Mark R. Hunter - Molson Coors Brewing Co. Tracey Joubert - Molson Coors Brewing Co. Gavin Hattersley - Molson Coors Brewing Co. Frederic Landtmeters - Molson Coors Canada, Inc. Simon Cox - Molson Coors Brewing Co. Stewart F. Glendinning - Molson Coors Brewing Co..

Andrea F. Teixeira - JPMorgan Securities LLC Laurent Grandet - Credit Suisse Securities (USA) LLC Vivien Azer - Cowen and Company, LLC Judy E. Hong - Goldman Sachs & Co. Stephen R. Powers - UBS Securities LLC Mark David Swartzberg - Stifel, Nicolaus & Co., Inc. Bryan D.

Spillane - Bank of America Merrill Lynch Robert Ottenstein - Evercore ISI Brett Cooper - Consumer Edge Research LLC Christopher Michael Pitcher - Redburn (Europe) Ltd. Pablo Zuanic - Susquehanna Financial Group LLLP.

Welcome to the Molson Coors Brewing Company Second 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 the 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 are made. Regarding any non-U.S.

GAAP measures that maybe 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 reflect the acquisition of MillerCoors as if it – and related financial financing had occurred on January 1, 2016. Following the prepared remarks this morning, management will take your questions.

In order to allow as many people to ask questions as possible, please limit yourself to one question. If you have multiple questions, please ask your most important question first and then return to the queue in order to ask additional ones. Now, I would like to turn the call over to Mark Hunter, President and CEO of Molson Coors..

Thank you, Laura and hello and welcome, everybody, to the Molson Coors earnings call and 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 Europe; Stewart Glendinning, our International CEO; Sam Walker, our Global Chief Legal and Corporate Affairs Officer; Brian Tabolt, our Global Controller; and Dave Dunnewald, our VP of Investor Relations.

On the call today, Tracey and I will take you through highlights of our second quarter 2017 results for Molson Coors Brewing Company. Along with some perspective regarding the balance of 2017.

On this call along with our remarks, we're also offering slides that show both reported and constant currency results and you can view and follow along with these slides on the Investor Relations page of our website.

In the second quarter, we continued to drive our First Choice for Consumers and Customers agenda, with laser focus on strengthening our core brands, premiumizing our portfolio, accelerating our international footprint, enhancing our customer partnerships, and driving the integration of MillerCoors and the Miller brands globally to unlock synergies and other cost savings.

As a sign of progress against this agenda, our team delivered solid growth in constant currency net sales, global brand volume, underlying EBITDA, net income, earnings per share and free cash flow.

Additionally, we exceeded our goals for cash generation and debt reduction in the first half of this year and have maintained our investment-grade debt ratings. Our second quarter performance was inline with our expectations, and we remain on track to deliver our 2017 business and financial plans, cost savings targets and cash flow goals.

Now, I'll turn it over to Tracey to give second quarter financial highlights.

Tracey?.

We now expect cost of goods sold per hectoliter for the full year 2017 in our International business to decrease at a mid-single-digit rate, versus a double-digit decrease previously. With the dynamic tax environment in the U.S.

right now, we are not changing our tax rate range of 24% to 28%, but our current view is that our full year underlying tax rate will be in the top half of this range. We now expect cash pension contributions in the range of $300 million to $320 million to defined benefit plans in 2017.

This range is $200 million higher than our previous target, as we plan to make an additional discretionary contribution of $200 million to our U.S. plan in the third quarter as part of our deleveraging goal.

Rating agencies treat pension under-funded status the same as debt, so this pension contribution will also benefit our investment-grade debt ratings. Note that all of these anticipated pension contributions are included in our 2017 underlying free cash flow target of $1.2 billion, plus or minus 10%.

This discretionary contribution is a strong indication of the progress we are making in achieving our financial plans and quickly paying down debt. We remain committed to reducing our leverage ratio to about four times on a rating-agency basis by the end of 2018.

Looking forward, we are focused on three primary financial targets – first, cash generation; we made great progress in this area in the second quarter, and we are confident that we will achieve our cash goals this year. Second, deleverage; we reduced our net debt by more than $520 million in the second quarter.

And third, we continue to expect the underlying EBITDA margin growth to average between 30 basis points and 60 basis points for the next three years to four years, while we remain focused on growing our top line, as well. At this point, I'll turn it back over to Mark for the business outlook, wrap up and the Q&A.

Mark?.

Thanks, Tracey. In 2017, we continue to focus on both top and bottom-line performance, driven by our First Choice consumer and customer agenda and the integration of MillerCoors and the Miller brands globally. My priorities remain unchanged as we shape the new Molson Coors to drive total shareholder returns over the medium to long term.

I am leading for a powerful and integrated First Choice culture, the successful integration of our businesses including the associated synergy and cost savings plans, a step change in our global commercial capability to support top line growth, accelerated performance in our international markets, further global productivity improvements through World Class Supply Chain 2.0, our North American supply chain approach and global procurement, with all of this enabled by a more efficient enterprise approach across global shared services.

We're also investing ahead of the curve for growth in key brands and markets. And as part of this, in the third quarter we plan to invest incrementally at an enterprise level in our brands. With this approach, we're driving for measured and sustainable performance on both the top and bottom line.

Through the balance of 2017, our business unit priorities are clear and consistent. Our U.S. goal of flat volume in 2018 and growth in 2019 remains unchanged.

We remain committed to Coors Light and Miller Lite accelerating their segment share gains alongside the strong volume performance of Coors Banquet, and to further improving the volume trajectory of our economy portfolio.

In addition, we took key steps to strengthen and further premiumize our portfolio, including the addition of Sol, as we signed a 10-year agreement with Heineken, commencing in October of this year for us to import, market and distribute the high potential Mexican beer brand.

In addition, we recently announced a partnership with Hornell Brewing Company, part of Arizona Beverages, to market and distribute a new beverage called Arnold Palmer Spiked Half & Half, which takes us into the alcohol tea market in a distinctive way.

