Molson Coors Beverage Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
February 23, 2022

There are 15 speakers on the call.

Operator

Good day, and welcome to the Molson Coors Beverage Company 4th Quarter and Fiscal Year 2021 Earnings Conference Call. You can find the related slides on the Investor Relations page of the Molson Coors website. Our speakers today are Gavin Hattersley, President and Chief Executive Officer and Tracy Joubert, Chief Financial Officer. With that, I'll hand it over to Greg Tierney, Vice President of SG and A and Investor Relations.

Speaker 1

Thank you, operator, and hello, everyone. Following prepared remarks today from Gavin and Tracy, we will take your questions. If you have more than one question, we will answer that your first question and then ask you to reenter the queue for any additional or follow ups. If you have technical questions on the quarter, please pick them up with our IR team in the days weeks that follow. Today's discussion includes forward looking statements.

Speaker 1

Actual results or trends could differ materially from our forecasts. For more information, please refer to the risk factors discussed 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.

Speaker 1

GAAP measures are included in our news release. And also, unless otherwise indicated, all financial results the company discusses are versus the comparable prior year period in U. S. Dollars and in constant currency when discussing percentage changes from the prior year period. With that, Over to you,

Speaker 2

Gavin. Thanks, Greg. 2021 was a turbulent year all around the world for our industry and for our business. The pandemic raged and receded multiple times, but unfortunately, it surged in the last 6 weeks of the year. And with it came government restrictions related to bars and restaurants, most notably in Europe and Canada.

Speaker 2

That impacted our business, creating a whole host of challenges. And yet through it all, Molson Coors made tremendous progress in each of the pillars of our revitalization. Our 2 biggest brands each grew net sales revenue in the U. S, Americas and globally, an incredible feat given the fact that over the past few years, many folks have been on the belief that this whole segment was in a path of We finished the calendar year with a larger global above premium portfolio than ever before, With our hard seltzer portfolio growing at the fastest rate of any major beverage company in the United States, very strong hard seltzer growth in Canada and standout beer innovations in the UK as well as in Central and Eastern Europe. We are moving to scale beyond the beer aisle on the back of the fastest growing energy drink in the United States per IRI, and we continue to invest in our future growth all around the world.

Speaker 2

Folks, in 2021, Molson Coors grew the top line for the first time in a decade. Top line growth is one of the core goals of plan and a result our company has not been able to deliver in a long time. Yes, we slightly missed our guidance on EBITDA as a result of the impact of the Omicron variant surge in the last 6 weeks of the quarter. But at the same time, we've been very disciplined with cash within the business, improving our leverage ratio faster than we expected, and we chose not to cut the marketing investments that will help ensure the long term health of our brands and our business. Overall, Molson Coors finished 2021 as a healthier business than we were at the end of 2019.

Speaker 2

Now as you recall in our Q3 call, we said that uncertainty as it pertains to potential surges in the coronavirus and or its variance to varying degrees by market Could have an impact on our financial performance. Unfortunately, that is exactly what happened. The on premise in much of EMEA This holiday period is one of the most important sales windows of the whole year. And due to government restrictions for pubs and restaurants And more cautious consumer behavior, we fell to below 80% of 2019 net sales revenue. The UK is our 3rd largest global market by net sales revenue and the on premise accounted for 65% of our business there in 2021.

Speaker 2

So as was well established earlier in the pandemic, when that channel is restricted or shut down, it has a meaningful impact on our business, and we felt that in the Q4. But we know from experience over the past 2 years of the pandemic that this has been temporary, When the on premise channel has reopened and when consumers are comfortable reentering bars and restaurants, they came right back. And I'm proud to announce that we are ranked number 1 in the UK Advantage Group survey. There is an independent industry wide survey on how the Big on premise national customers across the U. K.

Speaker 2

View brand owners, and the results speak volumes about our hard working team. Additionally, some of our U. S. Suppliers had renewed challenges providing materials like bottle crowns at the tail end of the year, which had knock on effects on our production. But this has certainly eased in the time since.

Speaker 2

We've taken matters into our own hands by increasing the number of suppliers we work with to limit these kind of issues going forward. One point I want to make clear though is that while pandemic driven issues with freight availability in the global Supply chain continued to challenge us in the Q4. We made significant improvements with our distributor inventory in the U. S. We closed 2021 with about 700,000 more barrels of distributor inventory than we did in 2020.

Speaker 2

And that progress puts us in a far better inventory position heading into 2022. And in fact, our out of stocks for core brands and packs are at their lowest level since before the pandemic. Today, our top line is growing fast for the first time in 10 years. Our core brands are growing net sales revenue for the first Our portfolio is premiumizing to levels never before achieved. We are moving to scale beyond beer, And our business is making tangible progress towards achieving the goals of our revitalization plan.

Speaker 2

We are set up for a strong 2022. Now I want to dig in a little deeper, starting with our core brands. For the past few years, you've heard Talk about things like segment share and brand health as leading indicators that Coors Light and Miller Lite remain strong foundations of our global business. And today, I'm very happy to tell you that each brand grew net sales revenue in the U. S.

Speaker 2

In 2021, Coors Light by 4.4% and Miller Light 7.6%. We also saw double digit growth in our on premise placements for Miller Lite versus last year. In Canada, Coors Light also reported revenue growth in the 4th quarter, while Miller Lite revenue was up double digits for the full year with acceleration in the 4th quarter. Our portfolio continues to premiumize. Our above premium net sales revenue has grown over 15% in 2021.

