Molson Coors Beverage Q2 2021 Earnings Call Transcript

Quartr
Provided by Quartr
July 29, 2021

There are 11 speakers on the call.

Operator

Good day, and welcome to the Molson Coors Beverage Company and Second Quarter Fiscal Year 2021 Earnings Conference Call. You can find related slides on the Investor Relations page of the Molsoncor's website. Our speakers today are Gavin Hattersley, President and Chief Executive Officer and Tracy Gilbert, Chief Financial Officer. With that, I'll hand it over to Greg Tierney, Vice President of SD and A and Investor Relations.

Speaker 1

Thank you, operator, and hello, everyone. Following prepared remarks from Gavin and Tracy, we will take your questions. Please limit yourself to one question. And if you have more than one question, please ask the most pressing question first and then reenter the queue for follow-up. If you have technical questions on the quarter, please pick them up with our IR team in the days weeks to Today's discussion includes forward looking statements and actual results or trends could differ materially from our forecast.

Speaker 1

For more information, please refer to the risk factors discussed in our most recent filings with the SEC. We assume no obligation to update forward looking statements. GAAP reconciliations for any non U. S. GAAP measures are included in our news release.

Speaker 1

And also, unless otherwise indicated, all financial results discusses versus the comparable prior year period and in U. S. Dollars. And with that, over to

Speaker 2

you, Gavin. Thanks, Greg. Good morning, and thank you, everybody, for joining us today. Nearly 2 years ago, we laid out the Molson Coors revitalization plan, a multiyear strategy To deliver the sustainable top line growth that has eluded our business for many years, while at the same time delivering sustainable bottom line growth. Under the plan, we have streamlined the company on reinvesting those savings to build on the strength of our iconic core, aggressively grow our above premium portfolio, Expand beyond the Bureau, enhance our capabilities and support our people and communities.

Speaker 2

We had a few doubters then, and we had some to challenges since, from a global pandemic to severe Texas winter storms to a cyber attack in our company. But nearly 2 years later, we can say to those doubters with confidence that Molson Coors is on the path to deliver sustainable top and bottom line growth. Our performance this quarter speaks for itself. I say that because for nearly 2 years, we've talked a lot about the outputs of our revitalization plan, new investments, new partnerships, new product launches and new campaigns. But today, we're able to start talking meaningfully about Outcomes from the revitalization plan, and that's an important shift.

Speaker 2

In the Q2, despite Ongoing pandemic restrictions, we delivered the most top line growth of any quarter in over a decade, and we nearly achieved 2019 net Sales revenue levels on a constant currency basis despite those pandemic restrictions during this quarter. I'm incredibly pleased with This progress, but it's a strong indicator of what is yet to come through our revitalization plan. Our progress was primarily driven by 3 things. First, it was driven by the fact that we delivered the best brand mix in the United States since the inception of the MillerCoors joint venture in 2008. This significant premiumization of our portfolio was led by the strong growth of our U.

Speaker 2

S. Hard seltzers, where we doubled our share of the U. S. Hard Seltzer segment in the Q2. We took over as the global brewer with the fastest growing U.

Speaker 2

S. Seltzer portfolio, We recently passed another major brewer and our 4th in total U. S. Seltzer share as we continue to move towards our goal of achieving a 10 share in the U. S.

Speaker 2

By year end. Those are outcomes. We're also continuing to see strong traction with our Vizzy innovation. Wizzy's fast turning new lemonade variety pack helped the Wizzy brand gain almost a full point of U. S.

Speaker 2

Share in the 2nd quarter. And we just added another new package to that family with busy watermelon, which has been a hit with retailers thus far. Topo Chico Hot Seltzer continues to exceed our expectations in the 16 markets in which it's sold in the U. S. Demand has far outpaced our original plans for the brand and with supply improving, we are now positioned to be more aggressive in marketing this brand.

Speaker 2

That is an outcome. Outside of the U. S, our Canadian hard seltzer portfolio continues to perform very well. The combination of Busy and Coors Hard Seltzer Has earned more than a 50 share of the hard seltzer category with the largest beer retailer in the country. Vizzy specifically has earned the number one spot in the on premise in key regions like Ontario, and we're looking forward to fuel this momentum with Vizzy Lemonade, which launched in Canada just a few weeks ago.

Speaker 2

That's In Europe, threefold in the UK and Y Moments in Central and Eastern Europe continue to build distribution and consumer awareness with a strong mix of brand advertising. The category is still at an early stage, but we are well positioned to win share and develop our portfolio as popularity around hard seltzers continues to grow. And while our fast growing hard seltzer portfolio Is driving our premiumization is not alone. Madrig continues to exceed expectations in the U. K.

Speaker 2

On premise with unprecedented consumer demand. And Paraher from the start of Plumber and Stable of Brands is performing ahead of expectations in the Central and Eastern European markets, beating initial estimates by more than 50%. Our Latin America business, where our global brands primarily operate in the above premium price segment, has exceeded expectations given the coronavirus pandemic throughout the region. Collectively, for the first half of twenty twenty one, the region is Exceeding brand volume levels for the comparable 2019 period despite continued government issued pandemic restrictions. For example, our Puerto Rican operations, which had been in long term decline, are currently growing.

Speaker 2

Those are outcomes. In Canada, our 6 pints craft division is growing absolute volume despite its reliance on the on premise. In the U. S, Blue Moon Light Sky was the number one new beer item in 2020 and has grown double digits this year, building off its strong base, While Leinenkugel's Summer Shandy brand volume is up 10% year to date. Those are outcomes.