Along with a resurgent Blue Moon Belgian White, we'll continue to integrate and expand the geographic reach of our recent craft acquisitions, which are growing strongly. Encouragingly, MillerCoors shared the top spot of the 2017 Tamarron distributor survey as the best malt beverage supplier.

This marks the second consecutive year that our distributors have rated us as their best brewer across a wide range of metrics, and it is a strong First Choice vote of confidence from our distributors who believe in our imperative of getting to volume growth by 2019.

In Canada, we continued to drive our First Choice agenda to bring momentum back to the top line, including a relentless focus on our two largest brands, Coors Light and Molson Canadian. While still under volume pressure, these brands improved their segment share trajectory in the second quarter.

In Above Premium, we're driving for further growth in the import, craft and cider segments with Coors Banquet, MGD, Creemore, Granville, Belgian Moon, and the Heineken brand family. In addition, we're beginning to leverage Miller Lite alongside Coors Light and introduced Miller High Life to simplify our economy portfolio in Canada.

In order to further transform our cost base, the construction of our new British Columbia brewery is progressing well, and we recently announced plans to build a more-efficient, more flexible brewery in the Greater Montreal area in the next few years.

We expect both of these brewery initiatives will unlock material savings in the medium to long term and deliver a highly efficient, fit-for-future brewery network.

In Europe, while strengthening our national mainstream brands, we will continue to premiumize our portfolio with a focus on 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.

Our craft investments have consistently delivered strong returns, and we are continuing to build a craft portfolio, including Sharp's, Franciscan Well, accelerated expansion of Blue Moon in the region, and the addition of the number-one craft beer in Spain, La Sagra.

In July, we also completed the purchase of Birradamare, a small Italian craft brewery based just outside of Rome, which gives us an opportunity to develop its special brands in Italy and select export markets.

Finally, Staropramen is growing very strongly across our European markets, and we've now unified the brand visual identity across the Czech Republic and all international markets.

Our International business will continue to leverage our strong global brands, partnerships and commercial capabilities around the world to grow, in particular Coors, Miller and Blue Moon. One action we are taking is to lift and shift the original white can packaging for Miller Lite to all markets globally in the second half of this year.

The scaled-up International business requires upfront investments to grow our brands, and our MG&A will be higher this year, funded by a 2017 step change in gross profit, as we lay the foundation for accelerating top and bottom-line growth from 2018 onwards.

In summary, in the second quarter we continued to drive our First Choice for Consumer and Customer agenda in each of our businesses to deliver top and bottom-line performance. As a sign of progress against this agenda, our teams delivered solid growth across all key financial measures.

We exceeded our goals for cash generation and debt reduction in the first half of this year, and we've maintained our investment-grade debt ratings. Our second quarter performance was inline with our expectations, and we remain on track to deliver our 2017 business and financial plans, cost savings targets, and cash flow goals.

Equally important, we continue to make progress in our First Choice for Consumers and Customers agenda in each of our businesses, and we will remain resolute on PACC as a key business decision framework, using our cash to reward investors and critically ensure a healthy balance sheet, reducing costs to provide top line investment firepower, and making smart investments that deliver brand-led growth and shareholder value.

Now, before we start the Q&A portion of the call, just a quick comment; as usual, our prepared remarks will be on our website for your reference within a couple of hours this afternoon.

Although we will not host a follow-up Investor Relations conference call later today, 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.

Additionally, we hope to see many of you at the Barclays Global Consumer Staples Conference in Boston in early September, or at one of our other investor outreach events in the months ahead. So, at this point, Laura, I would like to open up for questions, please. Thank you..

Thank you. We will now begin the question-and-answer session. And our first question today will come from Andrea Teixeira of JPMorgan..

Hi. Good morning, everyone. Just wanted to follow-up a bit with the STRs and STWs into the quarter. And related to that, do you think that marketing spend, as you incurred, if you can elaborate? And I think also, you – at the same time, you said you're going to be investing more in marketing. So, I wanted to relay the message in the U.S., in particular.

Thank you..

Yeah. Hi, Andrea.

Gavin, do you want to pick up on STR/STW question specifically?.

Sure, Mark. Thanks. Good morning, Andrea. Look, in June, we filled the orders that our distributors placed and when you couple that with lower-than-expected industry-wide sales, it did increase our distributor inventory at the end of the quarter by a couple of days.

On the positive side, the higher level of inventory really helped us to increase our service levels, coming into the 4th of July holiday and that worked well for us as we had a 22% reduction in distributor out-of-stocks compared to the last year. On a full-year basis there, Andrea, our year-to-date STRs are down 2% and our STWs are down 2.1%.

So they are converging. And we duly estimate that our Q3 distributor inventory levels will be in line with the prior year. So that implies a pullback in inventories, as Mark said in his prepared remarks. And for the year-end inventory levels, we'll continue to evaluate that, but our current expectation is to ship to consumption within the year..

Yeah. Thanks, Gavin. And then, Andrea, just on the other part of your question. With regard to our marketing investments for the year, I mean, clearly, quarter-to-quarter, there is always some fluctuations depending on the timing of activity.

We expect our marketing investment on enterprise level to be slightly higher in the third quarter compared to last year. But right across our business, the number one priority with our marketing spend is to drive higher effectiveness and productivity. You've seen that with the use of the return on marketing investment model or ROMI in the U.S.

We've now rolled that into the Canada business and it's starting to really unlock some significant efficiency savings, and we'll be taking that into the UK later this year and into 2018.

So, we'll continue to retain the flexibility on our discretionary line items on our P&L to ensure that we deliver our bottom line, but we will also balance that with ensuring that we're investing at the right level to drive our brand performance. And I think, you've seen that with our share performance virtually across all of our markets..

So, would you say – that's very helpful.

Would you say that the marketing spend decline was mostly non-working spending decline or how – just to help us bridge that the improvement in margin, if that is recurrent?.

Some of it was timing. Some of it was non-working, and you're starting to see the benefit of us really now looking an aggregated approach in terms of our marketing spend, our agency partners and our procurement impact as we drive our global procurement agenda.