Speaker 2

The biggest driver of that premiumization was our growth in U. S. Hard seltzers. Despite ending the year with only 1 nationally distributed hard seltzer brand, Our portfolio grew triple digits over the course of 2021, and we generated the largest growth rate in this space among any of the major beverage Today, we have 2 of the top 5 hot seltzer brands in the U. S.

Speaker 2

With Topo Chico Hot Seltzer and Vizzy, And we see more upside ahead. At the company's 10 Hard Seltzer franchises, Lilly is the only one that has existed for multiple years and has never lost hard seltzer share in a quarter. In 2022, that success is continuing with busy growing both industry and hard seltzer share. And while it's still early, we are very optimistic about the national launch of Topa Chico Hard Seltzer. Topo Chico Hot Seltzer has jumped to the 6th fastest turning hard seltzer nationally, and we believe it can become a top 3 hard seltzer in the U.

Speaker 2

S. For IRI, Topo Chico Hot Seltzer has improved industry share each week since its national launch. Even in markets where the Topachika mineral water is less known, we are seeing strong results. Alright, Topachika Hard Seltzer alone has already reached the 5th share of hard seltzer in 7 new markets since launch. Now we're bringing new packs to the brand with bottles, margarita hard seltzer and ranch water that is already driving results.

Speaker 2

Our 12 pack of Copa Chica Ranch Water is not only the fastest turning ranch water in Texas, it's the fastest turning in the United States. Our hard seltzer progress extends to Canada, where we achieved a 9 share in hard seltzers in less than 9 months. That was driven by both Vizzy and Coors Seltzer, with both brands finishing the year in the top 10 hard seltzer brands in Canada. Above premium beer continues to be a growth driver for us as well. In the U.

Speaker 2

S, Blue Moon, Belgian White grew net sales revenue by high single digits in 2021 and saw double digit growth in the 4th quarter. Peroni earned double digit growth in 2021, and our U. S. Regional craft portfolio once again outpaced the category. And we are gaining total share of the Craft segments in Canada as well, led by the strong performance of Brasier de Montreal and Food Diabliere.

Speaker 2

We also continued to premiumize our EMEA and APAC business. Madre exeptional has continued to accelerate as the world beer category grows in the UK and in Ireland. As of today, it's now delivering the 4th highest rate of sale of all draft world largest per CGA. And in 2021, private became the fastest growing premium 4% lager per CGA. We are also bringing an exciting new innovation to market in the U.

Speaker 2

S. Through an expanded agreement with The Coca Cola Company. SimplySpike Lemonade will be a full flavor alcohol beverage inspired by the number one overall juice brand, a growing $1,000,000,000 brand and the 2nd largest brand in Coke's portfolio. Simply can already be found in 1 out of every 2 American households, and the brand continues to grow. So we are very excited about this opportunity to shake up the full flavor alcohol beverage space as more legal age consumers look for bolder flavor.

Speaker 2

In 2021, we put teeth behind our talk of becoming a total beverage company. Our Beyond Beer products are performing very well And helping to fuel our emerging growth business, which contributed approximately $800,000,000 to 2021 net sales revenue, Taking ahead of our $1,000,000,000 annual revenue target by 2023. ZO has already proven to be a success with a lot of opportunity still ahead as we In less than 10 months, it has gone from non existent to the fastest growing energy drink in the U. S. Per IRR, and it is number 2 in Health Imaging sales in the C store channel.

Speaker 2

Latin America closed out 2021 with stellar performance, generating double digit growth across this part of the business and record sales in many of the markets in which we operate. And we're backing it all up by investing in our capabilities. There are physical investments, which are, of course, foundational. Newhart Seltzer production capabilities will be coming online in the U. S.

Speaker 2

We will soon turn on the new hard seltzer and spirits production line in Toronto. Our new state of the art brewery is online in Montreal, And we're adding new canning and production capabilities in the UK. And then there are the investments we're making behind our brands. We increased marketing behind our core brands and key innovations, and we've become much more effective with those dollars as we accelerated our digital marketing capabilities. Folks, over the past 2 years, we have laid the foundation for some sustainable long term top and bottom line growth at Molson Coors.

Speaker 2

Today, our core power brands are growing dollar sales. Today, more of our portfolio is in the above premium space than ever before. Today, we are moving to scale beyond the BRRR. Today, we have stronger capabilities to drive future growth. And because of all of that, because of the foundation we have laid over the past 2 years, against great odds and in a historically challenging environment, We can give guidance that in 2022, Molson Coors expects to deliver highest top and bottom line growth in over a decade.

Speaker 2

We will continue to invest in our business to drive towards sustainable long term top and bottom line growth. Now to give you greater details on that, I'd like to hand it over to our Chief Financial Officer, Tracey Jaber. Tracey?

Speaker 3

Thank you, Gavin, and hello, everyone. As Gavin highlighted, 2021 was a year of tremendous progress against our revitalization plan. Despite the challenges that we and so many other companies faced, we achieved our top line guidance of mid single digit growth for the year, delivered strong free cash so enabling us to further reduce our leverage ratio and return cash to shareholders. We continue to execute building a strong foundation for future growth, and we issued fiscal 2022 guidance that underscores that progress. Before I take you through our quarterly, our full year performance and our outlook, I would like to update on A couple of naming convention changes in our business unit reporting.

Speaker 3

This does not change our reported results for these segments and was done for the names better affect The geographies within the segment. As of December 31, 2021, our reporting segments The Americas, formerly called North America and EMEA and APAC, formerly called Europe. Now let's discuss the Q4. We delivered strong top line and EBITDA performance. While we benefited from significant on premise restrictions in the prior year, we were still impacted by the rapid emergence of the Omicron variant in mid November, which resulted in overall on premise softness compared to the 3rd quarter.

