Molson Coors Beverage Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2022

There are 12 speakers on the call.

Operator

Good day, and welcome to the Melton Kors Beverage Company First Quarter Fiscal Year 2022 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 Tracy Jaber, Chief Financial Officer. And with that, I'll hand it over to Greg Kearney, Vice President of SP and A and Investor Relations.

Speaker 1

All right. Thank you, Brica, and hello, everyone. Following our prepared remarks today for Gavin and Tracy, we will take your questions. In first question is, I'd ask you to reenter the queue for any additional follow ups. If you have technical questions on the quarter, please pick them up with our IR team in the days weeks to 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. Also, unless otherwise indicated, all financial results the company Our 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

With that, over to you, Gavin.

Speaker 2

Thank you, Greg. In the Q1 of 2022, Molson Coors continued to generate positive trends, Giving us continued confidence in our ability to meet our full year guidance. We grew the top line by double digits and the bottom line on an underlying basis by triple digits. Top line growth has historically been a challenge for this business. But through our strong execution of the revitalization plan, Our core brands continue to outperform their peers.

Speaker 2

Our global above premium portfolio continued to grow, again achieving portion of our overall portfolio by volume and revenue. To put a final point on it, in the U. S, The economy segment accounted for more than 100% of our volume decline, following our decision to streamline and strengthen this part of our portfolio. Our expansion beyond the beer aisle continues meaningfully as Zohr generated its largest sales month ever this March. And we continue to invest in our capabilities, most notably with a project that also increases the profitability of 1 of our fastest growing beverages, Copa Chico, Hard Sulfur.

Speaker 2

Collectively, these are the core tenets of the revitalization plan we laid out for you over 2 years ago, It is very heartening to see our business generating consistent results in each of these areas. Our core brands globally had another very strong quarter. In Canada, Coors Light grew share of the beer category, and our national champion brands in EMEA and APAC Significant improvements with the reopening of the on premise channel. You will recall that pubs in the U. K.

Speaker 2

Were closed the entire Q1 of 2021. By the end of Q1 of 2022, beer sales in pubs were back to 98% of pre coronavirus levels, And this was particularly beneficial to our Carling brand, the largest beer brand in the U. K. As a result, In the Q1, the EMEA and APAC business unit substantially improved its earnings and nearly doubled its 2021 revenue. In fact, we exceeded our EMEA and APAC Q1 2019 revenues, which is a fantastic sign and further evidence of the value of increasing marketing spend In the U.

Speaker 2

S, Coors Light and Miller Lite continue their strong performance, made possible due to a multiyear approach that is clearly bearing fruit. East Jude Brands compete in the same segment. So for years, it seemed virtually impossible to get them both moving in the right direction at the same time. In the late summer and early fall of 2019, under Michel Saint Jacques, our Chief Marketing Officer, The marketing team made an intentional decision to bifurcate how we market these 2 brands. What they stand for, what makes them unique in the marketplace And how they show up in ads.

Speaker 2

You can see that in the Coors Light Made to Chill campaign and in Miller Lite's work since then. Coors Light's Made to Chill campaign generated an immediate improvement in brand health in 2019, and that improvement has held since. And ROI on the marketing campaigns for our premium light brands has significantly grown. Combined, our new approach, Better marketing and increased investment as on premise restrictions have eased resulted in sequential improvement over the past few years. Coors Light went from being down mid single digits in net sales revenue in 2018 to growing by 4% in 2021.

Speaker 2

Volume also went from down mid single digits to nearly flat in 2021. Miller Lite went from 0.5% down net sales revenue in 2018 to growing 7% in 2021, and the brand's volume went from down 0.1% to almost Nearly flat in 2021. In the Q1 of 2022, we again grew revenue for both brands Generated the best combined industry share performance in 5 years. And while our core brands have been building strength over the past 2 to 3 years, we have continually grown our above premium portfolio across each business unit. We have now grown our share of net Sales revenue and above premium for 5 straight quarters and above premium net sales revenue now represents over 26% of our global portfolio On a trailing 12 month basis, a record for this business since the 2016 Miliquis acquisition.

Speaker 2

We again enjoyed the largest growth in U. S. Seltzers of any major brewer. That's been fueled in large part by the successful national launch of Turbo Chico Hard Seltzer, which is the fastest growing major Seltzer in the country. We only see further upside for this brand as we introduce the new margarita packs.

Speaker 2

And with respect to investments in our capabilities, I would note that in the Q1, we completed a capital project at our Fort Worth Brewery. This project allows us to begin to bring the U. S. Topo Chica hot seltzer production in house, improving our profitability with the brand. Our share of the hot seltzer market in Canada continues to be very strong with impressive performance by both Vizzy and Clear Seltzer.

Speaker 2

We expect to see those results only improve further when we introduce Topo Chica Hard Seltzer to the Canadian market next month. But our premiumization is also being driven by growth in above premium beers around the world. Farha, a relatively newer pilsner from Star Department, It's earned strong results in Central and Eastern Europe and has now launched in Romania. This will be its 2nd largest market to date, and we believe this expansion has Potential to dramatically increase prior volumes. Metri is performing well beyond expectations in the U.