Speaker 2

And In just a few weeks, the Yengling joint venture will launch in the state of Texas, where distributor, retailer and customer interest has been incredibly high. Product shipments begin next week and are scheduled to hit retail by August 23. The other factor that drove the best brand mix In more than a decade is a rationalization of the long, long tail of our economy portfolio in the U. S. As we have discussed, in recent months in the U.

Speaker 2

S, We paused production of a number of smaller low margin slow moving economy brands and SKUs. This allowed us to improve our brewing efficiency and Stabilized inventories of our core brands, and it also premiumized our portfolio and improved our margins. And we intend to maintain that high level of premiumization and service. So after an extensive analysis of our business, we are meaningfully streamlining and premiumizing our U. S.

Speaker 2

Portfolio, discontinuing around 100 SKUs, including the elimination of 11 economy brands altogether. This will improve supply chain flexibility for our more profitable priority brands, enhance our innovation efforts, enable us to better focus And ensure dependable and on time shipments to our distributors. Let's be clear, while economy brands have typically not been a focus of the investment community, Distributors who sell brands like Magnum and Mickey's Ice are going to feel it when they're discontinued. So our local sales teams are partnering with Distributors and retailers on a market by market basis on exit plans and to identify swaps that make sense. So the headline is simple.

Speaker 2

Premiumization is here to stay at Molson Coors. We're going to invest bigger behind our fast growing global heart sell through portfolio, and we're going to Growth was also driven by the strength of our core brands and the pace of the return to the on premise. Coors Light and Miller Lite again grew share of the U. S. Premium Light With on premise accounts reopening in a big way across the U.

Speaker 2

S, the brands were at 97% of their total 2019 STR volume in the second Coors Light specifically achieved its best half year share trend in 4 years and its U. S. STRs rose by 1.7% in the 2nd quarter. At the same time, Miller Lite grew 3.2% in the U. S.

Speaker 2

In the quarter. In Canada, Coors Light has grown share with our largest retail customer for 4 straight quarters. Our top line growth was also aided by the investments we have made in our Beyond Beer initiatives. Standing here at the end of July, ZOWA has already far surpassed our expectations for the entire year, And its co owner, Dwayne Johnson, continues to amplify the product across his massive social media presence as well as through New TV campaign that debuted during the Olympics this month. The RTD coffee market is estimated $4,300,000,000 in 2021 and Life Alarm is ranked number 1 in the above premium category.

Speaker 2

We're excited about the progress we are making And continue to have success with distribution to large national and regional retailers in both the drug and convenience store channels. Trust Canada, our joint venture with HEXO, has grown to more than a 50 share of the Canadian cannabis beverage industry and now holds 7 of the top 10 SKUs in the country. And in the U. S, after starting in the Denver metro area, Truss US has expanded distribution to other distributors and independent retailers across State a strong vote of confidence in the joint ventures plan and in its brands. As I said earlier, the results from the 2nd quarter demonstrate The revitalization plan is starting to pay off.

Speaker 2

So we're going to continue investing in our business, in our people and in our communities to continue driving the results we're starting You saw that in the last quarter as we announced 2 new projects to increase our global hard seltzer production capacity. Canada, we announced plans to quadruple our in house hard seltzer production capacity. And in the U. K, we announced plans to add a new hard seltzer canning line in our Burton on Trent Brewery, while also upgrading our beer and cider packaging facilities to drive efficiencies. Those two investments follow a similar effort last year to increase Our hard sell to production capacity fivefold in the U.

Speaker 2

S. These investments will have long lasting benefits as we bring more production in house and ultimately improve our profit margin. But the investments in our business are not stopping there. Finally, after more than a year of pandemic related challenges, we're going to be able to more fully invest behind our brands. Now what does that mean?

Speaker 2

While sticking in the U. K. For a moment, Seafold Hard Seltzer is backed by the biggest brand investment Molson as ever made into a new U. K. Category.

Speaker 2

And you can expect to see a boost in our marketing spending over the second half of the year as well. That's because markets are opening back up. Our local alliances are reactivating for the first time in over a year, and our inventory would have recovered to a point that it makes sense to Fully invest behind the brand marketing. As important as that is, our success or failure as a company isn't entirely defined by our top growth is also determined in part by how well we support our approximately 17,000 employees and support our hometown communities all around the world. That's why we directly engaged our North American employees in what we call Project Justice, an effort we started last summer and have continued in 2021.

Speaker 2

Through this initiative, we are supporting 33 organizations across the U. S. And Canada that are working to create a more just and inclusive world. That's also why we're expanding our scholarship program for U. S.

Speaker 2

College students of color who are pursuing careers in fermentation and brewing sciences As we work to bring more diverse voices to our industry. And that's why we're looking within our organization to improve of women and people of color across the biggest part of our business. We also just released our annual ESG Report called our Our Imprint with a refreshed strategy that focuses on 2 key pillars, people and planet. From eliminating plastic rings in the U. K.

Speaker 2

To saving over 100,000,000 gallons of water annually through our Golden Brewery Modernization project To the significant work we are doing to support our people, we've made great progress against our goals and stay tuned as we continue our ESG journey. We've had our share of challenges over the last several years, but that is changing. And today, the signs all say the same thing. Molson Coors' future is bright and the revitalization plan is succeeding. We're deleveraging our business.

Speaker 2

We've reinstated the dividend. We're thinking more consciously about how we best support our people in the communities in which we operate. We're investing behind our brands. We're reshaping our portfolio and we're expanding into new spaces. Nearly 2 years into our revitalization plan, Our results are improving.

