Molson Coors Beverage Q3 2023 Earnings Call Transcript

There are 13 speakers on the call.

Operator

Good day, and welcome to the Molson Coors Beverage Company Third Quarter Fiscal Year 2023 Earnings Conference Call. You can find related slides on the Investor Relations page of the Molson Coors website. Our speakers today are Gavin Hattersley, President and Chief Executive Officer and Tracey Juba, Chief Financial Officer. And with that, I'll hand it over to Greg Tierney, Vice President of FP and A, Commercial Finance and Investor Relations.

Speaker 1

All right. Thank you, Britta, and hello, everyone. Following prepared remarks today from Gavin and Tracy, we will take your questions. In an effort to address as many questions as possible, We ask that you limit yourself to one question. If you have technical questions on the quarter, please pick them up with our IR team in the days weeks that follow.

Speaker 1

Today's discussion includes forward looking statements. Actual results or trends could differ materially from our forecast. 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.

Speaker 1

S. GAAP measures are included in our news release. 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.

Speaker 1

Also, U. S. Share data references are sourced from Serkana. Further in our remarks today, we will reference underlying pretax income, which equates to underlying income before income taxes on the condensed consolidated statement of operations. And with that, I'll hand it over to Tracy.

Speaker 2

Thank you, Greg, and hello, everyone, and thank you for joining us. We will be doing things a little bit differently this quarter. I will open and address our results, Our guidance and importantly, our 4th quarter expectations at the start of the call and then Gavin will close. In the Q3, we delivered another set of strong results. Our net sales revenue grew an impressive 11%, driven by double digit growth in both our business units.

Speaker 2

Our continued focus on efficiencies and cost savings combined with volume leverage significantly offset inflationary pressures resulting in meaningful margin expansion. This led to 43.5% growth In underlying pretax income with both business units up strongly. And with free cash So nearly doubling for the 1st 9 months of the year, we continue to prudently execute our capital deployment plan, investing in our business, Reducing net debt and returning cash to shareholders. This performance underscores the strong momentum in our business, which is a function of the foundation we have built to sustainably grow both the top and bottom line. And this is exactly what we have done, both in 2022 year to date in 2023, all while navigating a challenging and dynamic global macroeconomic environment.

Speaker 2

And while these macro conditions remain, the fundamental strength of our business coupled with the actions we are taking to sustain the momentum we have achieved gives us confidence for another year of growth in 2023 and beyond. For 2023, we are reaffirming our High single digit top line growth guidance, but narrowing our expectations to the high end of that range. And we are raising our underlying pretax growth guidance to 32% to 36% as compared to 23% to 26% previously. We are also reducing our interest expense guidance to $210,000,000 plus or minus 5% as compared to $225,000,000 plus or minus 5% previously. All other previous guidance metrics As detailed in today's earnings release remains unchanged.

Speaker 2

There are a few key reasons for these guidance changes. 1st, the U. S. Beer category has been healthier than we had projected when we revised guidance on August 1. In other words, its rate of decline is better than we had expected and better than it was earlier this year.

Speaker 2

2nd, our brand volume growth is stronger than we had expected. In fact, we anticipate our global brand volume growth to accelerate in the 4th quarter. 3rd, pricing across our global markets and in particular in Canada has been better than we had planned. And 4th, due to higher than expected cash balances, we now anticipate lower net interest expense. Okay.

Speaker 2

With that in mind, let's discuss the Q4. Our updated full year 2023 guidance implies mid single digit top line growth and at the midpoint a high single digit decline in underlying pretax income for the quarter. Now the 4th quarter growth rates do not imply a reversal in the trend for our brands in the U. S. In fact, our October brand volume performance is currently outpacing our trends in the Q3.

Speaker 2

And we expect continued share growth roughly aligned with what we saw in the Q3. In short, we are not seeing anything that suggests that our market share gains are slowing. So let's talk about some of the key factors driving 4th quarter performance. First, we will experience a reduced level of pricing In the U. S.

Speaker 2

And EMEA and APAC. For example, we are lapping an approximate 5% general increase in the U. S. Before As anticipated and is supported by the strength of our brands, we took pricing in many of our U. S.

Speaker 2

Markets in the 1% to 2% historical average range. 2nd, we expect our U. S. Brand volume to outpace financial volume growth in the Q4 and this is due to a couple of reasons. We ended the 3rd quarter with healthy U.

Speaker 2

S. Inventory levels. This was due to our strong brewery performance, which enabled us to shift ahead of expectations in the quarter. And this put us in a great position in the Q4, providing the opportunity to give our employees some much deserved time off around the holidays. And it also allows us to execute planned downtime in the U.

Speaker 2

S. Network for system maintenance. Overall, we expect agreement winding down ahead of its termination at the end of 2024. We continue to expect volume declines under this contract to accelerate in the 4th quarter, resulting in a quarterly headwind of approximately 2% to 3% in Americas financial volume. 3rd, underlying COGS per hectoliter is expected to be a headwind in the 4th quarter.