So, that some of that's starting to play through in terms of unlocking value which we can either drop to the bottom line or invest back in the business. That's good news as the integration proceeds positively..

Thank you, both..

Thanks, Andrea..

And our next question comes from Laurent Grandet of Credit Suisse..

Yes. Good morning, everyone. I've got a question, I mean, on contract brewing. It has been declining by about 16% in the quarter.

What was the driver? I mean, is it structural or is it kind of the running rate of, I mean, the manufacturers you are saying too, or how should we think about these going forward, as it has impacted your top line growth, revenue per hectoliter, and bottom line..

Yeah. So, Laurent, thanks for the question. So, I mean clearly contract brewing is something which is an arm's length relationship that we have. It's included within our financial volume, but it's not a focus for the leadership team and the business.

So, the majority of people in our organization we have to deliver on the demand that comes through from the third parties that we have that contract brewing relationship with. So, to be honest the contract brewing volumes will fluctuate based on the success of those third party brands in the marketplace and we can't really influence that.

And I would just remind you it's relatively low margin business. Clearly it gives us overhead recovery. So, it's not a big driver of our overall financial performance..

Yeah.

So, therefore should we think about you thinking about moving away from this business and how we should think about the pubs business you are manufacturing in the U.S.?.

Well, I think, the pub situations are relatively well publicized situations. Clearly, we're in a litigation process at the moment, and that will hopefully come to a conclusion as we get into 2018. So, I really don't want to comment any further on that at this stage..

Thank you very much. I appreciate that. Thanks..

Thanks, Laurent..

And the next question will come from Vivien Azer of Cowen..

Hi. Thank you so much. And before I ask my question, I just wanted to say that the new press release format was super helpful. So, thank you for that. It was a much easier earnings update this morning. So, on the Above Premium, so nice to see that that's back into growth.

Gavin, perhaps, could you comment on how that benefited your price mix realization in the quarter?.

Okay, Gavin..

Sure. Sure, Mark. Thanks. Look, I mean, if you break out our pricing recovery, Vivien, we got 80 basis points of net pricing growth that obviously excludes the 40 basis points impact of the FET drawbacks. And our sales mix added about 60 basis points.

And it was attributed really to the improvement we saw across the board in our Above Premium portfolio just driven by the performance of the new craft companies. The Leinenkugel's Shandy brands, I mean, we're on track to have a record summer with Shandy, Blue Moon Belgian White, and of course, the limited time release of Zima.

And we also saw in the second quarter, Henry's trends improved relative to Q1 when the brand was tackling it's the first quarter in the market from 2016. So, I would say those are the hard spots in the Above Premium, Vivien..

Thank you very much for that. As well staying on the U.S.

business please, could you elaborate on your comment on the softening at the end of the quarter? What do you think that's attributed to? And as a kind of part two to that question, could you also comment on the promotional activity in the – that you've been seeing for the category as a whole? Thanks..

Gavin, straight back at you?.

Thanks, Mark. Vivien, you're right. It's no secret that the beer industry in June was soft according to Nielsen, and we did see some growth in wine and spirits accelerating in June. And particularly, in the low end with some promotional activity, particularly with vodka.

From a beer industry point of view, we obviously need to take wine and spirits seriously as an industry. And as I mentioned at the BR Conference in July, we need to be pro-beer first and try to differentiate our category from wine and spirits, and we need to do that together.

And at MillerCoors, we're committed to investing in our brands and transforming our portfolio to bringing incremental drinkers into the category. And you'll see us continue to make bold moves like we have with the economic strategy, we've got the full craft partners and we've recently signed those agreements with Sol and with Arnold Palmer Spiked.

So, June was a rough month from an industry point of view but that's all it was. It was one month and I'm optimistic about what's ahead for MillerCoors in the industry and I'm confident the industry is going to come together and focus on what's really important for us, which is the quality of our beers and the consumers that enjoy them.

From a second part of your question, we're not raising a fundamental deceleration of pricing overall in the U.S. There's always some level of promotional activity in – during summer and 2017 is no different. If you look at it over a longer timeframe, our full year 2016 net pricing growth, it's actually slightly higher than our full year of 2015.

So, no real fundamental deceleration..

Thank you..

Thanks, Gavin. Thanks, Vivien. And, Vivien, thanks for your feedback as well on the financial release. That's much appreciated..

The next question will come from Judy Hong of Goldman Sachs..

Thank you. Good morning and I also echo Vivien's comment about the release being much cleaner here, so thank you for that. So, Tracey, I guess I just wanted to clarify your free cash flow guidance. So, it's obviously unchanged, but there is additional $200 million of pension contribution.

You talked about the first half coming in better than you expected from a cash generation standpoint.

So, can you just talk about what's driving and sort of – or these improvements kind of sustainable as we go into 2018 and 2019?.

Yeah. Hi, Judy. So, just a couple of things. As I've said before, my priority is to generate free cash flow as quickly as possible, so that we can deleverage, and we've made that commitment to the rating agencies to be around four times by the end of 2018.

So, U.S., I mean, we are generating stronger free cash flow and that has allowed us to make this incremental contribution to our U.S. pension plan. So, that is the U.S. pension plan. So I do want to remind you that pension contributions are deductible for tax. That $200 million in gross. You would need to tax effect that to get the net number.

And then, the other part that goes in to our free cash flow is obviously our working capital and the timing of working capital does play into the guidance that we've given of the $1.2 billion, plus or minus 10%. And in terms of looking forward to 2018, we're not ready to give guidance here for 2018. We will do that early in 2018 to help with that..

Okay. And, Tracey, can you maybe just update on kind of the improvement or stuffs that you've seen on the cost savings front? You talked about the $175 million plus for the full year.

Can you at least tell us if you've gotten about halfway of this already? And as you've kind of implemented some of the plans, what have you been seeing in terms of perhaps further opportunities to unlock some of the cost savings going forward?.