Speaker 2

We're going to put our foot even more firmly on the gas pedal as we drive towards our sustainable top and bottom line growth initiative for this business. Tracy?

Speaker 3

Thank you, Gavin, and hello, everyone. We posted We had a strong Q2, which exceeded expectations. We continue to make real progress executing our revitalization plan, and we are starting to see the results in our operating performance. As Gavin noted, we continue to premiumize our brands and strengthen our core business. And our improved financial flexibility has enabled us to invest in our business, while continuing to delever our balance sheet and to reinstate a dividend.

Speaker 3

Now let me take you through our quarterly results in more detail and provide an update on our outlook. Consolidated net sales revenue increased 13.7% in constant currency, delivering 98% of Q2 2019 levels despite continuing to operate with varying degrees of on premise restrictions. Consolidated financial volumes improved 5.5%, Uptasting brand volume growth of 3.1%, driven by higher Europe volumes and favorable U. S. Domestic shipments.

Speaker 3

Top line performance benefited from on premise reopenings in the quarter for most of our major markets as well as strong global net pricing, positive channel mix and historic favorable brand mix levels in the U. S. As we continue to premiumize our portfolio. Net sales per hectoliter on a brand volume basis increased 5% in constant currency, driven by pricing growth, coupled with positive brand and channel mix, partially offset by geographic mix given the strong growth in Europe and Latin America. This top line growth was somewhat offset by inflationary pressures, which impacted most consumer product companies, as well as increased marketing investments as we continue to execute our revitalization plan.

Speaker 3

Underlying costs per hectoliter increased 8% on a constant currency basis, driven by cost inflation, including higher freight and packaging costs. However, with robust hedging and cost savings programs, we have been able to significantly mitigate much of the inflationary pressure. Augusted reductions to marketing spend in the prior year period due to the coronavirus pandemic. As planned, we significantly increased marketing investments in the quarter, putting strong commercial pressure behind our key innovations and core brands. Underlying EBITDA decreased 1.3% on a constant currency basis, but increased compared to 2019 Q2 levels.

Speaker 3

Underlying free cash flow was $200,000 for the first half of the year, a decrease of $238,200,000 from the prior year period. This decrease was wholly driven by lapping roughly 5 $100,000,000 in benefits in the prior year related to tax deferrals due to governmental programs and was partially offset by favorable working capital and lower capital spend. Capital expenditures paid were $212,000,000 for the first half of the year As we continue to invest behind capability programs such as our previously announced Golden Brewery Modernization and our new Montreal brewery. Capital expenditures were lower in the first half of the year compared to the prior year primarily due to project timing. Now let's look at our results by business units.

Speaker 3

In North America, the on premise channel accounted for approximately 13% of our net sales revenue in the quarter compared to approximately in the same period in 2019. In North America, on premise reopenings vary by market. In the U. S, our largest Marcus, we continue to see progressive reopenings during the quarter and attained over 80% of 2019 levels as of quarter end. In Latin America, restrictions continued to ease, while in Canada, significant restrictions continued throughout the quarter with on premise in constant currency, driven by strong net pricing growth, positive brand mix in the U.

Speaker 3

S, favorable U. S. Shipment timing and higher Latin America volume. Of note, U. S.

Speaker 3

Net sales revenue exceeded the Q2 2019 levels. In the U. S, domestic shipment volumes increased 1.2%, outpacing brand volume declines of 4% as we focus on rebuilding inventory following the Q1 supply disruption. The brand volume declines were Highly due to economy, which was down double digits as we deprioritized certain non core SKUs. Our above premium portfolio was up double digits and our premium brands were up low single digits.

Speaker 3

In fact, Our U. S. Above premium brand volumes reached a record high portion of our portfolio compared to any prior quarter since the creation of the MillerCoors joint venture in 2008. Canada brand volumes declined 5.1%, while Latin America brand volumes experienced Triple digit growth driven by strong core brand performance. Net sales per hectoliter on a brand volume basis increased 4.7% in constant currency with pricing growth delivered across all geographies.

Speaker 3

The U. S. Increased 6.9 percent driven by net pricing and historic levels of positive brand mix. While the intention Time in economy was a contributor, about half of this record mix performance was due to growth in above premium led by innovation brands, including Vizzy, Topa Chico Heart Salsa and Zoa. These positive factors were partially offset by negative geographic mix resulting from the restricted trading environment in the higher revenue Canadian business and strong growth in Latin America.

Speaker 3

Underlying costs per hectoliter increased 8.5%, driven by inflation, including higher transportation and packaging materials costs and mix impacts from premiumization. Underlying MG and A increased 24.2% due to higher marketing investments. We increased marketing investment behind core innovation brands, and we increased media spending behind our iconic core Brands, Coors Light and Miller Life. Our U. S.

Speaker 3

Media spend approached 2019 levels, while local tactical spend was somewhat constrained due to on premise restrictions, which eased throughout the quarter. North America underlying EBITDA decreased 10.7% in constant currency as higher gross profit was more than offset by higher planned in constant currency, driven by volume increases and positive channel, geographic and brand mix due to on premise progressive reopening, most meaningfully in the UK, given the reduced on premise restrictions compared to nearly full lockdowns in the prior year quarter. Above premium brand volumes reached a record high portion of our Europe portfolio. Europe financial volumes increased 17.8% and brand volumes increased 15.4%, driven by a significant increase in U. K.

