Tracey Joubert
Chief Financial Officer at Molson Coors Beverage
Thank you, Gavin, and hello, everyone. For the second quarter, we delivered another quarter of top line growth on a constant currency basis and achieved income before income tax at the favorable end of our anticipated range, while we continue to invest in our business, reduce net debt and return cash to shareholders. We did this while navigating global inflationary pressures, the Quebec labor strike and cycling a strong shipment quarter in the prior year. Our performance and our organizational agility demonstrates our successes against our revitalization plan. And it's the efforts and outcomes of that plan that provide us the confidence to reaffirm our guidance, which calls for both, top and bottom line growth for the year.
Now, I'll take you through our quarterly performance and our outlook. Consolidated net sales revenue increased 2.2%, driven by strong EMEA and APAC growth. As restrictions had eased, we have seen sequential improvement in the on-premise performance with variations by market and total net sales revenues returned to 99% of 2019 levels. Consolidated net sales revenue growth was driven by strong global net pricing, favorable sales mix from portfolio premiumization and positive channel mix. These factors were partially offset by lower financial volumes.
Consolidated financial volume decreased 4.6%, as we cycled distributor inventory recovery efforts in the second quarter of 2021, the impacts of the Quebec labor strike, as well as lower U.S. economy brand volumes driven by our SKU deprioritization and rationalization program that started in the second quarter of 2021. These factors were partially offset by strong financial volume growth in EMEA and APAC due to higher brand volumes and factored volumes, along with growth in our U.S. above-premium portfolio.
Net sales per hectoliter on a brand volume basis increased 7.1%, driven by global net pricing and positive brand and channel mix, with premiumization delivered across both business units. Underlying COGs per hectoliter increased 11.5%, driven by cost inflation, including higher inputs and transportation costs, mix impacts from premiumization and factored brands in EMEA and APAC as well as deleverage. This was partially offset by lower depreciation expense.
Underlying MG&A in the quarter increased 7.5%. G&A was up due to higher people-related costs, including increased travel and entertainment, while marketing investment increased as we continue to provide strong commercial support behind our core brands and new innovations. As a result of these factors, underlying net income before income taxes decreased 22.8%, which was at the favorable end of our outlook range of down 20% to 30%. While we discuss our business performance on a constant currency basis, on a reported basis, our second quarter results were negatively impacted by the strength of the U.S. dollar. This impacted our reported net sales revenue by 280 basis points and our underlying income before income tax by 150 basis points in the quarter.
Underlying free cash flow was $287 million for the first half of the year, a decrease of $271 million from the same period last year, primarily due to the timing of cash paid for capital expenditures and lower net income, partially offset by lower cash taxes. Capital expenditures paid were $389 million for the first half of the year, an increase of $177 million from the prior year period and focused on expanding our production capacity and capabilities programs.
Now let's take a look at our results by business units. In Americas, the on-premise has not returned to pre-pandemic levels, but continues to improve on a sequential quarterly basis. In the second quarter, the Americas on-premise channel accounted for approximately 13% of our net sales revenue compared to approximately 16% in the same period in 2019.
In the U.S., on-premise net sales revenue improved to 93% of 2019 levels compared to 87% in the first quarter of 2022. And in Canada, on-premise net sales revenue was 77% of 2019 levels, up from 55% in the first quarter of 2022. Americas net sales revenue was down 1.7%, as net pricing growth in the U.S. and Canada and positive brand mix were offset by lower financial volumes as declines were expected.
Americas financial volumes decreased 8.1%, largely due to cycling higher U.S. shipments due to the prior year period inventory recovery efforts, as well as 2.2% lower brand volumes, including impacts related to the Quebec labor strike. In the U.S., net sales revenue declined 2.1%, with domestic shipments down 8.2%, outpacing brand volume declines of 1.7%.
Brand volume declines were driven by economy brands, which were down high single-digits, largely due to the SKU deprioritization and rationalization program. To a lesser degree, our premium brand volumes also declined, reflective of the soft industry. Volume declines were offset by continued strength in the above-premium portfolio, which was up nearly double digits for the quarter.
In Canada, net sales revenue decreased 2.3% as brand volume declines of 8%, driven by the Montreal Brewery strike, were largely offset by positive pricing premiumization and channel mix. Latin America net sales revenue decreased slightly as higher brand volume of 1.8% was offset by a mix shift to our license business.
Net sales per hectoliter on a brand volume basis increased 6.2% due to net pricing growth and favorable brand mix. U.S. net sales per hectoliter increased 6.7%, driven by net pricing growth and positive brand mix led by the above-premium brands. Net sales per hectoliter on a brand volume basis grew 8% in Canada due to net pricing increases and positive sales mix, while Latin America decreased 4.2% due to unfavorable sales mix.
Americas COGS per hectoliter increased 10.2% due to inflation, including higher cost for brewery, packaging and brewing materials and freight, as well as volume deleverage and mix impacts from premiumization. And this was partially offset by lower depreciation. Underlying MG&A increased mid-single digits on higher G&A due to increased people-related costs, travel and entertainment expenses and increased U.S. marketing investments. In the U.S., we increased marketing investments high-single digits, putting strong support behind our core brands and innovations, including Topo Chico Hard Seltzer and the June national launch of Simply Spiked Lemonade, as well as in local sponsorship and events. As a result, Americas underlying net income before income taxes decreased 20%.
Turning to EMEA and APAC. Net sales revenue increased 20.5%, driven by higher financial volumes, net pricing growth and favorable mix. Top line performance also benefited from fewer on-premise restrictions in the U.K., compared to the second quarter of 2021. Recall that the on-premise in the UK was closed the entire first quarter 2021, and did not fully reopened without restrictions until July, the 19, 2021. So in the second quarter, our on-premise net sales revenue in the U.K. exceeded 2019 second quarter level.