Yeah. So, Judy, look, we – our cost savings and synergy plans are on track. And so, we are pleased that we are delivering the cost savings. We have, as you rightly mentioned, we've said that for 2017, it is going to be more than the $175 million.

However, we are not breaking that up quarter-by-quarter because that number does fluctuate and this is for the full year, it will be more than $175 million and we are very pleased with our plan so far to deliver the $550 million over the three years..

Judy, it's Mark. Just to give you a little bit more color on that. I mean, if you look at the constituent parts, the cost savings program. So, really solid progress on our global procurement, that's integrating and as we push into that, clearly, some things we're looking to try and accelerate.

We're pushing harder into some of the retail (32:43) opportunities that we didn't have the visibility to as we went through due diligence ahead of the deal closing. North American supply chain, we've now started to move some volume, announced we're moving some volume from the U.S. up into Canada.

And our global shared service initiative is very much on track. Leadership team is in place. Our shared service center in Romania is up and running and performing strongly. And I feel very good about how that is developing and we'll really start to, I think, deliver ongoing savings as we get to the end of 2018 and into 2019.

IT integration is performing strongly and our global commercial group is really coming together powerfully as well. So, literally, six months to nine months post-closing, I would say, very, very solid progress on all fronts..

Got it. Okay. Thank you..

Our next question will come from Steve Powers of UBS..

Great. Thank you. Good morning. Just a quick follow-up on free cash flow and pension for Tracey and then maybe a broader question Mark for you. First, Tracey, I think you had previously indicated that we should expect another $100 million plus being contributed against the pension next year and 2018 as well.

So, in that context is this higher 2017 contribution a pull forward that would eliminate that need or should we still expect an incremental $100 million, $120 million as a use of cash in 2018? And then Mark, broader question.

I think, it's fair to say that there was a good deal of consternation coming out of the June Analyst Day specifically around the 30 basis points to 60 basis points of annualized EBITDA margin expansion that you expect going forward. And I guess I'd just like to get your reaction to the concerns that arose, many of which I'm sure you've heard.

I mean, whether or not, you think they were rooted in any kind of misunderstandings that you might be able to clarify.

From my perspective, I think, many investors have been hoping that while the rate of EBITDA margin expansion that you guided to was maybe below Street expectations, that perhaps your EBITDA dollar expectations were more in line under the assumption that you've embedded more optimistic top line assumptions into your outlook.

And I'd just like to get a sense of, if you think that's fair, if you thought about providing further clarity maybe in the form of dollar-based EBITDA outlook, more color around the top line assumptions or anything else.

And again, I'm just trying to get a sense for how you've reacted to the markets interpretation of your June messaging and whether it's impacted your thinking at all about how you may communicate going forward. Thank you..

Thanks, Steve.

There was a lot in that – I think the first question on free cash flow and pension where that's going forward, do you want to pick up, Tracey?.

Yeah. So, hi, Steve. So, the additional contributions that we made is to the U.S. plan. So, it is pulling forward next year's contributions. We had an opportunity to do that. However, the U.S. isn't the only pension plan. So, I don't want to say that there won't be any further contributions to pension plans, but this one is a pull forward for the U.S. plans.

Having said that, there's a number of things that enter our decisions as to the amount to contribute to our pension plans, and one of those is market performance against our assets. So, depending on how the assets perform, will also tell us how much we need to contribute.

And then just going forward, we're not going to give any contribution guidance at this stage, but we will do that again early next year, depending again as how our assets and our plan performs..

Okay. Thanks, Tracey. And then, Steve, just to your perspective coming out of the Analyst Day in June, I think, the messaging back to us was loud and clear. And clearly, we've had further discussions with our Board based on some of that feedback. I think we feel good about the guidance that we've offered.

I think if there was any miss or disconnect that relates to the fact that our aspiration for our business is to improve the trajectory of our top line. And that top line plus our EBITDA margin expansion which I believe is measured and balanced over the medium term allows us to drive our bottom line EBITDA performance in a sustainable way.

And I think, in a number of conversations I've had with investors, I've clarified that – clearly, I will retain flexibility on the P&L if we believe that the top line isn't coming through because markets are softer or there's other factors, we'll retain the flexibility to protect their absolute profit performance.

And that's what we've agreed with our Board. So, I think, if there's any message, maybe a lack of belief in our ability to get our top line moving. But I think you have seen certainly in our current quarter results that we are making that happen in many parts of our business. We're driving initiatives that are going to further premiumize our portfolio.

And there's two been announced already in the U.S. We continue to work on others. And we're seeing very, very strong volume growth, which is an impact to our total level in our international business, and I believe, there's a lot more to come there as well.

So, our belief is that we'll deliver absolute profit growth and we'll do that with a balance of an improved top line delivery on our costs and synergy targets, but with flexibility retained on our P&L to protect that bottom line performance..

Great. Thank you both for the perspective on both those questions. Thank you..

Thanks, Steve..

Our next question will come from Mark Swartzberg of Stifel, Nicolaus..

Thanks. Good morning, everyone. And it's actually a natural progression to the question you just answered, Mark, and it pertain specifically to Canada and your comments about premiumization surely apply there, and yet if we look at establishing revenue momentum in Canada it seems like it's a rather – it's been a rather elusive outcome.

So, my question is still simply, number one, how impactful do you think having these Miller brands is to your capacity to achieve the momentum that really hasn't evidenced itself? And then, number two, if you think about spending, if you think about execution, you think incremental additions to your portfolio, what you currently lack in the high-end.

What's still necessary to achieve in a structural sense the momentum that hasn't quite materialized in Canada?.

Okay. Thanks, Mark. Let me offer a few headlines. If I miss anything, Fred, then let me know. Clearly the addition of the Miller brands back into the portfolio in Canada is meaningful and you've seen share growth now in Q1 and in Q2 which is very encouraging including the addition of those brands.

And I believe there's more potential to come because it's certainly over the course of the last 12 months to 18 months, the brands weren't particularly well supported or focused on by the previous owners. But we've seen share growth come through and we've seen consistent solid pricing growth come through in the first and second quarter.

