Tracey Joubert
Chief Financial Officer at Molson Coors Beverage
Thank you, Gavin, and hello, everyone.
In the second quarter, on a constant currency basis, we delivered tremendous results. Net sales revenue grew 12.1% and underlying pre-tax income grew 52.6%. We achieved this while continuing to invest in our business, reduce net debt and return cash to shareholders.
As Gavin discussed, we have built our business to sustainably grow both the top and bottom line. We achieved this in 2022 and in the first quarter of 2023 before this recent period of accelerated demand in the U.S. And while we remain mindful of the dynamic global macroeconomic environment and recent beer industry softness, the foundation we have laid coupled with our strong second quarter performance provide us confidence to increase our full year 2023 guidance, meaningfully accelerating growth from our prior expectations.
Now before we get to that, let's talk about some of the drivers of the second quarter performance. Net sales per hectoliter grew 9% in the quarter. This was driven by positive global net pricing due to rollover pricing benefits from higher than typical increases taken in 2022 and favorable sales mix driven by geographic mix and premiumization. Financial volume increased 2.8% and consolidated brand volume increased 5%. The volume growth was driven by strength in our Americas business, partially offset by a decline in our EMEA and APAC business.
Turning to costs. Underlying COGS per hectoliter were up 5.9%. As expected, inflationary pressures continue to be a headwind. As you may recall, we bucket COGS into three areas. First is 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 80% of the increase and was mostly due to higher materials and manufacturing costs, partially offset by cost savings. Volume leverage had a meaningfully positive impact on COGS per hectoliter in the quarter providing a 100 basis point benefit. Other COGS per hectoliter drivers included mix, which accounted for the remainder of the increase. This was largely due to the impact of non-owned brands as well as premiumization. And while premiumization is a negative for COGS, it is a positive for gross margin per hectoliter.
Underlying marketing, general and administrative expenses increased 4.1%. The increase was driven by higher incentive compensation expense, which is a variable expense tied to our operating performance, as well as higher marketing investments.
Now let's look at our quarter results by business units. In the Americas, net sales revenue grew 11.5% and underlying pre-tax income grew 40%. Americas net sales per hectoliter increased 6.2%, benefiting from positive net pricing across the region as well as favorable sales mix. The strong net pricing growth included benefits from higher than typical U.S. and Canada pricing in 2022. As a reminder, in the U.S. in 2022, we took two part increases, a spring and fall, each averaging approximately 5%. We lapped last year's spring increase in the third quarter and will begin to lap last year's full increase this September. Financial volume increased 5%. This was due to a 4.8% increase in U.S. domestic shipments, driven by higher brand volumes due to a shift in consumer purchasing behavior largely within the premium segment in the quarter.
In addition, Canada shipments increased in part due to cycling the impact of the Quebec labor strike in the second quarter last year. This was partially offset by lower Latin American and contract brewing volumes.
Americas brand volumes were up 8%. U.S. brand volume increased 8.7% largely due to growth in our core brands with Coors Light, Miller Lite and Coors Banquet all up double-digits. Growth was also driven by strength in our Above Premium portfolio led by flavor. In Canada, brand volume increased 11.3%. While sparkling the Quebec labor strike was a driver, we also achieved growth in each of our Canadian regions. In Latin America, brand volume was down 5.9%, largely due to industry softness in some of our major markets in that region.
On the cost side, Americas underlying COGS per hectoliter increased 2.5%. Inflation remained the leading driver of the increase, but the impact was partially offset by the benefits of volume leverage and lower logistics costs. MG&A was up on higher incentive compensation and higher marketing investments, particularly for key innovations like Simply Spiked.
Turning to EMEA and APAC, net sales revenue increased 14.7% and underlying pre-tax income increased 82.7%. Net sales per hectoliter grew 18.3%. This was driven by positive net pricing largely related to the rollover benefits from increases taken in 2022, favorable sales mix and continued premiumization in the U.K., fueled by the strength of brands like Madri and positive geographic mix.
Financial volume declined 3%, relatively in line with brand volume, which was down 2.9%. Looking by market, financial volume grew in the U.K. on strong brand volume due to the resilience of the U.K. consumer and our strong on-premise performance, as well as higher factored brand sales. But this was more than offset by the counts in Central and Eastern Europe due to industry softness, including the impact of the continued inflationary pressures on the consumer.
On the cost side, underlying COGS per hectoliter increased 17.7%. This was largely due to inflation-related brewing and packaging materials and logistics costs, as well as the mix impacts of premiumization and higher factored brands. MG&A was relatively flat.
Underlying free cash flow was $570 million for the first six months of the year, and this was an improvement of $282 million, primarily due to higher net income and lower cash capital expenditures.
