that we're retaining flexibility in our P&L to ensure that we've got levers to pull this if volume isn't coming through as anticipated. We did that through the third quarter.

Clearly, some parts of our discretionary spend is more fixed than others if you're in big contracts, for example, and sponsorships. But whether it's the U.S., Canada or our other business units, we retain that flexibility to offset any volume weakness. Clearly, you can do that up to a certain point. And I think we demonstrated our ability to do that as we've come through the third quarter. Again, that's very consistent with how we've talked about managing our P&L over the course of the last 12 to 18 months.

The next question comes from Tristan van Strien with Redburn Partners.

One for Gavin. I just wanted to ask about Sol distribution to U.S. In terms of what share of your current distributors are actually doing Corona at the moment and to what extent is that a barrier? And maybe to follow up on that, how you're thinking about Sol, is this about getting distribution? Or is it more about velocity in the first few years?

Gavin, do you want to jump straight into that?

Yes. I would say, Tristan, probably 2/3 to 3/4 of our distributors have Corona, roughly. Look, I think it's really early for us on Sol. We've only had it since 1st of October. We've seen a lot of excitement from our distributors. We've seen that from our retailers. The transition is going well. It's been a tremendous cross-functional effort over the last few months. We're working closely with Heineken in Mexico to ensure a smooth transition.

And we're excited about it. It's a very stationable lager. It's got a great brand story. It's been around for a tremendously long period of time since 1899. And it fills a nice gap in our portfolio, which we've been under pressure to fill that gap on the Mexican portfolio. Now we've got Sol. We're excited about it.

The next question comes from Pablo Zuanic with SIG.

Look, I just -- I wanted to stay within the one question limit, but maybe for Gavin, when we look at the STRs in the first half, they were down 2%; in the third quarter, down 2.9%. Can't you just say -- indicate at a portfolio level whether the 3 buckets worsened or something worsened more than the other? And by the 3 buckets, I mean, your value brands, which I think have 30% of volumes, your mainstream brands and then you know what's above mainstream. So you can give color in that regard.

And then related to that, whether -- you can also answer the same question on a channel basis. Relative to the trends in the first half, did on-premise worsen more than off-premise? I suppose the hurricanes affect more the on-premise business than off-premise? If you can comment on that, please, Gavin. And if I'm allowed, I would like to ask a follow-up.

I'm not sure if he's in charge of follow-ups, Pablo. Gavin, why don't you take that one?

Okay. Lots of questions within that one question limit, Mark. So let me try and address that. Look, I mean, our third quarter STR volumes were down 2.9. It was little worse than the earlier track record. And I think it's safe to say that the industry had a tough summer.

If you look at the various components in the 3 segments as you call it out, Economy, we're very pleased with the progress we've made on Economy. We set a target 2 years ago that we wanted to halve the decline in our Economy portfolio and maintain share. We've achieved that. And in fact, we grew share in the third quarter. So we're very pleased with that outcome.

Premium Light had a tough summer for a variety of reasons. There was significant discounting from a spirits point of view, on-premise traffic to answer your channel-specific question, had declined during the prior year. Millennials are going out less. Latino shoppers changed their shopping behavior in 2017. We certainly were impacted by the 2 hurricanes that we had, which would obviously have a short-term negative impact on the industry, but a more positive impact going forward.

And then in Above Premium, we're making really nice progress on this. Blue Moon continues to grow and grow well. It's one of the few large craft brands in the country that are growing, and we're pleased with that turnaround. Leinenkugel Summer Shandy had a record summer. So we were very pleased with the performance of that brand. Our 4 craft companies are doing really well.

And we've got Peroni, which has got growth, which is accelerating. Redd's needs more work from outside. But Redd's Wicked is doing particularly well, and we're excited by our proposition with Hard Soda and with Sparkling Seltzers and believe both of those brands and the category are here to stay. So I think I covered most of your questions in that answer, Pablo and Mark.

Yes.

As you are trying to address the -- as you are trying to improve the STR trends, I mean, obviously, value and above mainstream are doing better than before, right? But overall trends are not improving, they are worsening. So the key issue boils down to Miller Lite and Coors Light, and is that brand-specific or is it segment-specific?