Speaker 2

K. With distribution in over 1,000 on premise accounts. With strength in the on premise alone, earned Middle East part as one of the top 25 U. K. Beers.

Speaker 2

And in March, we launched it in the off premise. In Canada, Molson Ultra has posted 47% volume growth From 2019 to 2021. And just last month, we launched a new campaign to fuel momentum. And our Canada Craft Business Six Bines grew 5x the growth of the total Craft segment in Canada in the Q1. In the U.

Speaker 2

S, both Blue Moon and Peyronie saw double digit net sales revenue growth in the Q1 as they benefited from the on premise recovery as well as strong results off premise. And there is more premiumization coming, most notably as we launch Simply spike lemonade in the U. S. Next month. We are pleased to bring this highly anticipated product to the growing flavored alcohol beverage space As our next major initiative with Coca Cola, we also continue to drive the scale beyond beer, particularly with Zoho.

Speaker 2

The brand continues its strong growth, achieving a record sales month in March, and the data behind those results suggest a very bright future for Zohr. After a year in the market, its retail sales and distribution numbers broke records for a new entrant in the healthy energy drink category. There are, of course, other promising signs in our work to expand beyond beer. 5 Trail, our first full string bottled spirit, Has now expanded to 2 more states based on the strong results from its initial four markets. And Lucknow is growing rapidly.

Speaker 2

While the ready to drink tea and coffee category is up 1% in dollar share per IRR in the Q1, Bacalome is up 17%. Collectively, our emerging growth division remains well on track to achieving its $1,000,000,000 annual revenue goal As we continue to execute our revitalization plan around the world, we continue to turn around our entire business. Our improving results, which we are now generating quarter after quarter, give us continued confidence in our ability to meet our full year guidance. But it's not necessarily a straight path over each quarter. There are unique headwinds for our business in the second quarter and tailwinds for our business in the second half that We believe keep us on track to achieve our full year guidance, and Tracy will go over those in more detail.

Speaker 2

There are also broader issues And trends happening outside of our business that we are monitoring closely. 1st, inflationary pressure. We have multiple levers, including pricing, premiumization, our hedging program and our cost savings program to mitigate inflationary pressure. They have been huge assets, but inflation is a real and growing challenge, and we anticipate the impact of inflation will worsen over the course of the year. It's important to note though that we are not seeing raw material shortages.

Speaker 2

Globally, we continue to have access to the materials we need To produce, package and ship our beverages. As we head into the peak selling season, we are in our best U. S. Inventory positions since before the pandemic, and we continue to see out of stock levels on our core SKUs at or below pre pandemic levels. 2nd, consumer behavior.

Speaker 2

For example, volumes are universally soft across the U. S. Beer industry to start the year. This was most pronounced in January We would have expected all that we saw after previous waves of the pandemic. I would point out though that Molson Coors industry share trends Continued to improve, both in the quarter and into April.

Speaker 2

In fact, the U. S. Saw its best quarterly dollar share trend in over 7 years this past quarter. Despite high inflation in our biggest global markets, consumers continue to trade up, not down. And while it may seem counterintuitive, this trend is consistent with consumer behavior in the recent economic downturns.

Speaker 2

However, should that change and should trade down actually occur, our economy portfolio is well positioned to capitalize. The SKU rationalization we conducted in the U. S. In 2021 didn't just make our economy portfolio smaller. We made it stronger and more efficient.

Speaker 2

By focusing on 4 key brands in 4 key verticals, instead of managing a long tail of smaller brands, we are able to put more effort and energy behind our biggest brands And finally, the Russian war in Ukraine. We quickly stopped all exports to Russia And pause the license production of our other brands there. Collectively, however, the Russian, Ukrainian and Belarusian markets account for a very small portion of our global business, and we have no breweries there. So it has had minimal direct impact on our global business. Well, our focus has been on arranging safe passage, accommodations and financial support as it's needed for our Ukraine based colleagues And for the Ukrainian friends and family of other colleagues in the business.

Speaker 2

And while we will continue to monitor consumer health in Europe, Along with the cost of and access to input materials, we have been able to manage these challenges to date for our business. In summary, it was another positive quarter for Molson Coors, another quarter of successful execution on our revitalization plan Another quarter of continually improving results for this business. And all of this was achieved in a very challenging macro environment that we are continuing to monitor Firstly, delivering in ways this business has not done for many years, and our future is bright. Now to give you more detail on that, I'd like to hand it over to our Chief Financial Officer, Tracey Gibert. Tracey?

Speaker 3

Thank you, Gavin, and hello, everyone. As Gavin highlighted, while macro trends have been challenging, we had a strong Q1 delivering double digit top line and triple digit Underlying bottom line growth. We achieved our highest quarterly top line growth in over a decade as we continue to premiumize our product portfolio Through the execution of our revitalization plan, while we, along with the rest of the world, are facing inflationary pressures, Our efforts over the last 2 years have built a strong foundation for future growth and have given us confidence to reaffirm fiscal 2022 guidance Now I'll take you through our quarterly performance and our outlook. Consolidated net sales revenue increased 17.6 percent with strong growth in both our EMEA and APAC and Americas business units. On premise net sales revenue has not yet returned to pre pandemic levels in all markets.