Turning to capital allocation. Capital expenditures paid were $335 million for the first six months of the year. This was down $54 million and was due to the timing of capital projects. Capital expenditures continue to focus on our Golden Brewery modernization and expanding our capabilities in areas that we believe drive efficiencies and savings.
We reduced our net debt by $308 million since December 31, 2022, ending the second quarter with net debt of $5.7 billion. And in July, we repaid our CAD500 million debt in cash upon its maturity on July 15. 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 a zero balance outstanding at quarter end. And we paid a quarterly cash dividend of $0.41 per share and maintain our intention to sustainably increase the dividend. Given our strong EBITDA performance and lower net debt, our net debt to underlying EBITDA ratio as of quarter end reached our longer-term leverage ratio target of 2.5 times.
Our capital allocation priorities remain to invest in our business, reduce net debt as we remain committed to maintaining, and in time, improving our investment-grade rating and return cash to shareholders. But our greatly improved financial flexibility does provide us increased optionality among these priorities, and we will utilize our models to determine the best anticipated return for our shareholders.
Now, let's discuss our outlook. But first, please recall that we cite year-over-year growth rates in constant currency. We are raising our 2023 key financial guidance to reflect the continued strength we are seeing in our core brands in the U.S., while remaining mindful of the softness in the beer industry and continued caution around the consumer.
We now expect high-single-digit net sales revenue growth as compared to low-single-digit growth previously. We now expect 23% to 26% underlying pre-tax income growth, as compared to low-single-digit growth previously. And we also now expect underlying free cash flow of $1.2 billion, plus or minus 10%, as compared to $1 billion plus or minus 10% previously.
Now let me break down some of the guidance assumptions. From a top line perspective, given the strong demand in the U.S., we now expect growth to be driven not only by rate but also by volume. But we continue to expect a headwind related to the large U.S. contract brewing agreement that has begun to wind down ahead of its termination at the end of 2024. As discussed on our first quarter call, we expect volume declines under this contract to accelerate in the fourth quarter. For context, the headwind impact of this is expected to be approximately 2% to 3% of Americas financial volume in the fourth quarter. We continue to view the termination of this contract as a positive, because while a headwind from a volume perspective, we believe it is positive for us in terms of freeing up capacity and enhancing margins.
As for distributor inventories before that we had both higher U.S. distributor inventory levels at the end of the first quarter this year versus the prior year. However, given the strong demand, distributor inventory levels in the U.S. declined following both the Memorial Day and Fourth of July holidays. We expect they will further decline following the Labor Day holiday. Recall that declines in distributor inventory levels through the summer and particularly post our holidays during this period are typical. Also, as usual, we anticipate rebuilding inventory in the shoulder quarters being the first and fourth quarters. So while our supply is currently tight, our brewery operations have done an excellent job of meeting the demand.
As for pricing, given the strength of our brands, we continue to anticipate taking a general increase in the U.S. this fall. At this point, we expect our pricing increase to be in line with industry average historical annual levels of 1% to 2%.
In terms of costs, we continue to expect the impact of inflation on COGS to be a headwind for the year, but we expect it to moderate in the second half. While stock rates for a number of commodities have declined, we, like most CPG companies have a hedging program, which we expect will largely smooth out the impact of swings in commodity pricing. Further, our business in EMEA and APAC is expected to continue to experience relatively high inflationary pressure. In addition, we expect favorable volume leverage to partially offset cost increases. This, combined with continued premiumization and lower contract brewing volumes, are expected to drive gross margin expansion for the year.
Underlying MG&A expenses is expected to be approximately $100 million higher in the second half as compared to the first half of this year and up approximately 15% versus the second half of 2022. This is primarily due to higher marketing spend, which is expected to be up approximately $100 million, as well as higher people-related costs as compared to the same period last year.
As for our secondary guidance metrics, we continue to expect capital expenditures incurred of $700 million, plus or minus 5%, underlying depreciation and amortization of $690 million, plus or minus 5%, and an underlying effective tax rate in the range of 21% to 23%.
However, we are reducing our net interest expense guidance of $225 million to $225 million plus or minus 5% as compared to $240 million plus or minus 5% previously. This decrease is driven by the July payoff of the Canadian debt maturity, higher interest income due to higher cash levels and higher interest rates on deposits and lower short-term borrowings than previously anticipated.
In closing, we are extremely pleased with our second quarter performance. While we could not have foreseen the shifts that we have seen in consumer behavior that began in the second quarter, our strategy has positioned us well. With a strong portfolio of brands across all price segments and the financial flexibility that enables us to continue to invest prudently in our business, we are confident in our ability to sustainably deliver top and bottom line growth, not only in full year 2023 but also beyond.
We look forward to sharing more details on our strategic initiatives, capital allocation and longer term outlook at our upcoming Strategy Day on October 3rd.
With that, we look forward to answering your questions. Operator?