Speaker 3

On premise volume. Net sales per hectoliter on a brand volume basis increased 16.6%, driven by favorable channel, Geographic and brand mix, particularly from our higher margin on premise focused UK business as well as positive pricing. Underlying EBITDA increased 189% in constant currency, driven by gross margin partially offset by higher MG and A expense. Turning to the balance sheet. As of June 30, 2021, we had Lowered our net debt to underlying EBITDA ratio to 3.35x and reduced our net debt to $6,900,000,000 down from 3.5x and $7,500,000,000 respectively, as of December 31, 2020.

Speaker 3

We ended the Q2 with strong borrowing capacity with no outstanding balance on our $1,500,000,000 U. S. Credit facility. Turning to our financial outlook. We are again reaffirming our 2021 annual guidance originally provided on February 11, 2021.

Speaker 3

While we are certainly in a better place than we were a year ago, it is reminding that uncertainty as it pertains to the coronavirus and its variance remains to varying degrees by markets. Now I'll provide some underlying expectations to provide some additional context For the balance of the year, we expect to deliver mid single digit net sales revenue growth for the full year on a constant currency basis. Building off the strong shipment growth in the U. S. In the Q2, we continue to aggressively to build inventories to more optimal levels.

Speaker 3

In the U. S, we expect on premise trends to continue to improve as we lap restrictions in the prior year period. In Canada, we are seeing gradual on premise reopenings veering by province, which should provide positive channel mix. In Europe, the U. K.

Speaker 3

Should benefit from this full on premise reopening July 19. However, The comparison is more difficult than it was for the Q2 given the on premise was largely open for the full Q3 of 2020. Our guidance also anticipates continued strength in our Buzz premium portfolio, particularly hard seltzers. Also, we expect continued solid progress against our previously discussed emerging growth 3 year revenue goal of $1,000,000,000 against which we are tracking ahead of plan. We continue to anticipate underlying EBITDA to be roughly flat compared to 2020, as top Top line growth is expected to be offset by continued cost inflationary headwinds, but more significantly from increased investments to deliver against our revitalization plan.

Speaker 3

We intend to increase marketing investments to build on the strength of our core brands and support successful innovations. As a result, we expect significant year on year increases in marketing investments over the balance of the year and most notably in the 3rd quarter. We expect Q3 marketing investments to be higher than the Q2 of 2021 and also higher than the Q3 of 2019 as we continue to ramp up supply following the disruptions in the Q1. Obviously, this will have an impact on our bottom line, particularly in the Q3, but this will strengthen the future of our brands. Also as a reminder, in 2020, our working capital This is from the deferral of approximately $130,000,000 in tax payments from various government sponsored payment programs related to the coronavirus pandemic.

Speaker 3

We currently anticipate the majority to be paid this year as they become due. Moving to capital allocation, we continue to prioritize investing in our business to drive top line growth and efficiencies, reducing debt and And capabilities to support new innovations and growth initiatives, improve efficiencies and advance towards our sustainability goals. 2nd, we have a strong desire to maintain and in time upgrade our investment grade rating. As such, we expect to continue to pay down debt and reaffirm our Target net debt to underlying EBITDA ratio to be approximately 3.25 times by the end of 2021 and below 3 times by the end of 2022. Demonstrating our commitment to this goal, on July 15, We announced that we had repaid in full the $1,000,000,000 2.1 percent senior notes that were maturing that day using a combination of commercial paper and cash on And 3rd, and also as announced on July 15, our Board of Directors determined to reinstate a quarterly dividend on our Class A and Class B common shares and declared a dividend, a quarterly dividend of $0.54 per share.

Speaker 3

The Board made the decision to reinstate the dividend at a level that they believe is sustainable and gives room for future increases as business performance improves. We are proud of our operational performance in the quarter, which underscores successful execution against We are excited about the future of Molson Coors as we drive towards our goal of long term sustainable revenue and underlying EBITDA growth. And with that, we look forward to taking your questions. Operator?

Operator

Thank you. We will now begin the question and answer session. Our first question comes from Rob

Speaker 3

Odenstein, Evercore.

Speaker 4

Great. Great and thank you very much. Gavin, I'm wondering if you could talk A little bit about what you've learned so far about the hard seltzer market. Clearly, it seems that there's some issues with beer And did trademarks, but at the same time, you've got this proliferation of 700 brands or more than I understand. There Competition from various ready to drinks, so love to get your thoughts on that.

Speaker 4

And then also Love to understand why you're not using the Vizzy trademark more in Europe and the UK And that you feel that you need to have different sorts of trademarks there. So a lot of questions. Just really love to get your thoughts on what you've learned about Hard Seltzers and what's going on in that segment. Thank

Speaker 2

you. Thanks, Robert, and good morning. Look, I mean, we've always said that the growth rates Weren't going to continue at the elevated levels that they were and that others might have seen. So, Robert, it's really no surprise to us that This rate of growth slowed because the category was starting last year's huge comps. And we've said in the past that Seltzer's were a beneficiary of the on premise shutdown because it had such Distribution exposure in the off premise.

Speaker 2

And so as the on premise is reopened, there's less distribution there. And so this is not a Price to us, I think we've been saying this for almost a year. We've also been saying for a while, Even if it's growing at 10%, 20%, 40%, there really isn't anything else in the beer space that's growing that quickly. So it's good for the beer category, and it's good for us. In North America, in the U.