Speaker 3

In December, the U. S. On premise net sales revenue was approximately 86% of December 2019 net sales revenue, down from 3rd quarter levels of approximately 88 Canada was approximately 60% of December 2019 net sales revenue, down from 3rd quarter levels of approximately 80%, And the U. K. Was below 80% after being 13.7%, driven by EMEA and APAC growth of 56.5%, And Americas revenue growth was driven by higher financial volume, positive global net pricing and favorable brand and channel mix due to premiumization and fewer on premise restrictions versus the prior year.

Speaker 3

In fact, consolidated net sales revenue increased 4.3% compared to 2019. Consolidated financial volumes increased 7.4% as we rebuild U. S. Domestic inventories and group brand volumes 2.3 percent driven by EMEA, APAC, Canada and Latin America. This was partially offset by lower U.

Speaker 3

S. Economy brand volumes as a result of our economy SKU Thank you, everyone. In the U. S, we grew net sales revenue 6.3% With domestic shipments up 3.3%, reflecting our efforts to build distributor increase The supply disruptions in 2021. U.

Speaker 3

S. Brand volumes declined 3.8%, but this was driven entirely by the economy portfolio, which was down double digits, while our premium portfolio grew low single digits and the above premium portfolio was up double digit for the quarter. In addition, our net sales revenue increased 9.9% on strong brand volume growth of 6%, While Latin America net sales revenue increased 15.9% on brand volume growth of 12.4%. EMEA and APAC net sales revenue grew 56.5%, driven largely by Western Europe, but also growth in Central and Eastern Europe. Strength in our core brands and new innovations like Madrid led to double digit growth in above premium and premium volume, partially offset by double digit declines in economy.

Speaker 3

Net sales per hectoliter on a brand volume basis increased 3.8%, driven by global net pricing growth and positive brand and channel mix with premiumization delivered across both business units. Underlying cost per hectoliter increased 5 0.2%, driven by cost inflation, including higher input and transportation costs and mix impact from premiumization. So we benefited from volume leverage due to higher production volumes and continued progress on our cost savings program. Underlying MG and A in the quarter increased 2.4% as we continue to invest behind our core brands and innovations across both business units, while G and A was flat. As planned, we increased marketing investments in the quarter to levels above the 4th quarters in both 2020 and 20 19, team, providing strong commercial support behind our brands as of 2022.

Speaker 3

As a result of these factors, underlying EBITDA increased 21.9 percent. Now recapping the full year, consolidated net sales revenue increased 4.7% with Americas up 2% and EMEA and APAC up 19.6%. Top line growth was driven by global net pricing, favorable brand and channel mix from premiumization and fewer on premise Consolidated financial volumes declined 0.5%, while brand volumes declined 1.7%. Americas brand volumes declined 3.2% as a result of the economy SKU depoweritization, which began in the Q2 of 2021 and rationalization program, which was announced last July. EMEA and APAC brand volumes were up 3%.

Speaker 3

Net sales per hectoliter On a brand volume basis grew 3.8% due to global net pricing growth and favorable sales mix. In the U. S, net sales per hectoliter on a brand volume basis was up 4.4% for the year, driven by net pricing growth and the success in above premium products, including Brisey, Topachika Heart Seltos, the Blue Moon family and Peroni. Underlying costs per hectoliter increased 6.9%, driven by cost inflation, including higher input and transportation costs, Mixed impacts from premiumization and volume deleverage. However, with the benefit of our robust hedging and cost savings programs, we were able to mitigate Underlying MG and A increased 2.9%, largely due to higher marketing investments versus 2020.

Speaker 3

In the second half of twenty twenty one, we began to progressively increase marketing actions in 2020 due to the coronavirus pandemic and were partially offset by a cost savings program. In 2021, we delivered approximately $220,000,000 across MG and A and cost of goods sold in our 3 year 6 $100,000,000 cost savings program. Over the 2020 through 2021 period, we have delivered an aggregate $490,000,000 facing us well on track to meet our $600,000,000 target in total gross savings by the end of 2020 As a result of these factors, underlying EBITDA decreased 3.5%. This was slightly below guidance of to be flat and was driven by the on premise softness as a result of 5.6% underlying EPS growth compared to the prior year. Underlying free cash flow was $1,100,000,000 for the year, a decrease of $183,000,000 from the prior year.

Speaker 3

This decline can be wholly attributed to the repayments of approximately $100,000,000 of taxes related to various government sponsored referral programs related to the pandemic, which benefited the prior year free cash flow by $150,000,000 creating a negative swing factor of about $250,000,000 on our 2021 free cash flow. Excluding these changes, net working capital movements were favorable to the prior year. Capital expenditures paid were $523,000,000 down from $575,000,000 in 2020 and focused on expanding our production capacity and capability programs, such as the previously announced Golden Brewery Modernization Project, Our new Montreal Brewery, which opened during the Q4 and expanding our hard sell through capacity in Canada and the U. K. We have continued to make great progress strengthening the balance sheet and improving our financial flexibility.