Unfortunately in the second quarter, industry was very soft in the months of May. So excluding May, we've actually been pretty much on track for our plan for this year. Premiumization of the portfolio is working very positively.

You do have to remember clearly, a large part of that premiumization effort is in partner brands, so not all of the field margin flows through on our P&L. But clearly the biggest kind of the driver of overall profit improvement will be improved performance in both Coors Light and Molson Canadian. They're such a large part of our portfolio.

It's priority one, two, and three for Fred and the team. We've seen sequential improvements in our share performance, but clearly, we're still not satisfied with absolute volume numbers, and we're seeing some very encouraging pockets of improvement, particularly in the West, national accounts, LCBO, et cetera.

But we've still got more work to do there. So I'm encouraged with the inputs. Still not satisfied with the outputs is probably how I would mark ourselves at this stage, Mark..

That's great and helpful. And if I could follow up with you or Fred, what I'm hearing, Mark, is that you don't consider it primarily a question of increasing spending on the brands at a faster rate than inflation, say, for example, that it's not primarily a spending problem, although spending obviously has its place.

But is that a fair characterization? And then when you think about priorities other than one, two and three, namely the amount of products you have in the high end, do you think you need to be more aggressive buying craft brewers or doing other things to partner with other import entities, something to allow you to participate even more fully in the import and the high-end segment of Canada?.

Okay. Actually, there were a lot of constituent parts to that question. I think if you look at the shape of our portfolio in above premium, I think we've got a very broad and deep portfolio. There's maybe one or two geographical gaps that Fred and the team are currently looking at, at the moment.

But I think it's very much about just further improvement of momentum there and premiumization of the total portfolio.

I mean, Fred, do you want to offer any color around that?.

Yeah. Actually, thanks, Mark. Just maybe one thing to add, and I agree with the topics you raised. One thing to add to Mark's question is probably the performance we're recording in the Western part of the country. I think I am indeed very encouraged by the share growth we are enjoying.

I am encouraged by the premiumization of the portfolio has translated into strong NSR per hectoliter growth. In the Western part of the country, there's a number of provinces where the momentum has already translated in absolute volume growth in Q2 and on a year-to-date basis.

And that's what is actually encouraging me to think that we can win the top line battle going forward, and we're keeping our focus on it. From a spending perspective, I'm confident that we have the right amount of spend in place.

I think it was mentioned before that we're trying to increase the effectiveness of our spend, so that's definitely high on our agenda. But I think we're pulling the right levers in my view, and ultimately I'm confident that that is going to pay off..

Great. Thank you. Very helpful..

Mark, just to add maybe two more comments on that front, because I think this is important, that there's no expectation that we need to step up our spend in Canada. If anything, we want to drive further effectiveness on our spend, and we've taken the return on marketing investment model from the U.S.

into Canada, and that's starting to throw up some very interesting opportunities for us to drive further efficiency. We've got a major initiative now up and running with a new resource in Québec in particular around our trade promotional investment, and again that's starting to really, I think, pay dividends.

We've taken Building with Beer from the U.S. and have launched that in Canada as well, which drives executional effectiveness at the front-end of the business. And I think I mentioned last year that Sergey Yeskov who was our GM and President for our business in Croatia and Bosnia is now leading the whole of our sales force.

And I'm delighted with the progress that Sergey is making again driving much enhanced sales execution at the front-end of the business. So it's still early days but very encouraged by the combination of both front-end execution and just the way that Fred's leading the business around kind of prioritization and spend effectiveness..

Super helpful. Thank you, gentlemen..

Thanks, Mark..

And our next question comes from Bryan Spillane of Bank of America..

Hey. Good morning, everyone..

Good morning, Bryan..

Hey, Bryan..

I have a question related to the plans to build a new brewery in Montréal. And I guess a couple questions related to it. First, I think in the press there was like a $500 million number that was being reported on in terms of the investment. I'm not sure if you've actually said yet how much you think it would cost. So some perspective on that.

Whether or not the build-out will be included in sort of normal CapEx or if we'll end up with an elevated CapEx level related to it? And then finally in terms of the cost savings related to that brewery, is that inside the $550 million or would that be above and beyond the current $550 million savings plan?.

Okay. So let me pick that up specifically, Bryan. So, firstly, the cost savings number is not in the $550 million because the brewery build-out is beyond the guidance we've given around 2017 to 2019. So that will be included in our next three-year cost-saving cycle, so more to come on that.

Our assumption is it's included within our current free cash flow and CapEx guidance going forward. So we'll manage that within our existing envelope. And the way to think about the Montréal brewery build-out, and clearly this is something we looked at in a lot of detail. We have two options.

One was to develop a brownfield site on our existing site – and I'm not going to give you specific numbers, but let's just say that was hundreds of millions of dollars – are building a greenfield site, which again is hundreds of millions of dollars.

The greenfield site drives significantly enhanced productivity and cost savings numbers versus trying to build out a greenfield. So far a relatively small incremental investment. We get a significant return that pays back very quickly because of the ongoing cost savings. And certainly from a pack perspective, it makes an awful lot of sense for us.

And I think once we are into further conversations and communication with our employees and confirmation of the exact site, we can give you a little bit more detail. But hopefully that deals with the three parts of your question..

That's very helpful. And just in terms of the existing – the property that you own today ....

Yes..

...will it be similar to Vancouver where you could potentially sell it to fund or have you made plans yet with that property?.

It will be similar in terms of selling to – unfortunately the real estate market in Québec isn't quite as hot as the real estate market in (48:18) Vancouver.

So I wish it was, but clearly that site will help offset some of the cost, and the intention is to retain a heritage and brew pub vehicle or presence on that site as well just to underpin our legacy in Montréal and Québec..

Okay, great. Thanks for the perspective..

Okay. Thanks, Bryan..

And next we have a question from Rob Ottenstein of Evercore..