Speaker 3

But as on premise restrictions have eased, We have seen sequential improvement in the on premise net sales revenue performance with variations by market. Consolidated net sales revenue growth was driven by strong global net pricing, favorable sales mix from portfolio premiumization, positive Consolidated financial volumes increased 5.1%, largely driven by strong brand volume growth in EMEA and ATAC, Higher contracts and factored volumes and stocking of lower U. S. Distributor inventory levels in the prior year. This was partially offset by a decline in Americas brand volumes, which was driven by lower U.

Speaker 3

S. Economy brand volumes a result of our economy SKU deprioritization and rationalization program implemented in the Q2 of 2021. Net sales per hectoliter on a brand volume basis increased 10.2%, driven by global net pricing growth And positive brand and channel mix with premiumization delivered across both business units. Net sales on a brand volume basis, which is an important metric from which to measure our progress against our revitalization plan, increased 12.2% compared to the Q3 of 2019. Underlying COGS per hectoliter increased 8.6% driven by cost inflation, including higher input and transportation costs as well as the mix impact from premiumization and factored brands in Europe, offset by lower depreciation expense.

Speaker 3

Underlying MG and A in the quarter increased 15 7% largely due to our planned increases in marketing investments, which surpassed Q1 2021 2019 levels to provide strong commercial support behind our core brands and new innovations. G and A was up due to higher people related including increased travel and entertainment. As a result of these factors as well as lower interest and depreciation, Underlying net income before income taxes increased 383.1%. Underlying free cash Used was $359,000,000 an increase of cash used of $271,000,000 in the same period last year. This increase in cash used was primarily due to higher capital project spending, partially offset by favorable timing in working capital.

Speaker 3

Capital expenditures paid were $244,000,000 and focused on expanding our production capacity and capabilities programs, such as our previously announced Golden Brewery modernization project and expanding our hard sulfur capacity in Canada and the U. K. Now let's 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 quarter basis. In the Q1, the on premise channel accounted for approximately 15% of our net sales revenue compared to approximately 18% In the same period in 2019.

Speaker 3

In the U. S, on premise net sales revenue was about 87% of 2019 levels. And in Canada, on premise net sales revenue was about 55% of 2019 levels because even though the on premise 0.8%, largely due to 3.1% lower brand volume, partially offset by cycling Lower U. S. Distributed inventory levels due to the March 2021 cybersecurity incident and the February 2021 severe Texas storm.

Speaker 3

In the U. S, net sales revenue grew 8.9%, with domestic shipments down 2%, Outpacing brand volume declines of 4.3%. More than 100% of the U. S. Brand volume declines were due to lower In the U.

Speaker 3

S, our economy portfolio was down high teens, while our bus and portfolio was up mid teens for the quarter. In Canada, mix sales revenue increased 4.1% as brand volume declines of 4.5% due to softer industry Performance were more than offset by positive pricing and mixed premiumization. Latin America net sales revenue increased 29.7% on brand volume growth of 13.8%. Net sales per hectoliter on a brand volume basis increased 9.8% With strong net pricing growth and favorable U. S.

Speaker 3

Brand mix. U. S. Net sales per hectoliter increased 11.1%, driven by net pricing growth As we took pricing earlier than usual this year and positive brand mix led by above premium innovation brands. Net sales per hectoliter on a brand volume basis grew high single digits in Canada due to net pricing increases and positive sales While Latin America increased low double digits due to favorable sales mix.

Speaker 3

Americas cost per hectoliter increased 6 0.7% due to inflation, including brewing and packaging materials and freight, as well as mix impacts from premiumization, partially offset by lower depreciation. Underlying MG and A increased 14.7% as we increased marketing investments Behind our core brands and innovations, including the national launch of Topo Chipra Hot Sulfur as well as in local sponsorships and events as pandemic related restrictions eased versus the same period last year. G and A was up as well due to increased People related costs and legal and travel and entertainment expenses. Americas underlying net income before income taxes increased 9%. Turning to EMEA and APAC.

Speaker 3

Net sales revenue grew 92.3%, driven largely by Western Europe, but we also experienced growth in Central and Eastern Europe. Top line performance also benefited from The U. K. On premise channel net sales revenue exceeded pre pandemic levels in the quarter. EMEA and APAC net sales per hectoliter On a brand volume basis was up 30.1 percent driven by positive sales mix with the on premise reopenings And above premium brands reaching another record high portion of the portfolio as well as net pricing growth.

Speaker 3

EMEA and APAC Financial volumes increased 29.4%, and brand volumes increased 19.8%. The increase was primarily due to higher U. K. Volumes, partially offset by the times in Central Europe and our export and license division. Strength in our core brands like Carlin and new innovations like Madrige led to strong double digit growth in above premium And premium volumes, partially offset by double digit declines in the economy.