Speaker 3

We reduced our net debt by nearly $1,000,000,000 in 2021 and are trailing 12 months net debt to underlying EBITDA ratio to 3.14x, better than our guidance of approximately 3.25x and down from 3.5 as of the end of December 2020 and down substantially from 4.8x in 2016 at the time of the Millicurus acquisition. We ended the year with strong borrowing capacity with no borrowings outstanding on our 1.5 That takes me to our outlook, which calls for both top and bottom line growth in 2022 for the first time in over a decade. Before we go through the guidance, wanted to note that year over year growth rates are on constant currency basis. We are adjusting the metrics provided to best align with the goals of our revitalization plan. Also and consistent with our historical commentary, uncertainty as it pertains to the coronavirus and its variance remains to varying degrees by If on premise restrictions are increased and or reinstated in some of our larger markets, this could have a significant impact on our financial performance during that Period.

Speaker 3

For 2022, we expect to deliver mid single digit net sales revenue growth. We expect you to enter the high single digit underlying income before income taxes growth and underlying free cash flow of $1,000,000,000 plus or minus 10%. This guidance implies that we will shift to consumption in the U. S. For the year.

Speaker 3

In terms of phasing, recall that we will start lapping the economies to deprioritization and rationalization in the Q2 of 2022. In addition, we expect to face continued inflationary pressure, including transportation and material costs. While we have levers to offset inflation, including pricing, mix from premiumization and our cost savings and hedging programs, These headwinds are expected to continue to pressure gross margin, but have been built into our guidance. And we expect to continue to invest behind our core brands and key innovations, which entails increasing the level of marketing investment from the prior year. Given the on premise restrictions in the first half of twenty twenty one, we expect greater year over year increases in marketing spend in the first half 2022.

Speaker 3

We also intend to invest behind our capabilities with cash capital expenditures Metrics include underlying depreciation and amortization of approximately $750,000,000 plus or minus 5 percent Reported net interest expense of $265,000,000 plus or minus 5%, and an underlying effective tax rate in the range of 22% to 24%. Turning to capital allocation. Our priorities remain to invest in our business to drive top line growth and efficiencies, reduce net debt and to return cash to shareholders. We are maintaining our target net debt to underlying EBITDA ratio of below 3x by the end of 2020 And we have a strong desire to maintain and in time upgrade our investment grade ratings. And on February 22, 2022, the Board declared a dividend of $0.58 per share, An increase of 12 grams authorizing the company to purchase up to an aggregate of $200,000,000 of our company's Class C common stock through March 31, 2026, with repurchases primarily intended to offset annual employee equity award grants.

Speaker 3

In closing, 2021 was a volatile year, but it did not deter us from executing our plan. The progress we have made has laid a strong foundation to achieve our goals of sustainable long term top and bottom line growth, And our 2022 guidance demonstrates our confidence we are on the right path. And with that, we look forward to answering your questions. Operator?

Operator

We will now begin the Q and A portion of the call. In consideration of others and to allow more of you to participate in this call, we ask that you limit yourself to one question. If you have additional questions or follow ups, please rejoin the queue. We will now pause to compile the Q and A roster. Our first question goes to Kevin Grembie with Jefferies.

Operator

Kevin, your line is open. You can go ahead.

Speaker 4

Great. Thanks. Good morning, everyone, and congratulations on the continued progress, particularly in the difficult environment. I want to start with the sales guidance for the year. Tracy, this may be for you.

Speaker 4

Maybe just spend a moment on How you expect that to break down between volume and net sales per hectoliter within net sales per hectoliter? Maybe just comment Broadly on the contribution you're hoping for between price and mix, Particularly from pricing perspective given the difficult input cost environment. And then Gavin, maybe just at a high level Coming off of what's been a strong year.

Speaker 2

Thanks, Kevin, and good morning. Let me start and then Tracy can take you through some of the guidance around cost of goods sold and so on For 2022. But from a pricing point of view, obviously, we're experiencing inflationary pressures. We expect them to continue well And while we take have historically taken price increases in the spring of This year, we actually announced price increases a little earlier than that. And we went with a price increase of between 3% 5 That took place mostly in January and the early part of February.

Speaker 2

And obviously, the amount and the timing of Pricing increases does vary by market. We do have more levers than just Pricing, of course, right? We have the mix shift, which is fundamentally part of our revitalization plan is To shift our mix into the above premium and emerging growth, and emerging growth is almost entirely above premium. So I spoke about that in my opening remarks. And Tracey, why don't you talk about hedging the hedging program, And then I'll circle back

Speaker 3

on the brands. Okay. Yes. I mean, we've spoken before about Our robot teaching program in 20222023, We're really comfortable with that. We're really comfortable with our hedge positions and that hedging program is going In mitigating some of the inflation that we've seen.

Speaker 2

Thanks, Trish. Kevin, look, I mean, our business At the end of 2021 is fundamentally more sound than it was at the beginning of the revitalization plan, particularly with our brands. And you referenced Coors Light. We ended the year with both of those brands growing the top line, which we haven't done For quite some time, Coors Light, the Made to Chill campaign continues to work hard for us, both regionally, nationally and at a local level. It's resonating and attracting 21 to 29 year old consumers.

Speaker 2

And Miller Lite has despite some of the inventory challenges and some of the tough comps we had to overcome have just Sequentially improved over the year and that continued to focus on a true BSBF through all sorts of different brand Exploration into the metaverse. So we feel like those 2 brands are really well placed heading into 2022. And then looking beyond that, above premium, Blue Moon has bounced back very strongly. Our Virgin Growth division, as I said, is ahead of our plan to get to $1,000,000,000 Canada is growing, Coors Light has grown share, It's as healthy as it's been for a while. And Europe is bouncing back now that we're heading through the Omicron variant and restrictions have been lifted and we've got strong above premium innovation, which

Speaker 4

Yes, that's very thorough. Thank you very much. I have a number of questions. I'll take offline with Greg and Tracy, but continued success. Thank you.