Thank you very much, and nice quarter and a very, very helpful conference call so far. Thank you. I was wondering if you could give us – you touched on a little bit in the beginning but a little bit more detail on how Coors Light is doing outside of the U.S. in aggregate.

I think you gave us a Latin American number, but how is it doing in general? And also Miller Lite, that brand I think you had alluded to had not gone perhaps as much support over the last couple of years. How that is starting to come along and a little bit more detail on the transition to your system and partners, please..

Okay. So, thanks, Robert. Thanks for your comments. Let me ask both Simon and Stewart to comment on this. So, obviously, Coors Light in UK and Ireland is a big brand.

Simon, do you want to just offer a couple of headlines around the Coors Light performance and MCE? And then, Stewart, do you want to pick up on Coors and Miller transition for MCI?.

Yes. Thank you, Mark. So, as Mark stated, the Coors Light brand in Europe is really predominantly a UK and Ireland brand. And frankly, it continues to perform very well. We're investing behind, as you know, premiumizing our portfolio. That's working very sell. Coors Light is a big part of it.

And once again, Coors Light showed double-digit growth in the UK and Ireland. So a brand with real momentum that we're very pleased with, we're going to continue to invest behind, and those investments are really paying off for us..

Yeah.

And I think in scale terms, Simon, we'll be roughly what kind of size now for Coors Light?.

Yeah. MAT will be something like 1.3 million hectoliters now, Mark, and obviously continuing to grow strongly. So very positive..

Okay. Thanks, Simon.

Stewart, do you want to pick up on progress in international markets?.

Yes. So, Robert, thanks for the questions. So, first of all, your question relative to the transitions, as Mark mentioned in the call, they've been going very well. We're almost all of the TSAs now and having the brands both – well, Miller in our own hands is going to allow us to drive the brands much more aggressively.

We're certainly seeing improvement on Miller where we have taken over the brands. There are a number of markets, as we mentioned, which we think didn't receive the attention, but they're getting our full attention now and we think we've got an excellent platform.

One thing to note is that both on MGD and Miller Lite, we will see new global campaigns coming out on those brands, and specific to Miller Lite, we'll be rolling out the white cans globally, and I think that's going to make a big impact on the brand.

With respect to Coors Light, the brand has been growing partly, including in Puerto Rico, even though the market is struggling as an industry. We grew share in the market broadly across Latin America. We were up high-single digits.

And I think most importantly actually is that Miller itself has opened up a number of markets where Coors Light is not currently being sold, and that will give us the opportunity to expand Coors Light even faster..

Great. And then as a follow up, just kind of going back to Europe, it looked like you did very well there, but the results are a little bit confusing because there's a lot of moving parts.

Could you talk about kind of the – if you will, the organic growth in Europe as much as you can in terms on an apples-to-apples basis?.

Yeah. So the confusion comes from my desire to ensure that we've gotten kind of pan-European approach, so bear with us as we go through this year, Robert.

But, Simon, do you want to kind of deconstruct that as best you can to give a better sense of the underlying strength of the business?.

Yeah. I guess the concern with the results could be that is it all coming from things that we've transferred in. So Miller brands or the exports and license brands in all MCI. And that, of course, does play a positive role in the numbers. But to give you some real reassurance.

If you strip that away, we would still have good volume growth on the underlying and core business through both our core brands and growth in our premium brands. We would still have positive pricing, and we would still have positive mix.

So the underlying business has pulled the hat trick this quarter with volume, pricing, and mix, and I think any quarter that we do that in Europe would be a very strong quarter. I think particularly pleasing is where we're putting our marketing investments, particularly behind premiumizing the portfolio on the existing business that's working.

So Staropramen has great momentum; frankly, more or less across every country that we're putting it into Europe, and we've unified the visual identity of Staropramen in the Czech Republic and internationally, which helps us really market that brand efficiently and consistently. We talked about Coors Light, which continues to be a star for us.

Blue Moon, we're really starting to see that accelerate, particularly in UK and Ireland, and our craft volumes continue to perform well. So just to give you some reassurance, if you strip away some of the tailwinds that we get through the acquisition and the transfer in, we still had a very solid performance underlying.

And all those inputs have led to – if you strip away currency, a 21% increase in EBITDA. So, overall, I would say a very, very strong performance in Europe, both supported by some of the transfers in, but more importantly a very strong performance in the underlying business also..

So organic growth low-single digit, mid-single digit, can you give us a sense, please?.

Yeah. I don't want to disaggregate too much, but we've been between those two numbers, something like that..

Okay. Thank you very much..

That's a great answer, Simon. Okay. Thanks, Robert..

Thank you..

Our next question will come from Brett Cooper of Consumer Edge Research..

Good morning, guys. A couple of questions..

Good morning..

This quarter, we saw two license agreements in the U.S. you alluded to.

Just wondering is this somehow a broader strategy to broaden your portfolio assuming this will end up being lower margins since your licensed? And then kind of a follow-up to a comment you made in terms of having higher distributor inventories leading to meaningful reductions in out of stock.

So, I guess, the question is why not keep those higher along peak periods, assume that the returns are pretty positive given lost sales from out of stocks? So, if you can get into those, I'd appreciate it. Thanks..

Okay. So, Gavin, do you want to think about the second question, and then I'll answer the first questions.

So, on the first in terms of license agreement, to be fair, Brett, if you look at our business, we've got a long history of partnering to ensure that we've got a broad and deep portfolio and whether that's with companies like Heineken or Carlsberg or some independent companies we've attempted to ensure that in the markets that we compete in, we're offering the right portfolio from a consumer and a customer perspective.

I've called out and as a leadership team we're leading for the premiumization of our portfolio. And we think about that across three fronts we describe as build, buy or borrow.

So building would be creating something new, probably a great example of that would be Redd's in our portfolio which didn't exist three years or four years ago, and is a big brand. Buying is the number of acquisitions that we've made, craft acquisitions and/or setting up license arrangements and things like Sol and AriZona into that grouping.