Speaker 3

COGS per hectoliter increased 29.3 percent due to rising inflationary pressures and increased factored brand sales. MG and A increased 19.4% as we cycled mitigation efforts to lower costs in the prior year with on premise And higher marketing investments to support our brands and fuel on premise strength. EMEA and APAC underlying net loss before income tax improved 62.1%. We ended the quarter with net debt of $900,000,000 and a trailing 12 month net debt to underlying EBITDA ratio of 3.28 times compared to 3.14 times as of the end of 2021. With the Q1 typically being a cash used quarter, this leverage ratio was up from the 4th quarter, which is typical So our leverage ratio remains substantially below the end of the Q1 of 2021 where it was 3.74 times.

Speaker 3

We ended the quarter with $160,000,000 of commercial paper outstanding, leaving us with strong borrowing capacity With $1,340,000,000 available on our $1,500,000,000 U. S. Revolving credit facility. 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 have not seen in over a decade.

Speaker 3

Before we go through the guidance, I wanted to note that year over year growth rates are on a constant currency basis. Also, if on premise restrictions are increased and or reinstated in terms of our larger markets, this could have I think global inflation beyond that currently anticipated and a prolonged strike at our brewery near Montreal. For 2022, we continue to deliver mid single digit net sales revenue growth, high single digit underlying income before income taxes growth And underlying free cash flow of $1,000,000,000 plus or minus 10%. We expect to continue to be impacted by inflationary pressures in areas, including materials and transportation costs, and expect those pressures to increase for the balance of the year. However, we intend to judiciously pull our multiple levers to help mitigate the impact.

Speaker 3

As discussed on our Q4 call, we announced a 3% to 5% price increase early in 2022, which in the U. S. We took earlier than typical. Also, we have other leaders to help offset inflation, including mix from premiumization and our cost savings and hedging programs. In these unusually challenging times, we want to provide a bit more color on our quarterly outlook for the rest of the year.

Speaker 3

As Gavin mentioned, we have several headwinds and tailwinds that will impact our quarterly earnings phasing. As a result, We expect our 2nd quarter underlying income before income taxes to be down between approximately 20% 50% from the prior year period. We expect stronger relative year over year performance in the second half of the year, enabling us to reach our full year guidance. Now let me walk through some drivers. 1st, we are planning a double digit increase in our year over year marketing spend in the 2nd quarter, putting marketing investments well above 2021 levels.

Speaker 3

Recall in the Q2 of last year, we had lower relative spending with When our inventories were low due to the Q1 2021 cybersecurity incident and severe Texas storm, And we were still experiencing on premise restrictions across all of our major geographies. We did not begin upstanding until the second half of last Investing above 2019 levels. 2nd, our inventory position in the U. S. Heading into peak Summer season is the best it's been since before the pandemic.

Speaker 3

And last year, at this time, it was the lowest it has been in years. While the fact that we won't be playing catch up this year is taking a very positive development, it also means we don't expect our U. S. STW's to be as high as they were in the Q2 last year. 3rd, our ongoing strike at the Longdale Brewery and distribution centers near Montreal What has an impact on our 2nd quarter results and 4th year over year top line comparisons will begin to get more difficult in the second quarter relative to the 1st quarter comparisons, particularly in the U.

Speaker 3

K, where the on premise began to reopen in April 2020 However, these comparisons should ease in the Q4 given the renewed on premise restrictions in the Q4 of 20 We continue to expect underlying depreciation and amortization of approximately $750,000,000 plus or minus 5% reported, Net interest expense of $265,000,000 total minus 5 percent 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 below 3x by the end of 2022 as we had a strong desire to maintain and in time upgrade our investment grade rating. We repaid our $500,000,000 3.5 percent USD notes upon its maturity on May 1, 2022, using a combination of commercial paper borrowings and cash on hand. Also, during the Q1, we paid approximately $14,000,000 for 280,000 Under our share repurchase program, which was approved by the Board of Directors on February 17, 2022. As a reminder, this share repurchase program authorized the company to purchase up to an aggregate of $200,000,000 of our Class B common stock through March 31, 2026, with repurchases primarily intended to offset annual employee equity award grants.

Speaker 3

In closing, we remain confident in our strategy and pleased with our progress. These are dynamic and uncertain times, But what's clear is that we have built our business to manage through challenging times. Our demonstrated operational agility through the pandemic, Our dramatic improvements to our financial flexibility, our successful cost savings program that has served to fuel targeted investments to Our core brands and key innovations have all further strengthened our business as we continue to drive toward our goal of sustainable long to improve top and bottom line growth. And with that, we look forward to answering your questions. Operator?

Operator

Thank you. We will now begin the question and answer session. The first question from the phone lines today comes from Kevin Grundy of Jefferies. Your line is open.