Speaker 2

This is due to continued high inflation in EMEA and APAC and lower volume leverage than in the previous two quarters. And 4th, we expect total MG and A to be up approximately $90,000,000 which is driven by both marketing and G and A. For marketing, this includes approximately $50,000,000 higher spend in the 4th quarter And this increase is particularly impactful in a lower profit quarter like the 4th quarter. G and A is expected to be primarily due to higher incentive compensation given our strong performance this year. Okay.

Speaker 2

So now let's talk about our 3rd quarter performance. We delivered another quarter of strong results with net sales revenue growth supported by both Rate and volume. Net sales per hectoliter grew 7.6%. This was driven by positive global net pricing given the rollover This geographic mix was due to particularly strong performance in the U. S.

Speaker 2

In fact, consolidated financial volume increased 3.2%, while U. S. Shipments were up 7.2%. This was a result of our strong U. S.

Speaker 2

Brewery performance, which enabled us to ship ahead of our expectations, but also it was due to the continued strong momentum behind our premium brand. Consolidated brand volume increased 1.1% with results varying by market. Americas brand volume was up 3.6%. Growth was led by the U. S.

Speaker 2

Where brand volume was up 4.5%. In fact, Coors Light and Coors Banquet were each up double digits And Miller Lite was up high single digits. But there were some notable timing impact that masked the underlying strength in the U. S. Brand volume growth.

Speaker 2

Firstly, there was one less trading day in the quarter. On a trading day adjusted basis, U. S. Brand volume growth was 6.1%. In addition, we were cycling significant loading ahead of the 2022 forecast increases And there was some shifting of calendar and holiday timing as compared to the prior year, which had an impact.

Speaker 2

Canada brand volume increased 0.2%, benefiting from growth in its above premium portfolio. While industry softness weighed on brand volume, we continue to grow share in Canada for the quarter, adding over 3 share points for the 3 month period ending August. In Latin America, while mix improved, brand volume was down 2.5%. This was largely due to industry softness and economic conditions in some of our key markets in the region. And in EMEA and APAC, brand volume declined 5.2%.

Speaker 2

The consumers in Central and Eastern Europe continued to be affected by inflationary pressures And U. K. Demand was impacted by rainy weather. That said, our bus premium portfolio continued to benefit from strong growth from Madri, which grew brand volume over 50% in the quarter. This strong top line performance translated to even stronger bottom line results And this was across both business units, with underlying pretax income up 32.2% in Americas and up 58.1 percent in EMEA and APAC.

Speaker 2

We achieved this by prudently managing costs while continuing to invest strongly behind our brands. So let's talk about some of these drivers. Underlying COGS per hectoliter were up 2.6%. As expected, inflationary pressures continue to be a headwind, but moderated from the first half of the year. But the story differs by market.

Speaker 2

In the Americas, underlying COGS per hectoliter decreased 1% as cost savings, volume leverage and lower logistics costs more than offset the impact of direct material inflation. While in EMEA and APAC, inflationary pressures remained significant, Driving underlying cost per hectoliter up 15.8%. To break down the drivers But more, as you may recall, we bucket COGS into 3 areas. Firstly, cost inflation other, which includes cost inflation, depreciation, cost savings and other items second is mix and third is volume leverage or deleverage. The cost inflation bucket drove over 85% of the increase and was mostly due to higher materials and manufacturing costs, partially offset by cost savings.

Speaker 2

The impact of volume leverage had an 80 basis points benefit in the COGS per hectoliter in the quarter. Other COGS per hectoliter drivers included mix, which accounted for the remainder of the increase and was largely due to geographic mix. Underlying marketing, general and administration expenses increased 11.6%. About Half of the planned incremental $100,000,000 in marketing spend in the second half of twenty twenty three was in the third quarter And it largely went to supporting the momentum of our core brands. Our investments focused on retaining our existing drinkers and attracting new ones, including using addressable channels or places where we can use data to more precisely target them.

Speaker 2

Further, we continue to strongly invest behind live sports. Based on our brand health and share performance, we believe that this investment is working. Also general and administration expenses were higher. This was primarily due to incentive compensation expenses, which is a variable expense tied to our operating performance. And as you have seen, it's been a very strong year.

Speaker 2

Turning to capital allocation. Our priorities remain to invest in our business to drive sustainable top and bottom line growth, reduce net debt as we remain committed to maintaining and in time improving our investment grade rating and return cash to shareholders. With our greatly improved financial flexibility, we now have increased optionality among these priorities and we will Our models to determine the best anticipated return for our shareholders. Looking at these priorities. 1st, we continue to invest in the business with paid capital expenditures of $494,000,000 for the 1st 9 months of the year.