And then the third area is around borrowing. So I mentioned in my script, for example, we'll be taking Miller High Life into Canada from the U.S. and we've got other examples as we've moved our brands around the world. So, that's how we think about building out our portfolio. We are pretty flexible.

Clearly, when we do set up with the license agreement or a partnership, we do have to share the margin. But I'd rather share the margin and add to a margin as opposed to not compete in some parts of the industry, and I think that's working effectively for us.

And we're working hard to building out the portfolio in all of our markets, and hopefully there'll be other initiatives to talk to you and the investors about in due course. So, more to come on that front, but I think good progress so far.

And then, Gavin, do you want to talk about distributor inventories and then perhaps in out-of-stocks?.

Sure, Mark. Thanks. And, Brett, yes, you're absolutely right and we are doing that.

So, if you look at the fact that we came into this year with higher distributor inventories at the end of December that was to make sure that we improved our performance in this sort of January timeframe, which has traditionally been a bit of a difficult month for us because of our start-up of the breweries coming out of the seasonal festivities, and that worked well for us, and out-of-stocks reduced meaningfully there.

And we do it when we head into Memorial Day. This one obviously had an impact because it crossed over a quarter with the timing of July, the 4th. We've also introduced safety stocks of some of our faster-moving SKUs. And overall, I think, you will see a – and there has been a meaningful improvement in our service levels to our distributors..

Great. Thanks..

Thanks, Gavin. Thanks, Brett. I think, there's a couple more questions hope to come through..

Yes. Our next question comes from Chris Pitcher of Redburn..

Thank you very much for taking the question. A couple of follow-up questions on Europe. I know, you've said specifically that the underlying business had a strong quarter. But looking at the development in revenue per hectoliter it does look like there was a good sequential improvement Q2 into Q1.

I was wondering if it's possible to talk a bit more in detail about that. Any particular markets where you're seeing pricing improving? And then, secondly, you mentioned timing of marketing spend.

Can I confirm that was a shift from Q2 into Q1 or should we expect a further pickup in marketing for the balance of the year in Europe?.

Yeah.

So, Simon, did you manage to get both those questions? Do you want to take both of them?.

Yeah. I'm having a good day. Yeah. So, in terms of pricing and mix, so as you've seen in our release, our NSR per hectoliter was up 3.7%. That was more driven by mix than by pricing. So, pricing was about 0.3% and mix was 3.4%.

And what we're trying to do in Europe and this is obviously not unique, we try and make sure that we have a good balance between our volume growth, our pricing growth and our mix, and we try and make sure those three levers are in fairly good calibration.

And if we can get all three moving at the same time, then we would really regard that as a very positive quarter.

I'd like a little bit more on pricing, but the environment isn't always allowing us to do that, and therefore I think our volume result being as it is and our mix result being as it is gives us actually a very strong underlying revenue growth story. And it's premiumization that's really helping us do that.

So, without wanting to be too repetitive, it's really the investments that we're putting behind Staropramen which has a premiumizing effect on our revenue, it's Coors Light in the UK and then it's our Blue Moon and craft portfolio and then some other investments that we're putting behind our Central European premiumization program.

So, that's the main drivers of that. In terms of marketing spend, if you look at our long-term history, we've been increasing marketing spend year-on-year since we made the StarBev acquisition in 2012, and that's what's been driving a lot of our positive results. Quarter-by-quarter, we'll always going to get a little bit of volatility.

So, I don't want to give you too much of a steer on that quarter-by-quarter because I just don't think that's necessarily helpful. We did spend more in Q1 and we did spend a little less in Q2. That's not necessarily anything systemic. We want to invest where it's most effective.

And our view this year is we just needed to move some of those programs around, and particularly get off to a good start by investing more in Q1. But generally speaking, it's the same answer you've got from Canada or in America that timings may vary from quarter-to-quarter.

But overall, we're just trying to make sure that we're efficient in terms of our investments. And I think if you look at our outputs, again, volume, price, and mix, then our marketing investments are working very well for us. But you will see a little bit of variability quarter-to-quarter and I wouldn't read too much into it..

So, I'm not wanting to hog the call.

But – and forgive me if you've been gone through this in detail before, but in terms of the Punch transaction that's pending, have you given ever the percentage of your volume which goes through the Punch A states previously?.

Yeah. I mean, we – no, we haven't and we wouldn't intend to disclose that either. I mean, just to give you some context, there's over 100,000 licensed outlets in the UK on-trade of which Punch A represents less than 2%. So, we wouldn't be overly concerned about that.

The other thing to notice is that obviously a large majority of that estate is the lease-intensive estates, where the ultimate decision makers on what gets put on the bar are the tenants and the licensees.

And whilst we would expect some of that to be influenced by Heineken's purchase, it's not the same as having a manager stays in our brands to compete very, very effectively in that sector of the marketplace. So, I'm not factoring that in significantly to our UK performers which continues to be very strong..

Thank you very much..

Thanks, Chris. I think there's one or two more questions..

Yes. Our next question will come from Pablo Zuanic of SIG..

Thank you. Good morning. I've got a couple of questions for Tracey and then for Gavin. So, Tracey, obviously EBIT margins for MillerCoors for six months up about 80 bps. Company in total, EBIT margins flat – EBITDA margins flat. MillerCoors very good 80 bps.

So, the question is when you gave that guidance of 30 bps to 60 bps medium term total consolidated EBITDA margin expansion, was the assumption that there will be headwinds at some of the divisional level? I mean, obviously, there's a jump in corporate overhead this year, but it's bolstered by year two, year three corporate overheads as a percentage of sales is stable.

I'm assuming that Europe and MCI should contribute to margin expansion and Canada should not be a headwind. But I'm just trying to understand if you can give us some color where in terms of that algorithm. Because obviously MillerCoors is running at a faster pace than that.

And the second quarter for you, Tracey, if my numbers are right, your EBITDA margins comps in the second half at MillerCoors are a lot easier, if I can use that word, than in the first half. So, you should be able to run significantly better than the 80 bps expansion that you've shown in the first. So, that's for you.