Speaker 2

Thank you.

Operator

Thank you, Kevin. Our next question goes to Rob Ottenstein with Ricor, Rob, your line is open. You can go ahead.

Speaker 5

Great. Thank you very much. Gavin, I was wondering if you could talk a little bit about how business is starting off this year. I mean, we all see the public information. January was a very tough start for the whole industry.

Speaker 5

How much of that do you think is the maybe sticker shot from price increases, Omicron, the weather, maybe the people had a lot of beer in their pantries Given that a lot of holiday parties may have gotten canceled, I'm just trying to get a little bit more of a sense of what the beer industry and your business looks like and maybe what you're seeing in February to give you confidence to underscore your guidance? Thank you.

Speaker 2

Thanks, Rob. Look, I'm not going to repeat what I said to Kevin as far as our overall brands are concerned. But if you look to the to January, yes, I mean, The data that's publicly available will say that the whole industry, it wasn't the easiest of months. I don't think pricing has got anything to do Because the pricing increases came in the month and even into February to impact January trends. So I don't think it's got anything to do with it.

Speaker 2

And And frankly, the price increases, as I just said, for us, 3% to 5%, well lower than inflation rates, which are sticking in the consumers' minds. I'd point a finger squarely at the second point you raised there, which is Omicron, right? Consumers were resistant To going out into the on premise December and into January, and as we've got further into January and now into February, we've seen the Consumers come back to the on premise, particularly in our European businesses where restrictions have been largely lifted, But also in the United States and to a lesser degree in Canada. So I'm going to point the finger squarely at Omicron, Rob.

Speaker 5

In the way of demand, elasticity on the price increases, maybe less than historical?

Speaker 2

Well, we always we understand Dan, pricing elasticity in a normal world, right? And I think we're operating in somewhat unknown territory. So I think it's a little too soon to tell exactly what the various price increases that have gone into the market, What impact that will have from a volume perspective, Rob? I think as we head into Spring and summer, we shall see.

Speaker 5

Terrific. Thank you very much.

Speaker 1

Go

Operator

Thank you, Rob. Our next question goes to Andrea Teixeira with JPMorgan. Andrea, your line is open. You can go ahead.

Speaker 6

Thank you. Good morning. So my question is the assumption of the G and A savings, because your earnings guidance embeds faster growth, I understood correctly, on the bottom line, and I understand from Tracy comments that gross margin will go will be pressured this year In spite of the timing of the hedges, which I'm assuming are going to be better in the first half of the year and then give back some in the second half. So are you embedding your EBITDA margin we're expanding 2022 to reach your profit guidance? And then related to that, I Just a clarification there.

Speaker 2

Thanks, Andrea. I think, Tracey, why don't you take all those?

Speaker 3

Okay. So First of all, I think you spoke you asked about the margin expansion. So if you look at our Mid single digit top line and high single digit income before tax line. There's a couple of things that need to be considered. So first of all, you're right, I mean, we are seeing the freight markets remain tight.

Speaker 3

So that will create a COGS headwind. But to mitigate that, we have a very robust As you mentioned, we typically hedged the 1st year Between 1 3 years depending on the commodity and the liquidity of that commodity. But in the 1st year, our hedges are obviously higher than The outfit years, which are typically lower. So, as we look now into We have a $600,000,000 program delivered $490,000,000 We've got new state of the art, more efficient breweries in Canada And that we spoke about that they've come on line, so that's certainly going to help from a cost point of view. We've got the continued premiumization of our portfolio, which is really all about what the revitalization plan is driving.

Speaker 3

We Obviously, it's spoken a little bit about the full year contribution of our equity income from our Yangling joint venture. So we've got a couple of those items that will play out in 2020. We're going to continue to invest in our business So in terms of EBITDA The Q4, so we did reaffirm our guidance at the end of Based on the plans that we had in place and more importantly, what we were seeing In terms of very strong on premise performance, we stated on the call at that time that if restrictions were reinstated in some of our larger markets, it have a significant impact on our financial performance over the next few months. And we saw that with the Omnicom reemergence in mid November, and we saw a return to both government imposed restrictions as well as changes to consumer behavior. And that impact what a big part of our And then the guidance in terms of EBITDA, so what we have done is we have given metrics which We believe best in line with our revitalization plan goals of driving both top and bottom line growth.

Speaker 3

We've added in addition to the net income before tax, we've added the As well as a free cash flow and leverage target ratio. So if you add those back, you will get back to the EBITDA range. So we just believe that this is a better guidance in terms of our revitalization plan.

Speaker 2

Thanks, Joyce.

Speaker 6

Thank you.

Operator

Thank you, Andrea. Our next question goes to Bill Kirk with MKM Partners. Bill, your line is open. You can go ahead.

Speaker 7

Thank you. Good morning, everybody. Tracy, plus with Some 1Q phasing items, I think you have about 2,000,000 hectoliters shifting back into the Q1 Related to the Texas freeze and the cybersecurity events, but I guess what about prior year cost comparisons? Are they easier in some ways Since the prior year had those disruptions and maybe made servicing the wholesalers more expensive?