Speaker 2

This was down slightly due to the timing of capital projects. Capital expenditures continue to focus on our Golden Brewery modernization and expanding our capabilities to drive efficiencies, cost savings and sustainability initiatives. And second, we made further progress in reducing our net debt. We ended the quarter with net debt of $5,400,000,000 a decline of $584,000,000 since December 31, 2022. This was supported by our July cash repayment of our CAD 500,000,000 debt upon its maturity on July 15.

Speaker 2

As a reminder, our outstanding debt is essentially all at fixed rates. Our exposure to floating rate debt is limited to our commercial paper and revolving credit facilities, both of which had zero balance outstanding at quarter end. Given our strong EBITDA performance and lower net debt, Our net debt to underlying EBITDA ratio declined to 2.2 times. This is in alignment with our long term goal of under 2.5 times. And I would like to add that in October, S&P Global upgraded its first rating for Molson Coors to BBB from BBB- And that brings me to our 3rd priority, returning cash to shareholders.

Speaker 2

We paid a quarterly cash dividend of $0.41 per share and maintain our intention to sustainably increase the dividend. And as announced at our Strategy Day on October 3, Our Board authorized a new share repurchase program of up to $2,000,000,000 over the next 5 years. It replaces and supersedes of sustained and opportunistic purchases as part of our balanced and cohesive approach to prioritizing capital allocation intended to improve shareholder value creation. In summary, we are extremely pleased with our Q3 performance and confident in our ability to And with that, I'll turn it over to you, Gavin.

Speaker 3

Thank you, Tracy. In the Q3, we continued the growth trajectory that we've been on for nearly 2 full years. In the quarter, each Of our top 3 global markets are growing net sales revenue, volume, share or all 3. In the U. S, our shipments were up over 1,000,000 hectoliters compared to the Q3 of 2022 and we were the top volume share gainer in the industry.

Speaker 3

Coors Light and Miller Lite are on track to collectively deliver net sales revenue growth for the 3rd straight year, Something that had not done since Miller and Coors came together in 2,008. Coors Banquet volumes were up nearly 30%. Coors Light volumes were up double digits and Miller Lite volumes were up high single digits. We were the top Dollar share gainer in the U. S.

Speaker 3

Economy segment. In fact, our 2 biggest economy brands grew dollar and volume share of industry in the quarter. We have gained the 2nd most U. S. Share of flavored alcohol beverages of all major brewers.

Speaker 3

We grew share nationally in Canada in every region of the country and in every segment of our industry. Coors Light widened its Position as the number one light beer in the country, a position it has held since March. And the Molson Brands grew share. Miller Lite grew volumes by 50%, and we grew more share in flavor alcohol beverages than any other company in the industry. We were the best performing brewer in the U.

Speaker 3

K. In both value and volume share. And in some very exciting news from the U. K. Market, We are now the number 2 brewer in London after ranking a distant number 5 player only a few years ago.

Speaker 3

The transformation of our portfolio in the London market is a real testament to our team's commitment to a clear strategy that drives focus across all channels and customers. Additionally, Madri is now the 2nd largest above premium lager in the on premise And 3rd largest world beer in the total trade across the UK. And in Central and Eastern Europe, Ojushko, Our core power brand in Croatia is growing value share of the beer category year to date, and it has over 50% value share of the core segment. Now of course, our business has benefited greatly from the broader dynamics of the U. S.

Speaker 3

Beer industry over the past 7 months. But as you can see, the improvement in our business is being driven by more than one market. The improvement in our business is being driven by more than a couple of brands. The improvement in our business is being driven by more than one segment of the category and the improvement in our business predates April 1. Year to date, each of the top 3 biggest global markets are growing net sales revenue, volume and volume share.

Speaker 3

And as this slide plainly shows, the trajectory of our business has been on the upswing. And in regard to our future, we believe we can lap these results in 2024. We delivered top and bottom line growth in 2022. We're on track to do so again this year, and we plan to do so next year too. That's the plan we outlined at our Strategy Day last month.

Speaker 3

We've already gained thousands of tap handles across the U. S. Since the beginning of Q2. We're already gaining significant amounts of shelf space this fall As retailers work to adjust this space to meet consumer trends. Now I have seen some, let's say, interesting commentary around shelf space.

Speaker 3

So I want to be extra clear here. The vast majority of chain retail accounts typically update their shelf space once a year due to the complexity of lining all their stores And they typically do so in the spring. Over 50 retailers have made space changes in late summer or fall due to the massive shift This is not common. In fact, in the last 5 plus years, we haven't had any adjustments in the summer or a change to the premium segment in the fall. Among the chains that moved their resets up to the 4, Molson Coors was the biggest beneficiary with Miller Lite and Coors Light gaining 6% to 7% more shelf space.

Speaker 3

For brands of this size, that is a massive amount of space. In fact, it's tens of thousands of cubic feet of space. Regardless of how some folks might characterize the current environment, those are the facts. The conversations for spring resets are well underway. And while we can't exactly predict the future, it's safe to say that we Expect to gain more shelf space for our big brands in those resets as well.