And in the meantime I'll just ask Gavin my questions also. So, Gavin, I know the area....

Pablo. Pablo, it's Mark. Let's just pause there so that we can deal with these one at a time..

Okay. That's fine. Thanks..

On the first, Gavin, do you want to just talk to the EBITDA margin progress in the U.S. and I think if you can maybe just reference the progress that we made coming out of 2016 and the progress we've made in 2017.

And then I'll come back and ask Tracey just then to give a broader perspective on enterprise level and what we're trying to do from an EBITDA margin perspective. So, Gavin, do you want to just talk about the progress that the U.S.

team has been making on EBITDA margin expansion?.

Sure. Yeah. I mean we actually came out of last year in Q4 quite strongly. So, I'm not totally sure I agree with you Pablo on the comps are going to be easier, Q4 was actually quite tough.

And of course the focus that we're placing on Above Premium and shifting our portfolio and accelerating the Above Premium is obviously having a benefit as you saw in our mix benefits in the second quarter, Pablo. And of course we continue to focus on cost of goods sold, which is low single-digits in the quarter and from a guidance point of view.

And Mark talked quite extensively about the work that we're doing on marketing spending and ROMI, and more effectively spending our money and the benefits of becoming part of a global procurement organization as to how we leverage the synergies and the agency cost. So, that's what I would say on the margin, Mark..

Okay. And I think as we've talked about in the past Pablo I mean we know exactly where the opportunities are in the U.S. We're chasing those down. We saw very good EBITDA margin expansion last year and that's continued into this year.

But Tracey do you want to just give a broader perspective as we think from an enterprise perspective?.

Yeah. So, a couple of things maybe just to keep in mind. So, Gavin did mentioned the fourth quarter of last year for the U.S. Just to give a number around that, we're cycling in Q4 for MillerCoors, and a pre-tax income increase of 42%. So, that's a big headwind for us in Q4.

The other thing just to mention is we – in Q3 we're cycling one more quarter of the Canada brand amortization. If you recall in Q4 of last year we reclassified some of our brands to definite lives. So, we've got one more quarter of that cycle in Q3.

And then the other thing just to mention from a Canada point of view is the COGS per hectoliter last year in Q4 was actually a reduction, so recycling very positive performance in Q4 of last year. And then another headwind just to consider is we do have the higher corporate cost as you mentioned.

We are investing, for example, behind our global business services that we opened in May in Romania, and we're investing behind the shared service center that we'll be keeping in Milwaukee. So, there is a couple of costs to consider for this year that we will be investing and also cycling some performance.

And then, again, just to remind you, the 30 basis points to 60 basis points, we do look at that over a longer term, so three years to four years..

So, I think....

So, yes..

Yeah, I think the only thing I would add, Pablo, is just connect that to my earlier comments that we've tried to, I think, deliver what we believe will be a measured and sustainable improvement and our overall EBITDA margins, and connect that with our aspiration and our plan to get our top line moving. So, those two things have got to work in tandem.

So, hopefully I've given you some color around your first question. I think, your second question is (1:08:13)..

Yeah. Understood. Thank you very much for that. I'm sorry about the follow-up. So, it's more for Gavin I guess two questions. For two quarters in a row, your STRs have been two points to three points better than what is kind of data implied. And in the past, you had been the opposite, one point to two points worse.

So, I assume that it means you are doing better in developing terms in liquor stores, independents and on premise. So, if you can comment on that. And the second question just more in general.

If you can give us an update in terms of what's happening in the mass retail channels, supermarkets in particular in terms of space allocation, has the beer space been reduced in absolute terms, or – and/or is the space being managed in a different way by the retailers in terms of what they give to craft.

If you can give us an update on that, that would be useful. Thanks..

Thanks, Pablo. Gavin, over to you for both of those..

Thanks, Mark. Thanks, Pablo. Look, yeah, hard for me to give you an answer as to why there's a different between what you're seeing in Nielsen and the other industry guys and what we're coming up with. What I can say to you is that on-premise volume trends continue to underperform relative to off-premise.

And there's obviously a number of factors that are driving that lower foot traffic due to the economic impact and the economic environment. And frankly, the on-premise business has lost a relatively greater share to wine and hard liquors.

From a MillerCoors perspective in recent quarters, we've narrowed that gap with our on-premise volume trends actually improving and a big part of that is building with beer which is being well received by the retailers. And we're also taking that into C stores, liquor stores and grocery. So, that's what I would say on that.

As far as shelf space is concerned, obviously premium and economy segments are facing lots of challenges from a category headwind point of view, and from shelf spaces as well. But consumer interest in those segments remains really high, and it still represents 60% of the beer sold in the United States.

So, from a retailer perspective, premium and economy priced lagers do remain the fastest moving brands in the industry, and they've proven to be profitable. So, reallocating shelf space to brands that have lower velocities like Mexican imports doesn't really make a whole lot of business sense.

And we believe that all three price segments play an important role for the category, just as they do for wine and spirits, and we participate in all three of those segments.

So, taking away shelf space from premium and economy segment is not going to help grow the category, because as we saw with the economy drinker, when you ignore them, they just end up going to wine and spirits. So hope that answers your question..

Thank you. Very helpful..

I think, the only thing I would add to what Gavin said, and so spot on is that as we've seen the craft segment slowdown and many retailers actually focused on simplifying the crafts space within the context of the total beer space.

And we've seen that already and I think you'll see more of that to come over the course of the next 12 months to 24 months. So, Pablo, thanks for your questions.

I think, Laura, that's where we're wrapped on questions, is that correct?.

That is correct. I was just going to turn it back over to you, Mr. Hunter..

Okay. So, Laura, thank you and thanks everybody for your interest in the Molson Coors Brewing Company. Also many thanks for the feedback on our quarterly reporting. Hopefully, you recognize that you've been heard and we've made some improvements.

Please keep your feedback coming, it's invaluable and we'll continue to try and drive a real clarity and transparency as we continue the dialogues. So, thanks again and we look forward to seeing many of you in Boston next month. Thank you..

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