Speaker 2

S, we've got 2 Very clear and differentiated winners from our point of view, and we plan to continue our focus on busy and Topa Chico Hard Seltzer. Now you referred to Coors Seltzer, Robin. I would say to you that Coors Seltzer up in Canada is actually doing really, really well. It's already achieved double digit share in some retailers and it's between Busy and Coors It's probably the most successful product launches that we've had for our company in 5 years up in Canada. We do believe that there will be a shakeout in the near future as many brands struggle to succeed in the crowded space.

Speaker 2

And While Busy and Topo Chico hot seltzer continued to accelerate, Coors hot seltzer wasn't. And so that's why we made the decision in the U. S. To discontinue Coors Seltzer and commit our energy, our resources, the material supply we've got in our shelf space to Busy and Topo Chico. Of course, it's going to stay in Canada because it's doing, as I said, really well.

Speaker 2

The market dynamics are different and the brand has performed well. In Europe, It's exhibiting in the UK and Central and Eastern Europe some of the same trends in the early days As the U. S. Did, and we've obviously tested all of our options from a brand point of view. And the early read was that That threefold was the right brand to go with, and it's landed very well.

Speaker 2

We're building capacity there, and I think we're well positioned in the U. K. To be a strong player If it takes off like it did in the U. S. And the same applies to Central and Eastern Europe.

Speaker 2

Why? Moment was Best brand resonated really well with the consumers there. The Central, Eastern European team do a fantastic job From an execution point of view, so the execution is really good. And we actually have 1st mover advantage in Central Eastern Europe. So we feel very good about our leading position in Central and Eastern Europe with that brand As well.

Speaker 2

I think I hit all your questions, Rob. But if I didn't, happy to take a follow-up from you.

Speaker 5

Well, yes, the and thank you for that detail.

Speaker 4

The only other one was how do you look at the interaction between Hard Seltzers And ready to drinks, there's some observers say that there's really not much interaction. It's the same occasion. I'm not sure I believe that 100%. But love to get your thoughts on the various ready to drink concoctions that are coming up And how you intend to play in that space going forward as well? I know you're doing a few things there.

Speaker 4

Thank you.

Speaker 2

Sure, Rob. I mean, yes, RTD beverages are emerging and emerging and fast growing segments. In fact, RTD sales already outpaced And that gap is only going to likely widen in the future. And competing in Space is a natural fit for companies like ourselves. We've got experienced packaging beverages in 12 ounce cans and bottles and working with our distributor partners to get those products out there.

Speaker 2

So we look forward to competing in this category with Proofpoint. We've got Superbird as well, which is the top end of that, which we launched earlier this year. And we have other offerings that we believe will appeal to consumers in our innovation pipeline.

Speaker 4

And how much interaction do you see in that? And are these ready to drink products with hard seltzers? Or is it too early to say?

Speaker 2

I think it's too early to say, Rob. I mean, obviously, there is some interaction. It's interesting. We've been asked this question as it relates to the beer category, and there's More of Seltzer's volume and growth is coming from outside of the beer category than it's coming from inside the beer Our data would suggest that. I've seen our competitors say the same thing.

Speaker 2

And certainly, it's been very positive from an overall beer category, beer segment point of view.

Speaker 4

Terrific. Thank you very much.

Operator

Our first question comes from Bill Koch with MKM Partners.

Speaker 6

So you talked a bit about the rationale to streamline Now to streamline economy brands, but it also looks like there's some discontinuing of some SKUs For pack sizes on brands like Coors Light and Miller Lite, so can you talk about the decision, I guess, to streamline pack sizes as it relates to your efficiency efforts.

Speaker 2

Yes. Thanks, both, and good morning to you as well. Look, we did a A thorough review of all of our SKUs and brands. I would say the majority of the SKU and brand or certainly all the brand Reductions, the majority of the SKU reductions are in our economy space. We did identify a few SKUs Which were slow moving and which could be substituted with other more profitable SKUs that would make us more effective.

Speaker 2

And so there would have been just a few outside of the economy space that we rationalize. The vast majority of it, Bill, It's in the economy space.

Speaker 6

Got it. And Tracy, as a follow-up, I think you said that The U. S. Brand volume declines were entirely economy. Does that mean excluding the discontinued economy brands that U.

Speaker 6

S. Brand volumes positive? Or do the remaining economy brands still drag that number into the negative?

Speaker 3

No. So the 4 SKUs are just recent. And so I would say that it's really the entire sort of economy portfolio that is driving that down.

Speaker 2

And, Phil, Miller Lite and Coors Light in the second quarter, as I said, I think in my prepared remarks, Grew. I don't think I've been able to say that, that often over the last sort of 15 years or so. And our above premium portfolio did very well as well with the Blue Moon franchise coming back strongly, our craft Brands coming back and we're very pleased with our sales performance. Thanks, Bob.

Operator

Our first question comes from Lauren Lieberman, Barclays.

Speaker 7

Great. Thanks. Good morning. I'd love to talk a little bit more about on premise. And number 1, just thinking about about brand strategy and portfolio.

Speaker 7

So first, I was curious about hard seltzer, the degree to which you're trying to expand presence of your brands in on premise. And I think that you had mentioned Vizzy as an on premise play in Canada, if I got that wrong, Karam, I apologize. But I was curious if that was in the Process for the U. S. And then also just the, I think, industry wide discussion of big brands gaining more presence, Share tap handles and so on as on premise reopens.

Speaker 7

And I was curious the degree to which you're starting to see that or been positioning for that to be the case as reopening continues? Thanks.