Speaker 3

Yes. So Give quarter by quarter guidance, but maybe some of the things just to think about is from a more so in the first half. In terms of other COGS, obviously, we're still going to be impacted by inflation as One of the other things to consider is assuming that we don't see levels of on premise restrictions, We'll expect to see some benefit from volume leverage, particularly in our EMEA Expect to see both channel and geographic mix benefits as we cycle the first half restrictions in EMEA and APAC, which COGS predictor leader. And then again, I just do want to mention our robot taking program where we cover all commodities, And we're really comfortable with where we're sitting. Obviously, we've also got Acombo.

Speaker 3

I'd say those are some of the things to consider for least the first half of this year.

Speaker 2

And the only other thing I'd add to that, Bill, is the other side of some of that positive, which you mentioned, which is a Texas storm and the cybersecurity It's obviously our economy SKU reduction rationalization, right. So this will have the headwind of that, particularly in the Q1 and then for a chunk of the 2nd quarter. So that will be a negative from a volume perspective. But if you driven by Our economy as Premium Lights grew as good above premium as well. And of course, we came into the year with robust Stocks and I think as I said in my opening remarks, we are lower than pre pandemic Thank you, Gavin.

Speaker 2

And as a follow-up there, I think you've mentioned a lot of the

Speaker 7

Thank you, Gavin. And as a follow-up there, I think you You mentioned Topo Chico was the hard seltzer was the number 2 turning hard seltzer. Retailers are Finishing up their spring shelf resets right now, did they respond the way you wanted to with Topo Chico here with their resets given those velocity stats?

Speaker 2

Yes, they did. We've got our national rollout of Topo Chico has been very well received by Both big and small retailers.

Operator

Thank you, Bill. Hey, thank you very much.

Speaker 8

I guess mostly for Tracy that we've covered before. On the I guess, are you able to be any more specific you think your I guess what your outlook is for the coming year, but before any productivity offsets, I just I think the spot market

Speaker 2

Would indicate a magnitude

Speaker 8

and how much inflation may How should we be deferred into 23? That's question number kind of 1. And then 2,

Speaker 2

I know I still only have one, but if you can humor me.

Speaker 8

On the second one, on EBITDA, Just to remove away from explicit EBITDA guidance, I think all the piece You gave us do allow us

Speaker 2

to back into EBITDA, but

Speaker 8

I think it results in a wider range than you might typically Are you intentionally leaving a little bit

Speaker 3

So Steve, look, we didn't give COGS billings to be the guidance, but it is So the high single digit net income or income before tax guidance that is built in there. Some of the things Maybe they can just help put a bit of color around our COGS outlook is, As I said previously, we'll continue to be impacted by inflation on our commodities and our packaging materials in particular. And we do expect the freight market to remain tight. In Q4, we actually saw some noticeable impact in ATAX business, and we expect to see That continue into 2022. But inflation is just one component of our COGS charge and maybe a couple of additional items just to consider to add some color.

Speaker 3

So Again, assuming we don't see the similar levels of on premise restrictions as we saw in the first half of twenty twenty one, We do expect to see some benefits, particularly in MA and ATAC business around volume leverage. I also mentioned earlier that we expect to see channel and geographic mix benefits again in APAC, which has a lower overall cost per hectoliter cost. I had mentioned our hedging program. We don't get into Details around that other than saying that we typically hedge anywhere between 1 3 years depending on commodities, Depending on liquidity, depending on our outlook of the commodities, and again, at this point, we are Comfortable with our hedge positions as we look forward over the next couple of years. Maybe just one more item to consider around COGS is we also are expecting some depreciation benefits as we other than that, we've got And other levers that we can pull to deliver our top and bottom line, but the And then just In terms of EBITDA, I mean, really the intention is to More closely align the metrics, guidance metrics with our revitalization plan goal.

Speaker 3

So that's all about driving both top Intention other than that, we just want to more closely align with how we run the business. So again, we have added the other metrics

Speaker 2

Thanks, Steve. Thank you.

Operator

Thank you, Steve. Our next question goes to Nadine Sarwat with Cowen.

Speaker 9

Hi, guys. Thanks for taking my question. I want to push a little bit more on Gross margins, Tracy, I know you mentioned and provided some helpful color on all of the moving parts. And in your prepared remarks, you did say that gross margins were going to continue to be pressured. But pushing in a little bit more on that, can you give More precise expectations as to gross margins for this year.

Speaker 9

What I'm trying to understand is, do you expect to be able to take enough price plus that positive mix compression on a year on year basis? Thanks.

Speaker 2

Maybe I can start on that one, Tracey. I mean, but you've given all the components of it, right? So but I mean, if you look at Our P and L, obviously, we have a strong push in our revitalization plan to Change the shape of our portfolio, and I think we've been pretty successful at that. Coors Light, Miller Lite, Our core brands have grown very nicely. So you are in the top line.

Speaker 2

You've got Pricing, which I referenced, I gave you the U. S. Pricing, but obviously, there's pricing in Europe and Canada coming through as well. We've got strong positive mix across the economy portfolio In the first sort of first and second quarter, we'll drive positivity From an overall margin point of view, we do have The emerging growth, which is all operating in the above premium, and we're going to continue to invest in our business. We're going to continue to put money into marketing.

Speaker 2

We made that Tracy made the point. We We were very choiceful in December once we realized that Omnicom was going to impact us. We very choicefully chose not to pull the marketing lever Because we're executing and we wanted to set ourselves up for a strong 2022. And so that was choice. But then we are going to increase margins And all of our I'm not going to repeat everything Tracy

Speaker 3

Thank you.

Operator

Thank you, Nadine. Our next question goes to Chris Carey with Wells Fargo. Chris, your line is open. Go ahead.