Speaker 4

Great. Thanks. Good morning, everyone, and congratulations on the strong results and continued progress. Why don't we start with your guidance and just the composition now, Particularly between volume and net sales per hectoliter, whether that's changed at all given the strong start to the year, Sort of offset maybe with what's clearly a more difficult cost environment. And then within that now, Gavin, maybe you could just comment On how you see the progress for your key brands, particularly Coors Light, Miller Lite and well as some of the On beer brands, including Topo, which are off to a really strong start.

Speaker 4

So thanks for that.

Speaker 2

Thanks, Kevin, and good morning. Yes, there's a lot in that question. And Truss, why don't you take the guidance question? I'll just cover off on Coors Light and Miller Lite. You know, Kurzweil continues to perform very strongly throughout all of the Americas.

Speaker 2

It grew high single digits in the U. S. And Canada, we grew industry share, and we had strong double digit growth in LatAm. So what's driving that? I mean, it's got a clear and differentiated positioning Within the segment, driven by the Made to Chill campaign, we saw an immediate improvement in the brand health after we launched Made to chill.

Speaker 2

The campaigns are impactful, and we've seen a clear improvement in ROI. So That's Coors Light. From a Miller Lite perspective, we've seen bright spots so far with high single digit NSR growth on Miller Lite And its share continues to improve. In Canada, Miller Lite is growing strong double digits versus last year. And in LatAm, It's growing single digits.

Speaker 2

It's continuing to push its great taste point of view. And on top of this, we continue to land the brand into what's culturally relevant at the moment. I'd point to our J Balvin partnership and also being the 1st bar first brand to launch in a bar in a metaverse. So yes, it's driving a clear point of difference around great taste, and we're going to continue to capitalize that. I think you mentioned Beyond Bear as well.

Speaker 2

Although Zohr obviously is the star of the show for us there. And As I said in my prepared remarks, we had our best month in the month of March. I think it was. This is our biggest sales month. We're obviously learning as we're going along.

Speaker 2

We recently pivoted the whole lineup to 0 sugar SKUs, which is what the consumer really wants. It's It's gained share of the energy drink category sequentially in each quarter since we launched it, and it's now the 12th largest energy drink out there, Pick up an additional spot since the end of 2021. So lots of bright spots, very happy with how we're doing there. Guidance, Tracey, do you want to give a little bit of color there?

Speaker 3

Yes. So hi, Kevin. So yes, I'll talk a little bit to the And then touch on the volume versus revenue question. But as you know, our 2022 guidance calls for mid single digit top line growth And high single digit underlying net income before income tax growth. And what we are seeing that even though the on premise has not Return to pre pandemic levels across all of our markets, we do feel confident in our guidance.

Speaker 3

In the UK markets, We'll be more exposed to the on premise. We've already seen restrictions lifted, and our on premise volumes return to about 98% of pre pandemic levels. In other markets such as Central Europe, we there was still some uncertainty as the Omicron wave hits a little bit later. We're seeing improvements as well. In Canada and in the U.

Speaker 3

S, where our on premise revenues typically represent around 16 We continue to see sequential improvements each month, even though trading does remain below the pre pandemic levels. So just from the bottom line guidance, as we look at our rising inflationary I mean, we've seen that on certain commodities and packaging materials for sure, and the freight market still remains quite tight. We've got multiple levers to help mitigate that. So we spoke about pricing, got really strong pricing. Revitalization is around premiumizing our portfolio, and you see that coming through now.

Speaker 3

And then we've Got our heating and cost savings program, which will help mitigate some of that inflation. So as we look at the balance of the year, We do expect to see channel and geographic mix benefits as we cycle some of the second quarter that we saw in EMEA and APAC. These have an this will have an overall lower COGS per hectoliter. And then one other item is just that we've seen some benefit from our depreciation expense as we cycle out of 5 year period of asset fair value exercise on the MillerCoors acquisition. So I know I've put a lot into that, Hopefully, it gives you some color around how we're looking at volume and how we're looking at Revenue and certainly guidance reaffirming the guidance for the full year.

Speaker 4

Okay. That's very helpful. Thank you.

Operator

Thank you. We now have our next question from Nadine Swaraj of Bernstein. Sir, please go ahead. I have opened your line now.

Speaker 5

Hi, Thank you. Two questions for me. So first of all, your U. S. Brand volume is down 4.3% on a relatively easier comp of minus 7.3 From memory, many brands had already started to be deprioritized in Q1 last year.

Speaker 5

So could you help us understand What your U. S. Brand volume growth would have been without that component of deprioritization and rationalization that you call out in your release? And then just a second question on your Quebec strike. Am I correct in understanding that the strike is still ongoing?

Speaker 5

And how soon are you at risk of running through all your inventory from pre strike.

Speaker 2

Thanks, Nadine. I'll take those 2, Tracey. I'll start Quick, Bec, first. Yes, the strike is still ongoing. We're obviously doing what we can to produce and ship Our views within the confines of the law.

Speaker 2

Our hope is that the union come back to the negotiating table so that we can reach a reasonable Agreement for all the parties. At this point in time, obviously, there are some out of stocks, but we're continuing To produce and ship in line with our contingency plan. As far as U. S. Brand volumes are concerned, look, I mean, We were very clear about the fact that we rationalized our economy portfolio last year and that we would be facing those headwinds for a full 12 months.