Speaker 3

These retailers are smart business people. And when consumer trends shift to the degree they are shifting, chain retailers have 2 options: chain shelf space allocations to meet the trends Or leave money on the table. And they're not going to leave money on the table. It's as simple as that. We have more to say about 2024 on our Q4 call in February.

Speaker 3

But between the work we have done to improve our business trajectory And the current dynamics in our industry, we feel confident in this year, confident in our ability to grow next year And confident in our ability to grow in the years ahead. And with that, we'll take your questions.

Operator

Thank you please limit yourself to one question and then please get back in the queue. We now have Lauren Lieberman of Barclays. Your line is open.

Speaker 4

Great. Great. Thanks so much. Good morning.

Speaker 2

I was just curious if you could

Speaker 4

talk a little bit about going back to the beginning of the call, Tracy's And then the release on the beer category in the U. S. Being stronger than what you'd previously expected. So any color you can add on that would be great. Kind of what do you think some of Key drivers are, is it around key consumer cohorts?

Speaker 4

Just color on the beer industry backdrop would be great. Thank you.

Speaker 3

Thanks, Laura. Look, I mean, in Q1, the industry was down 2.7%, in Q2, it was down 2.5% And in Q3, it was down 1.3%. That's in the USA, obviously, and it's per Sukena. So an improvement. And as Tracy said, That wasn't the level of improvement that we were expecting to see.

Speaker 3

And obviously, the hard seltzers are still a big part of that decline. Certainly, while some buyers are switching categories and certainly, our data says that some Drinkers have left within the category. We're gaining share. Miller Lite, Coors Light are healthy and growing Share strongly and that share has been stable for the last 25 weeks. It's a structural change to the industry That is sticking whether you look at it on a 1 week basis, a 4 week basis, a 13 week basis or a 26 week basis, it's stuck.

Speaker 2

Next question, operator?

Operator

Thank you. We now have Bryan Spillane of Bank of America.

Speaker 1

Hey, thanks, operator. Good morning, everyone. So, Tracy, I guess I had just a question, 2 questions around cash flow. 1 is, I know we took the pre tax profit or the I'm sorry, the profit after tax guide up, But you left the free cash flow range. So I guess it's just why not, I guess, Higher conversion on free cash flow and then or on cash flow.

Speaker 1

And then second to that, just again, you've got some cash hanging around and the stock's Performed the way it has. So just any thought any way we should be thinking about whether or not you'd put some of that cash to work to buy back shares?

Speaker 2

Yes. Thanks, Brian. So look, the free cash flow range that we gave was already quite wide. So we're comfortable just leaving it where it is. In terms of capital allocation, look, our priorities haven't changed.

Speaker 2

It's those three brackets that we speak about. It is investing in our business to drive the sustainable long term top and bottom line growth. And that could be investments in our breweries or From an M and A point of view, the sort of spring of pearls approach, we will continue to reduce net debt with a desire to improve our investment grade rating. And as I remarked, we did get an upgrade from S and P. And then returning cash to shareholders.

Speaker 2

So we did announce the 2,000,000,000 Up to $2,000,000,000 share repurchase plan over the next 5 years. And we'll consider all of those things. I think the good thing is that With our strong free cash flow delivery, we do have optionality as to how we can balance the allocation of capital behind these priorities. But as always, we'll run all of the ideas through our models and make sure that we're investing where we are driving the higher Return for our shareholders.

Operator

Thank you. We now have Andrea Teixeira of JPMorgan.

Speaker 5

Thank you. I was just going to talk about a little bit of the share voice. And I think you in the Analyst Day, you obviously Discussed that against the incremental spend this year. Is there any KPIs you can talk about As you're tracking the development of the incremental spend. And if there is anything, I know most of that $90,000,000 I believe incremental expense for if I'm not mistaken in the quarter, It's mostly compensation, but wondering if it's going to reaccelerate even further in the Q4, so it sets you up for 2024.

Speaker 5

And on that, I was just trying to get Gavin, you mentioned that your market share continues to be solid. I think one of Your main competitor talking about Bud Light recovering a bit. I know obviously from a variable base, Anything you would be expecting to see? And I understand, obviously, you may not Count on that being on that share gain being structurally 100%, but most of it could be. So I was wondering if you can comment a little bit more on the market share performance that is baked in your outlook for next year.

Speaker 5

Thank you.

Speaker 3

Thanks, Andre. Look, from a marketing point of view, we're focused on the quality and effectiveness of our marketing spend versus the Sort of level of spends that drive the best returns and we certainly try and make sure that every single dollar counts. We've got great tools that we've had for a number of years, which evolve and they're designed to make sure that we get the required marketing effectiveness. We know which creative assets are working hardest and which channels are working hardest for that. So we're going to continue to put the right commercial pressure behind our brands To support the momentum.