Speaker 10

Hey, everyone. Thanks for the question. So Gavin, I'm trying to just understand a little bit on the it is a question on This is just hypothetical and you did say that the EBITDA would have kind of like in line if Omicron had not created the volatility at the end of the quarter. But sales came in line, which I suppose implies margin impact and specifically channel mix with the on premise. And if I just run that math on the Is that how we should be thinking about just the potential benefit of channel mix Going into next year as a tailwind to the business just So, you know, different packaging mix, and you're going to get some volume leverage.

Speaker 10

So, I mean, clearly, We're all trying to figure out how the cost per hectoliter versus MG and A dynamic plays out. And if you could just maybe offer some perspective on what you think the channel mix is the EBITDA in the quarter and I guess really how we should be About potential tailwind of the business on a profit?

Speaker 2

Right. Chris, yes, a lot's going on in that question. Let me see if I can help. Look, I mean, it's I think Safe to say, we're expecting our revenues to be higher than what we actually ended up with. So, although we met the guidance of mid single digits, I That was going to be higher.

Speaker 2

And obviously, it wasn't because of the Omicron impact. But there is a range there, right, of I think mid single digit guidance is 3.6% to 7.4% roughly, right? So we were expecting that number to be higher. Obviously, It's very positive for us when the oil price is very positive for us when the oil price is very Good. In the U.

Speaker 2

S, the margins are also good in the on premise for us, mostly because we Peroni, Pilsner, Ackell in the U. S. Are all higher margin, higher revenue brands. So when the on premise is open, we benefit Miller Lite and Coors Light also disproportionately overindigibles, and you have the same impact in Canada and you have the same impact in Europe. So when the on premise runs into some challenges, That's mix negative for us everywhere, but particularly in Europe.

Speaker 2

As we head into this The sort of 2020 2, we have some tailwinds behind us. I mean, in the Q1, we had the well The challenges of the Texas storms and the cybersecurity attack. And in Europe, we as I recall in the first Quarter last year, we were pretty much shut down in the on premise For I think the whole Q1, which obviously we don't have, but we did a little bit in January, but certainly Okay, completely, which will be which will obviously be positive for us. So We've got some positive tailwinds behind us from that perspective, and there happen to be positive tailwinds from a channel point of view because that We make more margin there. And then of course, you've got the negative headwind of cycling the economy portfolio change, Which we've got, I don't know, 4 or 5 months left off, starting on the first

Speaker 10

Yes. Thanks, Gavin.

Operator

Thank you, Chris. Our next question goes to Lauren. Your line is open. You can go ahead.

Speaker 11

Thank you and thanks

Speaker 12

Two

Speaker 11

questions actually on the top part of your assumption. So I would like to understand Thanks to Topochiko and Wizzi. And how was the first for Simply? I know it's not a hardtail there, but A different one. And finally, if you can help me try to figure How much ZOWA contribute to the growth of your emerging growth division?

Speaker 11

Thank you.

Speaker 2

Thanks, Lauren. On Simply, look, I mean, obviously, we haven't even launched it into the market yet. So all I can think to it. And They reacted extraordinarily positively to us. The reaction Simply, it's been even stronger than that.

Speaker 2

The number of in them were Very well known brand. So if we just go by reaction from distributors and from As we're going to get more than our fair share of shelf space in the If you look at emerging growth, it's got 3 big Components to it, the solid base business, right? We've got our distribution business, our craft In Tien tsin, Blake and then our Latin American business. Latin America contributed, as I said in our Opening remarks really strongly, but non alc, which comprises Zoa and La Colom, To all intents and purposes, we're coming off a 0 base of revenue coming into 2021. So A good chunk of the growth that we've experienced in emerging growth has come from non alc, Which is our end luck alum, Lawrence.

Speaker 2

I'm not going to break out by brand what that is, but you can assume that Big contributors to that growth were Latin America and Ireland, the 2 biggest drivers of us being ahead of plan.

Speaker 13

Thanks, Doreen. And

Speaker 11

if you can tell us specifically What's your assumption to my category growth and what's your opinion?

Speaker 2

Well, look, I mean, from a hard From a hard sell through point of view, Lauren, I mean, obviously, it was growing very strongly. It came off a lot, but it still grew low teens In 2021, we've got the 2 fastest growing services in of any major beverage company that We've got a lot of momentum behind them, and we think we can do really big things with With those 2 brands heading into 2022, I mean, we've got 2 of the top 5, Seltzer Brands. So we think we're well positioned To take share and grow, it's a big segment, Lauren. I'm not going to put a number as to what we Assess that it's going to grow, but frankly, it doesn't we can gain a lot of share in the space, whether the seltzer

Operator

Thank you, Lauren. Our next question goes to Lauren Lieberman with Barclays. Lauren, your line is open. You can go ahead.

Speaker 14

Just knowing, again, Right. So on Elasticity and really just sort of not knowing. But if I back into Under the comments you've made on pricing, mix still being

Speaker 3

Positive, I would assume, given

Speaker 14

you about premium growth. It sounds like you're planning for volume to be flattish, I'm guessing. And specifically, it's true that PRs and thinking about the category backdrop, the degree to which if that flattish volume thought process is right that implies continued market share gain across the portfolio or is that More of a kind of in line performance as you're thinking about how things may well play out next year? Thanks.