EMEA and APAC net sales per hectoliter on a brand volume basis was up 15.5%, driven by positive sales mix with the on-premise reopenings and strengthening our above-premium brands as well as net pricing growth. Financial volumes growth of 6.2% was due to higher brand volumes in Western Europe, as well as in Central and Eastern Europe, along with higher factored brand volumes.
COGS per hectoliter increased 22% due to rising inflationary pressures and increased factored brand sales. MG&A increased 14.2%, as we cycled lower relative G&A spending in the prior year and increased marketing spend accelerating investments behind our national champion and premium brands, especially in the U.K. supporting Carling, Madri and Staropramen and fueling on-premise strength. As a result of these higher costs, EMEA and APAC underlying net income before income taxes declined 22.7%.
Turning to capital allocation. Our priorities are to invest in our business to drive top line growth and efficiencies, reduce net debt and to return cash to shareholders. We ended the quarter with net debt of $6.4 billion, which included the repayments of our $500 million 3.5% USD notes upon maturity on May, the 1st 2022, using a combination of commercial paper borrowings and cash on hand.
Notably and of particularly importance during these volatile times, our debt is substantially all at fixed rate with a minimal amount of variable rate debt. We ended the quarter with $250 million of commercial paper outstanding, leaving us with strong borrowing capacity with $1.3 billion available on our $1.5 billion U.S. revolving credit facility.
Our trailing 12-month net debt to underlying EBITDA ratio was 3.2 times as of the end of the second quarter, down from 3.35 times at the end of the second quarter in 2021. We remain on track to achieve our target net debt to underlying EBITDA ratio of below 3 times by the end of 2022 and remain committed to maintaining anytime upgrading our investment grade rating. Also during the second quarter, in addition to paying a quarterly cash dividend of $0.38 per share to holders of Class A and B common stockholders, we paid approximately $12.1 million for 230,000 shares under our share repurchase program.
Now, let's discuss our outlook. We are reaffirming our fiscal 2022 guidance, which calls for both, top and bottom line growth in 2022, performance we had not seen in over a decade. Before we go through the guidance, please be reminded that year-over-year growth rates are on a constant currency basis. However, it's important to note that continued strength in the U.S. dollar will result in a headwind to our reported results in the effective period using current exchange rate.
For 2022, we continue to expect to deliver mid-single digit net sales revenue growth, high single-digit underlying income before income taxes growth and underlying free cash flow of $1 billion, plus or minus 10%. We are confident to reaffirm this guidance as our announced 3% to 5% pricing increase in some U.S. markets as Gavin mentioned are expected to offset volume headwinds, given the softness in industry and residual impact of the Montreal brewery strike that was resolved in June.
In terms of top line phasing, in the third quarter, we will still have some volume headwinds from the economy SKU rationalization program, which we will not fully lap from a shipment perspective until the fourth quarter. Also, while the Quebec labor strike was resolved in mid-June, it will take time to ramp up production and we don't anticipate returning to normal shipment levels from this brewery until the fourth quarter.
In the fourth quarter, we have multiple top line growth drivers. First, we have announced additional pricing in the 3% to 5% range in many markets in the U.S. That pricing will take effect in the fourth quarter. Second, recall that year-over-year top line comparisons will begin to ease in the fourth quarter, given the renewed on-premise restrictions in the fourth quarter of 2021, particularly in the U.K. and Canada. And in November, the World Cup will take place, which is a big beer drinking occasion in Europe and notably the U.K.
Third, as I just mentioned, we will have fully lapped the shipment headwind from economy SKU rationalization by the fourth quarter. On the cost side, we expect margins to continue to be impacted by inflationary pressures in areas, including input materials and transportation costs in the second half of the year. Now that said, we have multiple levers to help offset inflationary pressures, which include pricing, mix from premiumization and our cost savings and hedging programs.
When comparing year-over-year COGS per hectoliter growth for the second half of the year to the second quarter, it's important to note a few things. First, the second quarter was meaningfully impacted by volume deleverage, which we would not expect to continue in the second half of the year. And due to the timing and ramp-up of initiatives, the realization of savings and our cost savings program is weighted to the fourth quarter of this year.
In terms of marketing, we continue to expect to invest more in 2022 than we did 2021, but in the second half of the year, overall marketing spend is expected to be down compared to the prior year period. We anticipate higher year-over-year investment in the third quarter. However, in the fourth quarter, we do not anticipate increases. We are comfortable with our level of marketing investment in the second half of the year and would remind you that in the second half of 2021, we had ramped up marketing levels to those exceeding that of the respective period in 2019. In terms of our other guidance metrics, we continue to expect net interest expense of $265 million, plus or minus 5%. Underlying depreciation and amortization guidance of $750 million, plus or minus 5%, and an underlying effective tax range rate in the range of 22% to 24%.
In closing, our strategy is working, and we expect that to continue to play out in our long-term financial and operational performance. To be sure, these are dynamic and uncertain times, but we have built our business to manage through challenges. Molson Coors is a highly cash-generative business with a dramatically improved balance sheet, enhanced flexibility in its operating and cost structure, and a product portfolio that addresses all segments of the market while consistently evolving its concentration to areas of growth. We are proud of the progress we have made against the revitalization plan and the successes achieved under that plan give us confidence in our 2022 guidance and in our long-term goal of sustainable top and bottom line growth.
And with that, we look forward to answering your questions.
Operator?