Speaker 3

I just want to maybe correct you on one thing, right? So the extra $90,000,000 in the 4th quarter, there's about $50,000,000 of that Is the marketing and that's part of the $100,000,000 we said we're going to spend on extra marketing in the second half of the year. So We spent half of that in the Q3 behind really big beer drinking occasions like football, Which we'll do again in the Q4. And then obviously, a large component of what's left is, as Tracey said, The employee related costs. Look, as far as share gains are concerned, our share Position has been stable for the last 25 weeks.

Speaker 3

It's a structural share change to the industry That we believe is going to stick. And yes, I know there's been a lot of noise about trends changing and whether these results Speaking. So let me just share the facts and these aren't our facts. This is Sakena. And the fact is total share for Coors Light and Miller Lite has Stuck over the past 7 months.

Speaker 3

Through the latest 4 weeks of track channel data on a dollar change basis, Coors Light and Miller Lite both continue to put up double digit growth. And at the same time, Bud Light has lost just under $3 share points. The overall portfolio for our biggest competitors lost under $5 share points and that's consistent. If you look at 4 week data, the 13 week data and the 26 week data. In fact, Bud Light's actually getting worse.

Speaker 3

The brand's dollar share loss over the last 4 weeks Was more than any 4 week period this year. And as I said, these aren't I mean, this isn't a poll or possibility, right? This is the fact As laid out in Sakena, we believe that the strength is going to continue into 2024. And we're very confident in of our core brands in both the U. S.

Speaker 3

And obviously in Canada. We've got a very clear plan on how to keep these share gains. We presented it to our distributors at our 4 National distributor convention, we showed our plans. And honestly, the energy around our plans is something I have not seen, not only for Miller Lite and Coors Light, but for everything. We had a 95% positive score from our distributors.

Speaker 3

That has never happened. And we laid out the clear acceleration plan at our strategy day on how we're going to retain the share gains. So Yes. We believe we can retain the share that has proven to be extremely sticky on every measure that we look at.

Operator

Thank you. We now have Peter Grom of UBS.

Speaker 6

Thanks, operator, and good morning, everyone. Hope you're doing well. So I was hoping to get some thoughts on just kind of the underlying COGS hectoliter, which was kind of the lowest year on year increase in quite some time. Maybe just first, can you just help us And what's embedded in the guidance for the Q4? I think you mentioned an increase in underlying costs due to high inflation in EMEA and APAC.

Speaker 6

Is that just an increase year on year or is that an increase sequentially versus what we just saw in 3Q? And I know we're going to get more On 24 February, but maybe you can just give us some insights in terms of how you're thinking about some of the key cost buckets based on what

Speaker 7

we can see today? Thanks.

Speaker 2

I'll take that. So yes, look, we did say that we expect Inflation to continue to be a headwind for us in the back half of the year, but to moderate. Now as it relates to Q4, we do expect our COGS per hectoliter to be a headwind. And this is Because of the continued inflationary pressure in EMEA and APAC region, we're seeing continued inflation in the double digit range. But the added drivers of our Q4 COGS per hectoliter would be our lower volume leverage in Q4, lower than Q3 and Q2 For those reasons that we spoke about coming out of Q3 and into Q4.

Speaker 2

And then also expecting our brand volume to outpace the financial volume growth. Also we've got higher planned maintenance costs in the Q4. So those would be the big drivers of COGS per hectoliter in Q4. Thank you.

Operator

We now have Monique Herzog of Goldman Sachs.

Speaker 8

Good morning. I guess I wanted to ask a little bit about your MG and A expense. Could you maybe talk a little bit more about the areas where you're going to be investing incremental marketing dollars as you kind of talk through the end of the year? And then should we think about you continuing to invest at a higher rate as we think about next year to support your Your brands and the growth that kind of Gavin you mentioned in the stickiness. Just trying to think about or trying to hear how you're thinking about this?

Speaker 8

Thank you.

Speaker 3

Thanks, Bonnie. Yes, look, without giving a complete look under the tent for competitive reasons, obviously, we're going to continue to drive Strong pressure in the market with our very effective campaigns have made to chill with Coors Light and Taste Like Militane. We've got significant increases planned and already executed in the Q3 and also in the back half of this year, especially behind The high beer consumption moments like football is. We're also going to leverage targeted media And digital tactics to retain the new drinkers, which we've got into our brands, primarily Coors Light, Muller Light and Coors Banquet. We've also got some innovation that's coming in the Q4.

Speaker 3

Blue Moon Non ALK is launching in December, so that we're ahead of the dry January timeframe. And we're going Invest to make sure that we get more space in store. So whether that's continue to capitalize on The share that we've gained of displays, we've gained more than any other major brewer. We're going to invest In appropriate areas to make sure that our retailers understand that the incremental shelf space and the tap handles that we're getting that we're going to support That was strong marketing. And then we're going to invest in our EMEA APAC business, particularly behind brands like Madri, Carling and Ajus goes.

Speaker 3

So those would be the general directions and themes, Bonnie.

Operator

All right. Thank you. We now have Filippo Faloroni of Citi.