Speaker 2

Yes. Thanks, Lauren. Look, I mean, yes, during the pandemic, we did See increased demand for large trusted brands, and this is particularly true in the on premise. Many on premise owners are sticking to faster moving brands. And This obviously benefits brands like Miller Lite and Coors Light in particular for us, and we are seeing that trend stick as we settle into the sort of new normal.

Speaker 2

As I said earlier, with Merlaut and Coors Light, we did grow segment share for the 27th quarter. We're also seeing growth in our above premium portfolio. For example, Blue Moon in the U. S. Is up nearly 15% in the quarter.

Speaker 2

Peyronie is up nearly 30 5%. And it has provided us an outstanding opportunity to sample our newer offerings like Green Moon, LightSky and Busy and Topo Chico Hotel, which we actually missed that opportunity last year. So certainly, I wouldn't say it's just Busy that's going on premise. I would say it's both Busy and Topo Chico hard sell. Topo Chico is As good as well as it's doing, it's still in fairly limited number of markets, less than half of the states in the U.

Speaker 2

S. And in those states, it's the on premise the desire for it to be on premise has been very good. Canada, obviously, a little too early to say because the restrictions there have dragged on a little longer than they did In the United States, so too soon to tell how the Canadian on premise is going to open up. In Europe, it's been very pleasing. We, as you know, significantly over indexed to the on premise.

Speaker 2

So the on premise recovery that's taking In Europe has been very positive for us. And in fact, in July, we've seen the on premise business in the U. K. Start To approach 2019 levels and hold there. So that's been that has been very encouraging for us.

Speaker 7

And just to follow-up to just clarify, I think it's within on premise that's opened. Do you believe that you're gaining share within those outlets because of any degree of greater distribution or relative presence within the channel?

Speaker 2

In the U. S, the answer is yes. In the U. K, the data lags a little bit, so not ready to call that Yes. We have a hypothesis that we are, but I don't have data yet to support that.

Speaker 2

In Canada, obviously, the reopening It's not in a place where we can determine that yet. But in our biggest market, the answer to that is yes, Laura.

Speaker 7

Okay, great. And then the plan is to get to bring Vizzy and Topo Chico hard seltzer on premise in the U. S. And you have the capacity to do that in your And is that for this year or is that more of a looking into 'twenty two?

Speaker 2

Certainly, we have the capacity with Vizzy. We've been able to meet All the demand that our distributors have had with fall busy really since the beginning of the year. Topachica obviously It's more challenging from a supply point of view. It continues to perform extremely well. It's only got one SKU.

Speaker 2

It's got distribution in only 16 markets. And supply continues to be a little tight, but our production is improving. And That is going to allow us to push distribution, which would include the on premise, but it also allows us to start turning our marketing campaign on behind Topo Chica as well, Lauren. So I guess that's a convoluted way of saying yes.

Speaker 7

Okay, great. Thank you so much.

Operator

Next question, Steve Powers, Deutsche Bank.

Speaker 5

Thank you very much. A couple of questions centered on brand volume dynamics. In Europe, If my number is correct, it looks like you're at about 91% of 2019 in the quarter, which is up from the mid-70s last quarter, which is great. And I guess just As you think about the back half, do you think you kind of hold steady at that mid-90s index level or you think Your plans envision improvement, number 1. And as we pivot to North America, you're also at 91%, Indexed to 19 in the quarter, but that was down from 94% in the Q1, presumably as the economy brands were deprioritized.

Speaker 5

But As we think about the back half, similar question. Do you think you recover that index to 'nineteen in the back half? Number 1. And number 2, you mentioned that premium and above premium were At the highest percentage of the overall mix that you've ever seen. I guess curious as to whether in absolute terms Those price tiers are how they compare to where you were in 'nineteen in the similar time frame?

Speaker 5

Thank you.

Speaker 2

Thanks, Steve. Okay, let me see if I can get all these for you. Looking in Europe, as I said, actually, And particularly in the UK, as you know, we on premise is really important to us, and we've actually seen the on premise Approach to 2019 levels for the last well, most of July actually, it actually spiked But higher than that, but that was distorted by the Euro finals. We were actually in the U. K, we're actually For a few weeks, quite substantially above 2019 levels.

Speaker 2

That's settled back down now. And as I said, we're approaching 2019 levels. Central Eastern Europe is a little bit being a little bit more impacted by tourism. And so we're probably not quite At the UK levels in Central and Eastern Europe. And in the U.

Speaker 2

S, we've seen, as I think I said on the last call, more outlets open from an on premise point of view than we were initially expecting. And certainly, volume has Increased and settled down into a fairly stable level. We will have in the back half of the year a lot more Fairs, festivals, alliance opportunities, which we didn't have in the second half of last year, and I'm referring To football primarily, which is a big drinking occasion for us. So without wishing to put particular goals out there, We are encouraged by what we're seeing from an on premise and venue volume point of view. I I wasn't totally sure I got your price tiers question, Steve.

Speaker 2

So let me give it a shot. I mean, we did, as I said, have the strongest Share of our portfolio being above premium in the second in the second quarter based on an NSR point of view, it was Up into the high teens level, which we haven't seen levels like that since, I don't know, the joint venture started. So working Particularly well. And in Q2, our NSR was actually above 2019. So encouraging signs for sure.

Speaker 5

Okay. That's helpful. If I just play it back to you, it sounds like you do in North America Expect that the total portfolio, not just the on premise, but the total brand volume portfolio can better approach 2019 levels in the back half versus what we saw in the second quarter, is that a fair play back?