Speaker 2

And if you look at the Q1, obviously, the 1st month was tough because we had the coronavirus Impact the Omnicom by which pretty much shut down the on premise again. And we saw sequential improvements beyond that. But just to remind you that we're going against the economy SKU rationalization and brand elimination. We will start to cycle out of that In the second half of the second quarter and then obviously fully into the second half, 100% Of our volume reduction in the U. S, in fact, more than 100% was driven by the economy portfolio.

Speaker 2

Premium Light or Premium and Above Premium portfolios collectively grew.

Speaker 5

Got it. Thank you very much.

Speaker 6

Sure.

Operator

Thank you, Nadine. We now have Lauren Lieberman of Barclays.

Speaker 7

Great. Thanks. Good morning. Okay, good. So just continuing on the question of Americas volume performance.

Speaker 7

So you commented on industry dynamics, right, the year starting kind of soft in January related to COVID, but

Speaker 3

that the

Speaker 7

Trends for February March were a little bit softer than what you've seen in prior phases post a pandemic surge. So I was curious if one you could just talk about what you think is underlying that if you have any insights, How you're thinking about overall consumer demand in the category as we move into the key selling season? And then I was intrigued by the fact that you said that premium and above premium volumes were still up in the quarter even with your comments February March being a little bit softer from an industry standpoint. So do you think that these that your brands can actually Grow volume in a non COVID up and down comps dynamic environment. Like are we to a point where Miller Lite Coors Light could be in positive volume territory over time.

Speaker 2

Yes, lots of news as well, Lauren.

Speaker 7

Thanks. Sorry.

Speaker 2

No problem. I mean, look, I mean, obviously, it is our ambition and our goal To drive both of those brands positively. And yes, 100% or more than 100% of the loss in the quarter was driven by the reduction in the economy portfolio. We grew share segment share in both Premium and above premium in the Q1, we had accelerating trends compared to the Q4. And growth in share in premium was Driven by Coors Light, Middle Light and Coors Banquet, frankly, and growth in the above premium is driven mostly by ourselves as Topo Chico And Wizzy, although I'm calling out that economy was obviously a negative, we have started to see positive trends on economy for our portfolio Between the Q4 of 2021 and the Q1 of 2022 and the hope is as we start cycling our focus On the 4 main brands that we'll see that get more positive.

Speaker 2

From a consumer health point of view, we can draw a line there to Trade down. And honestly, we're just not seeing that. In fact, we're still seeing the opposite. And obviously, we'll continue to monitor it closely. And If we do have trade down, I think our portfolio is uniquely positioned to benefit from that given the strength Of Economy Brands that we've got and the current strength of both Miller Lite and Coors Light.

Operator

Thank you, Lauren. The next question comes from Laurent Grandet of Guggenheim. Please go ahead when you're ready.

Speaker 8

Hey, good morning, everyone. I do have some quickly a follow-up from previous question about your above premium portfolio. So What are you expecting for Simply Spike that is about to be launched? Will Simply be produced in house or through contract manufacturing and what incremental margin should we expect from in house manufacturing for Topo Chico kind of roughly if you can give us Some direction there. And really, if I can ask another one, I mean, on the price per hectoliter, Your 10.2% outperformance in the quarter, what is due to net pricing, favorable product mix, Channel mix as you as the employees is rapidly.

Speaker 8

So if you can give more color there, that would be helpful as well. Thanks. Sure, Lauren. On Simply Spark, we're on track to launch that

Speaker 2

in June of this year. Lots of excitement from our system with our retailers, our consumers. What consumers are saying on Social media ahead of this launch is anything to go by. It's going to be a very successful launch, which I guess is not entirely surprising, right? It's a powerful brand.

Speaker 2

It's Coca Cola is the 2nd largest brand in the U. S, only behind the Coca Cola trademark brand. We're excited about it. It's launching a 12 pack and a 24 ounce can. And at the beginning, it will be produced Outside of our production facilities.

Speaker 2

Tova Chico is, as you say, we now produce it in house and we actually outsource it As well, whatever works best for us. We haven't been specific and detailed about the margin improvement, Lauren, but you can assume that Meaningful margin improvement for us when we do bring it in house. And then I think your next Question was on revenue, the 10.2%. Half of that was due to net pricing. Remember, this is a global number.

Speaker 2

Half of that 10.2% was net pricing and the rest Was favorable mix and a few other odds and ends. Thanks, Lauren.

Speaker 8

Thank you very much.

Operator

Thank you, Lance. We now have Brian Spillane of Bank of America. Please go ahead. I have opened your line, Brian.

Speaker 9

Hi. Thanks, operator. Good morning, everyone. Hey, Gavin. I wanted to just ask a bit more about the economy segment in the U.