Speaker 9

Hey, good morning guys. I had a question on your U. S. Brand volumes. Even on an adjusted basis, the 6 Point 1 that you quoted, it still looks below what we're seeing traction of data.

Speaker 9

So maybe can you comment on The performance in OnTrack, On Premise and other smaller off premise retailers. And then thinking about Q4, you mentioned you expect Brand volume to accelerate, but you're planning to ship below brand volumes. It didn't seem like the over shipment in Q3 was The large? So maybe you can comment on where inventories are in the distributor channel. That will be helpful as well.

Speaker 9

And whether we should think If you don't ship over in Q4, should we see a catch up in Q1 of next year? Thank you.

Speaker 3

Thanks, Filippo. Tracey, do you want to take the shipment question and I'll take The sort of, so can or Nielsen number difference between ours and what you're seeing in tracked channels. I would say there's Probably 3 big differences between the number we disclosed and the tracked channels. You highlighted one of them, Which is the trading adjustment. But then the other one is obviously the significant loading that took place at the end Of the Q3 last year, which obviously we didn't have this year because we had that large price increase last year.

Speaker 3

And from a tracked channels point of view that mentioned that measures consumer behavior, whether our brand sales represent sales that our distributors Put into the retail stores. So the retailers would be buying ahead of the price increase. That doesn't necessarily mean that the consumer is buying ahead Of the price increase. And those would be the 2 biggest differences between those two numbers, Filippo. From a shipments point of view, Tracey, do you want to take that?

Speaker 2

Yes. So, look, we've spoken about our expectations for our Brand volume to exceed our financial volume. And really that's because of the healthy inventory levels that We ended Q3 on which enabled us to ship ahead of expectations. So just in terms of our inventory levels like coming out of Q3 and even today, we are at higher inventory levels than we saw in the prior year. So again, we feel very comfortable with the inventory levels going into Q4 coming out of Q4 and being able to have inventory levels Healthy to as we go into peak setting next year.

Operator

Thank you. We now have Vivien Azia of T. B. Cowen.

Speaker 4

Hi. Hi, good morning. Good morning. The earnings season thus far, we've heard some cautious Commentary from some of your peers around negative mix shift, shifting to smaller sizes, some weakness in the lower income Consumer more broadly. Student debt repayments obviously came October 1.

Speaker 4

I know you guys are probably hesitant to comment on inter Quarter trends. But I was just wondering, Gavin or Tracey, can you give us some perspective on whether you're seeing similar dynamics, whether there might be more refined in terms of spending, more choiceful spending? Thanks.

Speaker 3

Yes. Thanks, It's Vivien. You broke up a little bit there, but I think I got the gist of your question. From an overall consumer health point of view, we do remain cautious given the macroeconomic Environment that is out there. We're particularly cautious in Central and Eastern Europe, which has pretty been pretty consistent With our view for a while, right?

Speaker 3

I mean, tough economy, the high inflation has impacted our Central Eastern Europe business much more than our U. K. Business, which is honestly more weather related. We do though expect conditions to improve as inflation Falls in Europe and we are starting to see inflation falling there. In Canada, we are seeing softness.

Speaker 3

It's a tough economic Environment out there, we're particularly pleased with our own performance in Canada. We've really grown strongly and actually Our share growth in Canada is higher than it is in the United States. In March, Coors Light took over as the number one light beer and has maintained that position and Molson's growing share of industry volume and NSR. In the U. S, we're still seeing premiumization with growth in RTDs And spirits, albeit at a slower rate because of the fall off in seltzers.

Speaker 3

Consumers to your point are seeking more value through pack purchasing decisions, which they're making either into the larger pack Like 30 packs or into the smaller pack sizes, singles and 6 packs. The on premise is running pretty at pace with the off premise business. And We haven't seen any material trade down into our economy brands. If it happens, we're ready. I mean Miller High Life and Keystone in particular are well positioned and are showing very nice improvement Given where they were.

Speaker 3

So if it comes, we believe that the portfolio that we've got is ready for it. Thanks, Vivien.

Operator

We now have Rob Ottenstein of Evercore.

Speaker 10

Great. Thank you very much. Just a few follow ups on some of the points that have been mentioned. So Gavin, strong results. You're obviously super confident in the business and the momentum Disconnect, right, in terms of what the stock is doing.

Speaker 10

I think you're trading at about a 10% free cash flow Valuation. So given that, I know your general Points on capital allocation. I guess the question is, is there any impediments or any issues In terms of buying back stock now as in between now and the end of the year, so is there anything to stop you from doing that? So that's Question number 1. Question number 2 is just, you had mentioned that the business is better in October Then in Q3, is that a global?

Speaker 10

Is that U. S, Canada and Europe? Or is it just a particular region? Thank you.

Speaker 3

Thanks, Rob. To your second question, I'll take that first. It is global. It's across the spectrum, not just the U. S.