We're very pleased with our performance on Miller Lite, in particular. It continues to grow share, and it's doing well in a declining segment. Coors Light has admittedly had a challenging year, but we believe we've got the right campaign with Climb On, and we need to build on that campaign and bring the world's most refreshing beer more directly to the fore. So we're very happy with our 2 offerings in the Premium Light segment, Pablo.

A follow-up question from Mark Swartzberg with Stifel Financial.

Just clarity. I didn't catch it, Tracey, the CapEx coming down order of magnitude $100 million. Were you saying that's a timing issue? Will it show up next year? And in the higher end of the tax rate guide, I know this is a second question, but is that a view for the longer term? Should we just think about your tax rate being a little higher beyond this year?

Yes, Mark. So just to recap on the CapEx. So this is not timing. We identified ways to achieve our cost savings and synergies, while spending less in our CapEx both at our breweries and I mean, the [RT] space. So it is a reduction, a true reduction in 2017.

In terms of tax rate, yes, the underlying tax rate is at the higher end of what our previous guidance was. This is really relating to geography mix. We -- a lot of our or most of our income comes from the U.S. at the higher tax rate and then also, we had some discrete items in 2016 and 2017. 2016 was favorable and 2017 was negative, which did drive that. In terms of going forward, we will update our tax guidance next year. So I'll leave that until then, Mark.

The next question is a follow-up from Bryan Spillane with Bank of America.

Actually, I have 2, if that's okay. The one is just a simple -- and maybe I missed this. But did you quantify in the U.S. how much you think the storms affected your STWs and STRs?

We didn't, Bryan, and I think if you're looking for comparisons across from ourself against our biggest competitor, clearly, there was slightly different circumstances because our major breweries in the areas that were affected by hurricanes weren't really impacted in the same way. So clearly, there's been some impact, but we didn't call it out as a material impact on our volume performance.

And there is no ongoing effect at this point. You're back to normal service levels in Florida and, I guess, Puerto Rico would be the one area where that's not the case. But for the most part, you're back to normal service levels.

Yes. I mean, Puerto Rico, as you say, and some of the Caribbean islands, which are important markets for us, are struggling to get back on their feet. And that's going to be kind of a longer path back to normality there. I think it's fair to say in the U.S., our distributors are working very hard to get back to normal service. Gavin, I don't know whether you would want to offer any color on that one?

Yes, we're back to normal service, Mark, across the board. And from a brewery point of view, as you said, we had virtually no disruption at our Fort Worth brewery and the Albany brewery was down for 2 days, but picked back up very quickly. So no real impact.

(Operator Instructions) The next question is a follow-up from Pablo Zuanic with SIG.

Just for Tracey. So I look at EBITDA margin expansion on MillerCoors in the third quarter, very impressive given that you had this operating deleverage with shipments being down 7%. But that's being masked, obviously, by this doubling of corporate expenses.

So 2 questions there. When we think about 2018, are those corporate expenses continuing to be a headwind, or they going to be pretty much flat year-on-year in absolute terms? And the second question related to all of this, we talk about shifting media from production to customer-facing and those type of things, but how are these corporate expenses, whether we call them service of excellence or other things, how are they going to held the top line anyway?

Pablo, let me pick up on that. So firstly, we haven't doubled underlying corporate expenses. There's a chunk in there, so about $35 million, which is really onetime costs related to some of the synergy capture. So you got to make sure that you reverse that out.

And we were very clear earlier this year that if you look at our corporate G&A line, there is a difference of about $50 million year-on-year based on the guidance. About 40% of that is really a shift in costs around our business as we've moved some people who were working at a business unit-specific level to take on broader global jobs. So that's just really a movement of money around our business.

Another slice of that relates to our global growth team, and a big piece of that investment relates to the Miller trademark globally. So as we pulled that brand into our business, I mentioned in the script that we're changing the packaging on Miller Lite in 20 countries concurrently. That's a massive effort, and we're driving that centrally because it's the fastest way to deploy that kind of change in the marketplace. So the investment behind the Miller trademark will remain in that corporate cost. So again, that doesn't become an incremental headwind as we go into 2018.