Speaker 9

S. And I guess, I don't know if this if you can Disaggregate this or not, but if you were to take a look at the big four, so what you're focusing on, how are those brands performing? And I guess as we begin to cycle past the SKU rationalization, Will it begin to kind of contribute to the growth in the U. S? So just trying to get understand when we look underneath the hood, My sense is the economy segment is actually performing better than what we see because of the SKU rationalization, but just trying to get a sense of how that's performing.

Speaker 2

Yes, sure, Brian. Thanks. Without wishing to complicate things overly, right, there were 2 elements to the economy portfolio. 1 It was deprioritization as we came out of the cybersecurity attack in the Texas storm. So there were brands that we were not going to do Rationalized that we were constraining the production so we could focus in on Miller Lite and Coors Light.

Speaker 2

And then, of course, there's The SKU rationalization and the elimination of some of the brands. So there were those two elements. We came out of the sort of, How do I put it? Pause skews earlier than the rationalization skews. So we should start seeing improvement in Brands like Keystone, Miller High Life, Steel Reserve and HANS and already are even in the Q1, Brian, and that will accelerate as we start cycling some much easier comps.

Speaker 2

Probably as much detail as I want to get into, Brian, without really decomposing between the brands. But your thesis At a high level, it's correct.

Speaker 9

All right. Thanks, Kevin.

Speaker 2

Sure.

Operator

Thank you, Brian. We now have Erik Serotta of Morgan Stanley. You may proceed with your question, Erik.

Speaker 1

Great. It's Eric on behalf of Dara Messinian. Just a quick housekeeping question and then another question. 1st, from the housekeeping perspective, how much did the higher freight and fuel surcharge this year add to the U. S.

Speaker 1

MSR per And then my main question is just what you're seeing in terms of Topo Chico As you're cycling last year's launch, how are those launch markets comparing how are those how is this year's performance in the launch Markets comparing to where we were last year. And relatedly, what are you seeing in terms of rate of sale, velocity, Trial in new markets as you've expanded that rationally, how do those new markets compare to the initial markets from last year?

Speaker 2

Got it. Thanks, Eric. On your housekeeping question, remember the 10.2%, which I was referring to earlier was a global Number, the U. S. Number is actually a little higher than that.

Speaker 2

It was a percent higher than that. Roughly the same split, right? Roughly half Net pricing and half mix and other. And I'd say the freight and fuel is around 100 basis More or less, give or take, of the 11 odd percent net revenue per hectoliter Increase. As far as Topo Chico is concerned, remember, we only launched that brand nationally towards the back end, But it's already the number 4 brand in the segment, and it's growing.

Speaker 2

It's the first to your velocity question, it's actually the 3rd fastest Turning in the segment, it's got the highest repeat rate of any brand that we've launched over the last few years. It's got over a 5 share nationally already. And in major markets like Texas, it's Already into the mid teens from a share point of view. So your question about launch markets And new markets, it's holding strong in Texas, which is where we launched it, first of all. And we've got some exciting new stuff And that we've just put into the market for Topachica with Margarita, we launched that last month.

Speaker 2

We're ready for our first I mean, we didn't have it nationally in the summer of last year, and we are well positioned for our 1st national summer with Topo

Speaker 1

Thanks. I'll pass it on.

Operator

Thank you, Eric. We now have Robert Ottenstein from Evercore. Sir, please go ahead, Robert.

Speaker 10

Great. Thank you very much. I'd like to follow-up on Tapo Chico, which is which you guys have done a fantastic job with. Can you Talk a little bit what your team is telling you Tapo Chico is drawing from. Any sense of what percentage is coming from other brands or is drawing new consumers into hard seltzers, new demographics,

Speaker 1

Any data around

Speaker 10

that? 2nd, based on the momentum of the brand, do you think that a 10% market share is realistic in the next 1 to 2 years. And then finally, we continue to get a lot of questions On exactly how the brand hits the income statement. So if you could review that again. Thank you.

Speaker 2

Thanks, Robert. Look, from an overall CELTA point of view, we've more than doubled our CELTA Sure. Topo Chico is a big part of that. As I said, it's the 4th largest seltzer in the country. Vizzy is the 5th largest.

Speaker 2

We've just launched the Margarita variety pack. We've got ranch water out there now. And We still believe that 10% market share for us is our initial goal. And we certainly our ambitions Don't just stop there. That's just in the U.

Speaker 2

S, frankly. In Canada, we've already seen double digit seltzer share in some markets. In Quebec, it's already mid teens at a mid teens level, and that's before we've even launched at the Chico Heart Seltzer, which we're launching In the summer of this year, and of course, we've got 1st mover advantage in Europe with 3 fold and with the wire moment. So we're off to a strong start in Toca Chica. I feel very good about it.

Speaker 2

As far as the detailed financial metrics, I mean, that's obviously something between ourselves and Coca Cola. We don't we're not going to break They're down, but obviously it's positive for us, otherwise we wouldn't be doing it. And to be clear, it comes through the P and L, right? So I mean, it's in our volume, it's in our revenue, And it's in our margin and our bottom line.

Speaker 10

And any color on where it's sourcing from?