Speaker 2

Laura, look, I'm not going to give volume guidance. But what I can say to you is in the Q4, obviously, the entirety of our loss was driven by the rationalization of our Economy portfolio, above premium grew and our premium our premium lights grew in the some of our premium light Brands, but our driving to above It's reaping benefit. Honestly, we came within a whisker of being positive from a volume point of view for the whole year for For Miller Lite and Coors Light, in fact, I would hazard a guess that if we might well have got there if we hadn't had The curtailment in the on premise. So I don't want to repeat myself from earlier comments, Lauren, but Yes, we've it's a very deliberate decision. We think it's the right decision.

Speaker 2

It allows focus for us, allows us to focus in on 4 economy And we have a very strong kind of complexity from our supply chain, which has really helped us to rebuild our inventory levels to levels that we haven't seen for to our distributors on the brands that really matter, which is Miller Lite, Coors Light and our above premium portfolio. So Absent another variant in 2022, We think we're well placed from an overall portfolio point of view. Okay. Thanks so much.

Speaker 3

Thanks so much.

Operator

Thank you, Lauren. Our next question goes to Bryan Spillane with Bank of America. Bryan, your line is open. You can go ahead.

Speaker 10

All right.

Speaker 13

Thanks, Good morning, Gavin. Good morning, Tracy. Just one question. And Tracy, you touched on this a little bit, I think, in the prepared remarks. Just Can you give us an update on where we stand now in terms of the progress on the investments that you've made In the brewing in your brewing facilities, there's I think you referenced Montreal, there's an upgrade going on in Golden, there's the seltzer As the just kind of where we stand on those projects and maybe the contribution that we're getting from cost savings related to that?

Speaker 13

And then if you could, just give us a perspective on what it implies for capital spending for 'twenty two? And then maybe just are we in the right range in this mid-500s as an ongoing CapEx?

Speaker 2

Okay. That was for you, Tracey.

Speaker 3

Yes. Okay. So let me start and then Gavin, you just jump in here. So I mean, If we just start with our Canadian brewery, so our new Montreal brewery, State of the art brewery that we're building just outside of Montville, that actually came online at the end of last year. We still have some IT projects around bringing the Canadian business onto our U.

Speaker 3

S. ERP That's going to continue at least into this year, maybe a little bit more into the early part of next year. And then we've got the transformation and the modernization of our Golden Boot. That's a multiyear project. So that's still ongoing.

Speaker 3

The investment in our heart health capabilities, so we're Putting in capabilities in Canada and the UK, so that will be this year and next year. That's big projects. And then also The upgrade projects that relate to sustainability of our packaging, etcetera, that's ongoing. So I'd say those are the 3 big projects. Now we haven't given specific CapEx guidance, but what we do expect is our CapEx to return to more historical levels.

Speaker 3

So if you have a look at around 2019 type of Then you can expect that for this year.

Speaker 13

Okay. That's really helpful. And just Tracy, if you could just I guess if you could just give us a sense of just how much incremental savings or productivity efficiencies, just like how much more we could expect Incremental from here.

Speaker 3

Yes. I mean, I'll just refer you to our cost savings program. So we so right at the beginning of revitalization, We spoke about $415,000,000 of cost savings primarily related to the COGS line. So that would include The Montreal Brewery, some of those types of efficiencies that we put in place, and then $150,000,000 of the revitalization program was primarily around the G and A areas. So we've $490,000,000 of that $600,000,000 So the balance will be delivered this year.

Speaker 3

And again, related to the COGS line, so the more efficient breweries and the lower cost breweries. But I'm not sure that I can say much more than that other than The only other thing I'd add

Speaker 2

to that The only other thing I'd add to that, Brian, is obviously we have been pretty clear open about the fact that as we bring Celsius into our own facility, so The margin impact is very positive for us, right? And we started bringing Vizzy in last year into Fort Worth, and we'll bring Topo Chico in 2022. And in Canada, we'll bring those in house and we'll do the same in the UK. And that's very positive from a margin And then obviously, Tracy mentioned Montreal, with a state of the art brewery and it has meaningful That's

Speaker 13

really helpful. Yes, thank you. Thanks both.

Operator

Thank you, Brian. Our next question goes to Barra. Your line

Speaker 2

is open. You can go ahead.

Speaker 12

Hi, this is Chad. Good morning.

Speaker 9

First

Speaker 12

I want to circle back on with shelf space, seemingly potentially a lot of shelf space up for grabs. If the trimming in Just how you're thinking about that in terms of opportunities for What you're looking at in terms of shelf space position? Who do you think other than Topo Chico's picking up In the broader context of spirits having one of its best years last year And maybe even

Speaker 11

more on

Speaker 12

the call being particularly hot, what kind of risk Do you see for some of the core brands and retailers that are able to hold carry spirits

Speaker 2

Thanks, Eric. Yes, you're right. I mean, the comprehensive change And that's when most of the large innovations are actually launched. And Our team are selling our purpose drives purchase category management strategy, where we We believe that all decisions start with occasions, and therefore, all segments matter. And getting the call right for Ricos in those segments is really Coors Light, Coors Banquet, Miller Lite, Blue Moon Belgian White and Leining Kugels, particularly Summer Shandy.

Speaker 2

And at the same time, they're selling, what I think is one of the most focused and exciting innovation pipeline that we've had in years with Topachika Hot Seltzer and Visi Momosa And Tapachika Margarita and Simply Spiked and Blue Moon, Light Sky, Tropical Wheatonite, It's really focused and exciting. And with that strong performance in our Core, which we're experiencing as well as the innovation we're bringing, we are expecting to see expanded shelf space for our business in the spring, and that's what we're striving towards. Thanks, Erik.

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Earnings Conference Call
Molson Coors Beverage Q4 2021
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