Speaker 2

No, not really, Steve, because of our decisions around the economy portfolio, right? So the economy portfolio, we've as I said in my prepared remarks and Sorry to rationalize that. So that would be a negative for us. And if you look at our share performance, I see our share performance quoted often, 70% of that decline in share is the economy portfolio for us. And we paused a lot of SKUs and brands and some of them, as we announced today, won't come back.

Speaker 2

So certainly from a premium light And above premium point of view, which includes Celsius, we're feeling really good about our position and our momentum.

Speaker 5

Okay. That helps. Thank you very much. Appreciate it.

Operator

Our next question comes from Kevin Grundy, Jefferies.

Speaker 8

Hey, good morning, everyone. I wanted to kind of pull together some of the Topics we've discussed so far in the call, kind of bring it back to the revenue and EBITDA guidance, kind of, Gavin, as you're assessing the 1st 6 months of the year, looking to the balance of the year and Specifically around the major puts and takes, when you spoke with the investment community in June, you said the company was running ahead of plan. On premise recovery certainly seems to be running ahead of plan and certainly where folks thought perhaps 6 months ago, the performance of your sell through portfolio, Similarly, also running ahead of plan, commodity environment worse, and then it seems like the SKU rationalization probably has greater pace than you anticipated So when you kind of pull all this together, I was hoping you could comment on anything perhaps we're missing. Just put A finer point on the puts and takes as you look back over the past 6 months, how this has progressed, your level of confidence for the company as you look to the balance of the year, And then perhaps just confirm, given the setup here and the strategy, it sounds like the inclination will be to reinvest any top line upside.

Speaker 8

If you could just confirm that.

Speaker 2

Thanks, Kevin. A lot going on there. So I guess the two things which I would say when we talk to the investment community after Q1, Which didn't transpire as we were expecting was Canada. The reopening Of the on premise and the continuation of the lockdown went on for longer than we were expecting in Canada. And in the U.

Speaker 2

K, we were expecting So called Freedom Day to be back in June, and as you know, that was delayed into July. I would say those are the 2 things That we didn't know at that time. From a revitalization plan point of view, yes. I mean, we our the whole Rational for the revitalization plan is to drive both top line and bottom line growth. And the 1st year was always going to be a reinvestment year, which was supposed to be last year, but we've been through all the reasons why That didn't make sense, and we're certainly reinvesting behind our brands this year.

Speaker 2

We increased our marketing spend meaningfully in the Q2. There were Couple of things that didn't make sense for us to do, like investing meaningful marketing in Canada while it was closed and delaying the U. K. Out a month. So that was probably marketing spend that we would have spent in Q2, which will now move into the back half of the year, and as Tracey said, primarily In Q3, our supply situation has improved meaningfully since the cyber Security attack and our fast moving brands and SKUs with the exception of 1 or 2 SKUs or sub segments Our inventory levels that are higher than they were at the same time last year, which allows us now to really put emphasis behind our brands.

Speaker 2

And as I said, Topo Chico is supply we worked really well with our partners to increase our supply In the Q3 and beyond. And so that will be coming through, which will allow our marketing teams to really put emphasis behind that. So I I think I've answered your question, Kevin, but help me if I haven't.

Speaker 8

No, no, no. Gavin, that's extremely helpful. If I could just squeeze in one quick Follow-up, just Tracy, on the cadence of the margin profile for this company, there's a lot of discussion on the ability for the company to reach pre pandemic levels. As you sort of look out, I understand there's a lot of volatility still in the environment. How should investors think about that balancing the need to reinvest and get investment levels back So it's a pre pandemic levels, but is there any reason to think that over the next couple of years that at the total company level, margins should not reach Where they were in 2019, and then I'll pass it on.

Speaker 3

Yes. Look, we had not given guidance beyond This year. But as Gavin spoke to revitalization plan, that is about premiumization, which obviously comes with higher margin. It is about the cost savings initiatives in our breweries as well as from From a G and A point of view, so that should help. But beyond that, we haven't given guidance.

Speaker 3

But I would just consider those items specifically related to revitalization.

Speaker 8

Very good. I'll leave it there.

Speaker 2

Thank you. Good luck. Thanks, Kevin.

Speaker 3

Thank you.

Operator

Our next question comes from Nadine Sarwat with Bernstein.

Speaker 9

Yes, good morning everybody. Thank you for taking my question. So I wanted to zoom in a little bit more on Europe. So how much of the volume growth that you saw in Europe Came from restocking at distributor levels or retailers, especially on trade, as you said, Freedom Day was meant to be in June, then it was moved to July. And then any update on the state of the inventories now and how that can help us think of the state in Q3?

Speaker 9

Thank you.

Speaker 2

Thanks, Nadine. As far as inventory levels, is that a question for Europe or for the U. S?

Speaker 9

Maybe we kick off with Europe and then that

Speaker 2

Fraternity reopened. As you know, it reopened for outdoor consumption on April 12, and then moved indoors on May 17, and then Obviously, only fully out into Freedom on July 19. We saw on premise volumes In Q2, average around 70% of pre pandemic levels. And as I said in July, we We've seen on premise really start to approach the 2019 levels. There wasn't a 1 week or 2 week of inventory in the on premise.

Speaker 2

And so I would say that, that would be more progressive. I mean, frankly, we don't hold Big inventories in the U. K. At all. So it's not going to be a material impact One way or another from an inventory level point of view.