Speaker 3

To your earlier question around Why I believe and why we're confident that we're going to continue to deliver? I'm not going to rehash the points I made earlier about our share position that have been stable for the Last 25 weeks and the gains we've made being very sticky. But I would say to you that over the last 4 years, Robert, Yes. We made a lot we made a number of statements when we launched our revitalization plan. We said we would streamline our company and deliver €600,000,000 savings We did that.

Speaker 3

We said we would grow the top and bottom line of our business. And by the end of this year, we will have done it 2 years in a row. We said we would strengthen our core brands and we've done exactly that. We said we would become more than just a beer company And we have become more than a beer company. We also said we would grow more of our portfolio in above premium and we've done exactly that, Not just in Beyond beer, but also in beer with a brand like Madri.

Speaker 10

Sorry, Gavin, I don't mean to interrupt you. I mean, I know time is short. I wasn't challenging that. I was just saying in the light of that, Right. In the light of your progress, given where the stock is coming down here in the light of everything you're which I'm not challenging, is there any impediment, is there anything to stop you from buying back stock between now and the end of the year?

Speaker 10

And Ed again, sorry for interrupting.

Speaker 3

I'm glad you agree with all my points, Robert. I had a few more I was going to make too.

Speaker 10

I'm not sure that there's no miscommunication.

Speaker 3

As Tracy said, if we look at our capital Priorities, we're where we need to be. We have an approved Buyback program. And Robert, as we are required to do, we will disclose any And all shares that we may buy in a quarter when we release our Q, I think in February Of next

Speaker 7

year. Thank you.

Operator

We now have the next question from the line of Nadim Sarwat to Bernstein.

Speaker 11

Hi, morning everybody. Two questions from me. So first, look earnings clearly coming ahead of expectations Today, you guys have taken up full year guidance, so that's clearly not just a timing issue. But could you perhaps give us a sense of how much of that Stronger earnings are driven by temporary versus permanent factors, perhaps particularly thinking to any temporary benefit from positive operating leverage on fixed cost base Given shipments exceeded depletions. And then secondly, circling back to the point of market share gain sustainability, fully appreciate your comments On the latest scanner data and when the facts are there, I believe ABI though quoted some survey data indicating a willingness Some lost Bud Light drinkers to return to the brand.

Speaker 11

I'd be curious to hear if you have any survey data or additional consumer insights that you could share that adds to your conviction that those market share gains will continue to be sticky? Thank you.

Speaker 3

Thanks, Adi. Do you want to talk about operating leverage? Yes. Tracey, and I'll talk about the market share gains in the stickiness.

Speaker 2

Yes. So Nadine, in the prepared remarks, we spoke about the Volume leverage benefiting us by about 80 basis points on the COGS per hectoliter increase. So yes, that's for Q3. Just in terms of operating leverage, Our fixed cost comprise approximately 20% of our enterprise underlying COGS. Obviously, volume leverage helps us with those fixed costs over more of the volume.

Speaker 2

And so as we saw in Q3, it does have a fairly significant impact. And also though it does depend on The year over year does depend on the markets. In some of our markets, the fixed cost may be slightly higher. So the 20% that I've given you is really on an enterprise basis.

Speaker 3

Thanks, Joss. Look, I don't I can't really comment on Anheuser Busch's polling data, Nadine. But what I can say to you is that sales are What matter, right? And the sales are continuing as they have done since early April. As I said, The share gains are unchanged in 4 week, in 13 week and in 26 week.

Speaker 3

And in fact, in the latest 4 week read, the big brand is actually getting worse. That's the best indication of what's actually happening is the share has come to us and it is sticking And has done now for 7 months. And we've got a bunch of plans in place, which we showed our distributors And we revealed a little bit of at our strategy day, which highlights our intention to retain that share gain.

Operator

Thank you. We now have Eric Serotta of Morgan Stanley. Your line is open.

Speaker 7

Good morning. Thanks for the question. So coming back to U. S. Brand volume, You called out the double digits for Coors Light and Banquet and the high single digits for Miller Lite.

Speaker 7

Your overall depletions were up and mid single digits, which implies the rest of the portfolio was a lot lower. I realize a lot of the segments are not Growing like the premium life is growing right now. But can you give some color as To how you're doing, I'd say, your performance in the rest of the portfolio either by segment or call out Brands and how that is tracking versus 3 months ago? Thanks.

Speaker 3

Yes. Eric, that was tough to Catch the total drift of your question. Let me try. Obviously, there is the trading day adjustment we Talked about there is the timing of holidays and there is the timing of the price increases that come into that. We obviously do have some tail brands, which impact us.

Speaker 3

We We are seeing some of the same trends as everybody else is seeing from a Seltzer point of view in Particular, and that's why we've taken a much more broader approach To flavor, the total flavor segment seltzers, FABs and RTDs was about 5% of the category. That number Has tripled to about $13,000,000,000 now. It's a $9,000,000,000 business, but there's no question that seltzers within the flavor category is declining Fairly meaningfully. You've seen that with our brands and you've seen that with our competitors' brand. The data that we've looked at from a hard celtzer's point of view shows that it provided an entry point into flavor for For consumers and once they discovered flavor, they started to experiment and trade into FABs and RTDs and so on.

