Molson Coors Forms JV with Canadian Cannabis Company, Shares Q2 Results

Molson Coors Brewing Company today reported its second-quarter earnings, however the financial results took a backseat to news that its Canadian business division had formed a joint venture with a Quebec cannabis company.

The JV between Molson Coors Canada and HEXO, a recreational cannabis “sister brand” to The Hydropothecary, a licensed producer and distributor of medical cannabis, will be structured as “a standalone start-up company” led by its own board and management team.

Together, the two companies aim to make non-alcoholic, cannabis-infused drinks north of the border.

Molson Coors, the second-largest beer manufacturer in the U.S., will hold a controlling 57.5 percent interest in the JV and HEXO will own the remaining 42.5 percent.

The deal is expected to close on September 30, just before recreational marijuana sales will become legal in Canada. However, cannabis-infused edibles and beverages will not be immediately legalized — those products expected to receive approval sometime in 2019.

During a call with investors and analysts, Molson Coors president and chief executive officer Mark Hunter said the JV “is consistent with the company’s overall strategy to drive disruptive growth in our market’s globally.”

“We concluded that we wanted to be an active participant with a trusted partner, and that’s what we announced today,” he said. “I think it’s clear that the opportunity is still unproven because we’re not actually through legalization, but we believe based on the work that we’ve done that it’s got significant potential and that needs to be proven out in the medium to long-term.”

Hunter added the JV with HEXO, which currently operates a 300,000 sq. ft production space and is expected to complete a 1 million sq. ft. expansion before the end of the year, is another piece in the company’s overall strategy to grow and diversify its non-alcoholic portfolio, which includes investments in Clearly Kombucha and ready-to-drink chai tea maker Bhakti Inc.

Molson Coors Canada president and CEO Frederic Landtmeters added that consumer acceptance of cannabis in Canada is on the rise and said the company believes “that’s only going to continue.” However, the impact of legalized cannabis on beer sales remains unclear, he said.

“I think it’s going to be a little bit of wait and see in terms of the impact,” Landtmeters said.

In a memo following the announcement, Cowen and Company analyst Vivien Azer called Molson Coors’ entry into the cannabis market encouraging due to her “view that cannabis and alcohol are substitute social lubricants.”

“While much of our work has focused on the substitution impacts that we believe are evident in the U.S. (where adult use cannabis is already legal in a handful of states), we expect these same consumer trends to hold true in Canada upon legalization,” she wrote. “Indeed, our own consumer survey work in Canada, as well as consumer survey work conducted by Deloitte, indicate that only 20% of users regularly consume alcohol when using cannabis.”

Market research firm Euromonitor International estimated that the global market for legal and illegal cannabis is about $150 billion, with legal marijuana sales in Canada projected to total $7.5 million and $10.2 billion in the U.S. this year.

In a memo, Euromonitor’s head of alcoholic drinks, Spiros Malandrakis, wrote: “There is a paradigm shift underway and cannabis has the potential to provide answers to the alcoholic drinks industry’s existential questions. A transition towards a holistic responsible intoxication model will be the end game as key players are reluctantly yet steadily embracing the rising green tide.”

Molson Coors’ foray into the Canadian cannabis market comes about nine months after Constellation Brands purchased a 9.9 percent stake in another Canadian cannabis company, Canopy Growth Corporation (WEED), for $191 million.

Several other companies have ventured into the non-alcoholic infused cannabis beverage business, including California’s Manzanita and Madrone, Washington’s Le Herbe and Colorado’s Dixie Elixirs. Heineken-owned Lagunitas Brewing also teamed up with CannaCraft on non-alcoholic THC and CBD-infused sparkling waters. Blue Moon creator Keith Villa, who retired from Molson Coors after 32 years earlier this year, is also in the process of launching his own line of THC-infused products under the Ceria Beverages label.

The move into the cannabis segment comes as the beer industry continues to lose total beverage alcohol share to wine and spirits. Worldwide net sales (-0.2 percent) and volume (-2.4 percent) of Molson Coors’ products declined in the second quarter. The company attributed its declining volumes (24.7 million hL in Q2) to declines in the U.S. and Canada that were only partially offset by growth in Europe and other international markets.

In the U.S., the company’s Q2 depletions (sales-to-retailers) declined 4.8 percent while shipments (sales-to-wholesalers) declined 3.6 percent. For the three months ending June 30, the company reported more than $2 billion in U.S. net sales, down 3.1 percent compared to 2017 levels. Revenue per hectoliter increased 0.9 percent, however.

“Although the industry faced another tough quarter due to a challenging April as well as the impact of holiday mismatches, we are dissatisfied with our overall market share trends and we will continue to focus on reinvigorating Coors Light while maintaining the strong improvements in Miller Lite and continuing to accelerate our performance in above premium to improve both top and bottom line results,” Hunter said.

Hunter said the company plans to build volumes with its wholesale partners in the second half of the year, which will lead to higher shipments than depletions. He called the company’s focus “urgent” on Coors Light’s negative trends.

MillerCoors CEO Gavin Hattersley added that the Coors Light brand was “disproportionately” affected by issues with the implementation of a new ordering system at its Golden, Colorado, brewery.

“About a fifth of its decline in the second quarter would be associated with that,” he said, adding that Blue Moon volumes were also hurt by the changes. Sales of Blue Moon are “back to growth,” however.

MillerCoors is also in the process of hiring a chief marketing officer to supplant David Kroll, who left his post on July 27. The new CMO’s top priority will be turning around Coors Light.

Molson Coors executives cited increased aluminum and freight costs along with lower volumes, negative sales mix and unfavorable impact of new revenue recognition accounting standard for declines in its U.S. pretax income (-8.4 percent) and EBITDA (-7.2 percent). Those headwinds were only partially offset by higher net pricing and lower MG&A expenses.

In fact, the company said its cost of goods per hectoliter in the U.S. increased 5.5 percent, due to higher freight and fuel costs, “volatility” in aluminum prices due to President Donald Trump’s tariffs and spikes in the Midwest Premium, and lower volumes.

At the close of trading today, Molson Coors Stock is up about 3.5 percent.

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