I think, clearly, we have got start-up costs for things like a world-class supply chain 2.0, our introduction of global shared services. And again, they are now embedded in our cost structure for this year and are not headwinds as we go into next year. We'll update on our guidance for 2018 corporate G&A in February, but we'll be working very hard to make sure that that's kind of contained, at worst flat and more to follow on the specifics around that in due course.

The next question comes from Vivien Azer with Cowen.

Just in terms of your comment, Mark, on the exploratory committee or working group on cannabis. One, can you tell us when that was established? And number two, do they have any early insights into U.S. dynamics because you've got 3 years of overlap in the U.S. and more than that even. And then even in like a market like Nevada, which just opened up July 1, the early indications at least from the tax revenue office in Nevada is that liquor tax did come in below expectations.

Vivien, are you sure you haven't changed jobs? Because this is a high focus for you. That's for sure.

Well, I do believe in the interaction. I think you know that, yes.

Yes, I mean, I'm not going to get into when we established the team, et cetera. I mean, clearly, as we look across the landscape of both opportunities and challenges, we've got people working on a whole variety of fronts, which includes this front. So I don't think I need to get into the detail on that.

Clearly, in Colorado, we've actually seen the beer industry relatively healthy. So it's very difficult, if you look across different states in the U.S., to get a consistent read. So we've got a team of people working on it. There is a range of insights are being developed. And as I've said, we'll work through the implications both good, better, in different and more to follow on that. I just don't want to be drawn on it. I think it's competitively sensitive.

And as I say, we've got to be deliberate and thoughtful about how we respond in due course. So more to follow in due course. And I really don't think there's any value in getting into any of the detailed book beyond that at this stage.

The next question comes from Robert Ottenstein with Evercore.

I think we all understand that the summer was particularly weak. Our contacts with distributors at -- over the last couple of weeks suggest that business picked up reasonably nicely in October in the U.S. Can you confirm that?

Robert, I think you're aware we stopped giving kind of short-term volume guidance. I mean, you've got access to the Nielsen data as same as we have. So we're not going to be drawn on a few weeks' trends. I'll just refer you to the publicly available Nielsen data.

Okay. Let me try something else then. Going back to revenue per hectoliter, you also had pretty strong results in Europe on the revenue per hectoliter side. And I don't know how much of that is kind of on an organic basis or if there were sort of onetime items or things that weren't comparable, but perhaps you could give us some insight there.

Sure. And I'll let Simon talk about the Europe performance, which has been consistently strong as we've come through 2017. So Simon, do you want to talk about the portfolio approach and the balance that you're leading for across the P&L?

Yes. Thanks, Mark. Thanks, Robert. So, I mean, your question was, I think Robert pointing to, is it one-off or is it underlying. If you looked at Q2, I think our NSR per hectoliter -- well I know our NSR per hectoliter was up 3.7%. And in this quarter, it's up 4.1%. So we're posting fairly consistent results.

We've done that really through a mix of price and mix. So our pricing was up 1.7% in the quarter. Our mix was up 2.4%. And you would have heard us talk, I think, very consistently now about our attempts to premiumize our portfolio. So if you look at our Premium brands, they were up double digit in the quarter. If you look at our craft brands, they were up high single digit. Cider continues to work well for us, and generally is a premiumization opportunity in the U.K. Our core brands perform well, and they were competitive in the marketplace. And we have been thoughtful about our value brands. And actually, they declined at low single digits in the quarter, which we are very comfortable with.

So if you put all that together, we think that's the right sort of pricing mix and volume curve because, as you know, we also grew volumes strongly. And we continue to try and do that in Europe, and managed with the balanced portfolio, investing behind our brands, premiumizing our portfolio, driving craft and making sure that we're not fueling any move towards value in some of our Eastern European markets. That worked well in Q1, worked well in Q2, worked well in Q3. So I would describe it as an organic underlying trend that we're leading for. And to your very question, it's not a sort of -- there are some funnies or some one-offs in there.

That's terrific. Congratulations on the great results.

Rachel, back to you.

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

Yes, thanks, Rachel, and thank you to everybody for joining us today and for your interest in the Molson Coors Brewing Company. And we look forward to speaking with you again at our forthcoming investor meetings and as we get to our Q4 results. So thanks for your interest. Bye for now, everybody.

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