Speaker 2

And then for as far as inventories in the U. S. Are concerned, Look, we said we wanted to be in a better place by Memorial Day, and we were going to be in a good place by July 4th with our big brands and our fast moving SKUs and certainly cans was always the big challenge and We delivered what we said we were going to do with cans on our big brands and large packs. And the inventory levels for those These are actually have been and continue to be above the same levels as they were in 2020. We're making good progress there.

Speaker 9

Great. That's very helpful. And then if I could just squeeze in one more follow-up. A lot Question so far on Topo Chico. Can you give us any indication as to data you're getting from the consumers?

Speaker 9

How much of that performance is coming with respect to new trials or repeat buys? Any additional color would be helpful.

Speaker 2

Yes. And Adi, I mean, the demand for Topo Chico is incredibly strong. It's really only got one SKU, and we've only got Distribution in 16 markets, it's already the number 3 new item in the segment. It's quickly become the fastest Turning Seltzer brand in Texas, the number 3 fastest turning Seltzer overall, right behind White Claw and Truly. And Our supply continues to be tight, but our production has improved.

Speaker 2

So that is going to allow us to push distribution and features. Our distributors, our Our retail partners have got strong relief in this brand, and we're seeing that from A consumer point of view as well. It's actually a top 10 growth brand in the country, and as I said, less than half Of the states. From where is the volume coming from, it's coming from across All of the demographic groups is no one particular demographic group that dominates, and I'm sure it's taking share from some of our competitors, yes, for sure.

Speaker 9

Okay. Thank you. I'll turn it over.

Speaker 2

Thanks, Nadim.

Operator

Our next question is from Laurent Grandet, Guggenheim.

Speaker 10

Thank you and good afternoon everyone. So 2 sets of questions and the first one is really trying to exhaust any questions on Celsor. You, Vasily, mentioned that core sales are stopped. So but you reiterated your goal to reach 10% of the sales category by year end. So if you can really provide some color on how to will you do you think you will bridge the gap From where you are right now to 10%.

Speaker 10

And really on this, with the loss of core sales, Do you would you be pushing for VIVI in the short term to gain more shelf space? And how comfortable you are you will get that? And also with Corcelsior, I mean, you probably got some more, I would Manufacturing capacity potentially to launch faster to Pochico if you were to repatriate in house Sooner, so wanted to know if the stock has been impacting the timeline for Topo Chico to be repatriated in house and to be Could it in house and to be relaunched in more states?

Speaker 2

Thanks, Laurent. As far as our 10% As share goal is concerned, we as I said, I think we've got 2 clear and differentiated winners with Vizzy And Topre Chico. With Vizzy, we're seeing strong traction with the innovation that we brought, Particularly the Variety Pack 2 and Busy Lemonade, we're seeing with retailers where we've got all 3 Busy SKUs on shelf that we see You know, almost a 2 thirds increase in each of those SKUs' velocities. And so we're going to continue to fuel Vizzy's momentum. We've got more innovation coming.

Speaker 2

We have had innovation LTOs like our June Pride pack, and we've just recently launched watermelon variety pack. So it's carved out a unique point of difference in the category and so much so that we're well on our way to becoming the number 4 spot in the segment Despite all the new entrants in 2021, I'm not going to show our hand in terms of which brands are going to take Coors hard seltzers space, but you can assume that we do have innovation coming On Vizzy, and we will utilize Coorshard Seltzer space to put that innovation from Vizzy into that space. And so we feel good about Busy. Busy will certainly be a big part of getting to our 10 share goal, As will Topo Chico, as I said to Nadine, I'm not going to repeat all of that, but it does remain incredibly strong. Supply is improving.

Speaker 2

We have worked with our 3rd party suppliers to ramp up supply, and we'll go national when we believe We can supply the markets that we're in at this point in time. I mean, we how high is high is not Quite clear yet on Topo Chico because we haven't been able to supply all of the demand in Texas for over a 10 share, I said. Other states, we're doing equally as well. So in terms of When are we going to bring it in house? We've always said we're going to bring it in house in 2022.

Speaker 2

That plan is on track. When we do, it will improve Our margins, and it's a slightly different process than perhaps busy, so or Coors Seltzer. So it's It's not a direct substitution from a liquid point of view, but certainly from a can availability point of view, we've got that capacity and it's ready. Happy to take one more question, I think, operator.

Operator

Our last question comes from Sean King with UBS.

Speaker 5

Great. Thanks for getting me in here. One question I have is, what was the cadence of depletions from I guess we heard in the U. S. Like a positive mid single digits Back in April to the minus 4% for the quarter.

Speaker 5

And any insights maybe you could provide on what you're seeing in July

Speaker 2

Thanks, Sean. Look, I mean, from a second quarter point of view, most Our decline would have been in the economy space. I mean, if you look at our share, I think I said, almost approaching 70% of our share loss is Economy, it's a very choiceful decision that we've made. That doesn't mean that we don't think all segments matter because we do. We do believe all segments matter, but we've To ensure that we meet the demands of the largest segment of our consumers at this point in time.

Speaker 2

So most of that decline would have been driven by the choice around economy. As far as volume guidance into the second half, Sean, We don't do that as a matter of principle anymore. I know we used to do it in years past, but we're not going to give that now.

Operator

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

Speaker 2

Thanks very much, operator. Look, I understand that there were more questions that we weren't able to get to today given the time constraints. So please, if you Follow-up with our Investor Relations team, and we look forward to talking with many of you as the year progresses. So thank you, everybody, for participating in Today's call.

Operator

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

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Molson Coors Beverage Q2 2021
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