Speaker 3

And that's why we built A diversified portfolio of brands. And from a performance point of view, we're very pleased with the performance in the flavor space. We're The number 2 share gainer for major brewers and F and Bs. We've got the number 3 and the number 5 hard seltzer in the category or admittedly a declining category. We've got the top innovation in flavor in 2021, 2022, in the summer of 2023.

Speaker 3

We've got simply spiked within that space, which is on fire. It's got nearly 5% of the FAB segment. And we're bringing new build and borrow brands to the space with The Peace Heart Tea and the launch of Happy Thursday. From a premiumization point of view, Peroni doing well. Blue Moon is operating in a challenged segment as you've seen from a craft point of view.

Speaker 3

It's still the number one brand in the Craft segment, but we've experienced softness with Blue Moon largely due to those Those craft category challenges. We've got a really clear plan in place of how we're going to change that. We're already starting to see positive Display trends and we've got a big year planned for Blue Moon in 2024, which we unveiled for our distributors in September and which they Liked a lot and that includes new innovation, which is coming, as I said, in December. And then finally, in economy, yes, it's a challenge segment, but we're the top dollar share gainer in the economy space. So We're pleased with the performance of our 2 big brands there, Miller High Life and Keystone.

Speaker 3

So that's a walk around the park for you, Eric.

Operator

Thank you. We have our final question from Chris Carey of Wells Fargo Securities.

Speaker 12

Hi, everyone. Thanks for the question. So one on the EMEA and APAC segment And then just a high level question. The price mix tailwinds that we're seeing right now, how much of that is Your premiumization within the business versus on premise versus just straight list pricing. I'm trying to determine How much of this tailwind that we're seeing right now is perhaps sustainable structural versus maybe just a cyclical recovery of the business?

Speaker 12

And then I was wondering if you could just comment on competitive activity as we get closer to spring and spring resets. Are you seeing any notable shift in the market? Thanks so much.

Speaker 2

I'm sorry. What was the second question, Chris? Competitive activity, are you seeing anything?

Speaker 12

Competitive activity, Sorry, yes, I should have been more clear. Competitive activity for the total business, specifically in the U. S, As we get closer to spring resets as competitors are jostling for space. So are you starting to see Any changes? Obviously, you're stepping up marketing spending in Q4.

Speaker 12

I don't know if that's why, but anyway, just a broader comment on Whether you're seeing any developments with from a competitive activity, specifically in the U. S? And then the other question was on The pricing in ME and APAC and how much of this is sort of durable because of premiumization and or and how much is Perhaps just list pricing that all normalize and some cyclical recovery of your channel mix. So thanks so much.

Speaker 3

Thanks, Chris. Look, it's a bit of everything there, right? So I mean, obviously, we did get strong pricing in our EMEA APAC Obviously, it varies by country and is driven largely by whatever the inflation environment is in those countries. But from a mix point of view, we're getting strong benefits from particularly The continued very strong growth in Midry, which is an above premium brand and as I can't remember if it was me or Tracy that said it, but it's up 50% in the quarter And it's continuing to grow strongly. It's one of the primary reasons why we're the number 2 brewer in London, which was somewhat unthinkable A few years ago.

Speaker 3

So a large part of the overall UK business is now In the above premium space and it is accelerating. So that's part of it. Hard to tell where pricing is going to land out In EMEA APAC and it does vary by country and it is driven largely by the local dynamics. I do think it's safe to say that it's not going to be at the historical levels that we've experienced over the last few years. From a U.

Speaker 3

S. Point of From a price realization point of view, we put price into the markets that we were expecting to put it into in the Paul, as we've said before, I would expect pricing to fall back to more historical levels In the New Year, the ones that go in spring. And from a shelf reset point of view, yes, I guess everybody is fighting for space. The beauty of our position at the moment is that we've got the facts and the data To support meaningful increases in space for our brands And the distributors that have gone in fall have given us tens of thousands of extra cubic feet of space. And we're going to fight for every square foot of space based on those trends as we head into the spring resets.

Speaker 3

Thanks, Chris.

Operator

Thank you. I would like to turn it back to Greg Tierney for any final remarks.

Speaker 1

Very good. Thank you, operator, and appreciate everyone joining us today. I know there may be additional questions we weren't able to answer. So please follow-up with our Investor Relations team, and we look forward to talking with many of you as the year progresses. So with that, thanks everybody for participating and we'll talk soon.

Speaker 1

Cheers.

Operator

I can confirm that does conclude today's call. Thank you all for joining. Please have a lovely rest of your day and you may now disconnect your line.

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Earnings Conference Call
Molson Coors Beverage Q3 2023
00:00 / 00:00
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