Speaker 2

Sorry, I forgot about that one. Yes, look, it is sourcing in many respects in the same way that overall Seltzer's are, right, Which is more than half of it's coming from outside of the beer category, but it does play strong more strongly With Hispanic consumers, I would say we're probably taking a higher share of the Hispanic consumers Then the general services would be taken.

Speaker 10

Great. Thank you very much.

Speaker 6

Sure.

Operator

Thank you, Robert. We now have Chris Carey of Wells Fargo Securities. Sir, please go ahead when you're ready, Chris.

Speaker 6

Hi, everyone. Thanks for the question.

Speaker 8

So Just on

Speaker 6

the expected decline in Q2 profit, I just wonder conceptually how much of that is related to the investment you noted to step up in marketing spending versus Like the higher COGS per hectoliter, you've also noted that inflation is stepping up. And then just conceptually, As we head into the back half with the implied ramp in profit to get to the full year guide, I Appreciate spending timing is likely a factor. COGS per hectoliter may now be higher than your initial expectations. Can you confirm that? Maybe just conceptually, is there anything that gives you confidence from launch Timing, specific plans you have around product categories into the back half, momentum in brands that gives you that Confidence on the top line.

Speaker 6

Clearly, price mix is a very good story and that I suspect it will remain so, But perhaps on the volume side as well. So it's really just on kind of drivers of Q2, but then conceptually why things ramp from here, Fundamentally, sort of the brands and product

Speaker 9

categories that might be getting you there.

Speaker 1

So thanks for that.

Speaker 2

Thanks very much, Trish, why don't you get into the detail of that?

Speaker 3

Yes. Hi, Chris. Okay. So if I talk about Q2 phasing, as you heard me say, we expect our underlying Pretax income to be down between 20% 30% versus prior year. The main driver of that is our Marketing investment.

Speaker 3

So we're expecting a double digit increase in marketing. If you recall, we had very low relative spend when our Inventories were low last year this time due to the cyber incident and the Texas storm. And then we still had on premise And across a few part of our geographies in the prior year. And we also another driver The Q2 phasing is really the high inventory position that we're going into the summer this year. It's a much higher inventory Then we had last year, which was actually a really low inventory position.

Speaker 3

So we don't expect our STWs to be as High as they were in the Q2 of last year. The other thing impacting our Q2 is, Gavin mentioned the strike at our long day delivery and distribution centers near Montreal, that will have an impact on Q2 results. And Year over year, our top line comparisons are a little bit more difficult in Q2 versus Q1, particularly in the U. Okay. Where the on premise began to open in April of 2021.

Speaker 3

As it relates to the balance of The year end and giving us confidence. A couple of things to think about there. We expect continued top line growth From both price and premiumization of our portfolio. And in the second half of the year, we will also cycle Out of the headwinds from the economy SKU rationalization and deprioritization that Gavin just spoke to as well. And then In Q4, we'll be cycling a period of lower sales in 2021, especially in the EMEA APAC Region, which were impacted by Omnicom at the back half of last year and the UK on premise Sal, again.

Speaker 3

And then finally, we'll be cycling higher marketing and sales spend in Q3 and Q4 of the prior year, which increased last year much higher than the year before, so 2019. And if you recall, We didn't spend as much in Q1 and Q2 of last year. And so you'll be seeing an increase in Q1 this year and a And increasing Q2 of this year versus the back half of this year as well. So just a couple of points of color, hopefully that will help.

Speaker 2

Thanks, Tracy. I mean, Chris, just to tie a bow on the marketing, right, is I mean, we've always said we're going to invest behind our brands. And we've got brands in the with Miller Lite and Coors Light, We've got brands in the above premium space that are really doing well, and we're going to invest behind that momentum. And then we've got the Simply launch, Which takes place in Q2. So I think we've said from the beginning of the revitalization plan, we're going to invest behind the momentum Got it.

Speaker 2

And we're seeing that.

Speaker 6

Gavin, Tracy, thanks so much for the perspective.

Speaker 3

Thanks, Chris.

Operator

Thank you, Chris. We now have Steve Powers of Deutsche Bank. Please go ahead when you're ready, Steve.

Speaker 10

Yes, great. Thank you very much. Just a quick follow-up for me on the economy portfolio rationalization Deprioritization. Maybe could you just remind us what happened to the shelf and cooler space that you may have surrendered as part of that portfolio Streamlining. I guess what I'm curious about is to whether or not any of that space may have Migrated to the benefit of your premium and above premium portfolio, just to keep that in mind as we potentially also cycle that in the back half?

Speaker 10

Thank you.

Speaker 2

Thanks, Steve. Look, we had a very clear and detailed plan with our distributors by brand that was discontinued by SKU that was discontinued to Try and make sure that we filled it with the brands that we wanted there. Some of it would well have landed up in the premium light space and some of it would have extended Some of the brands that we kept in the economy space. I mean, I'd also be naive to suggest that we didn't lose some shelf space to our competitors. I'm sure we did.

Speaker 2

But our sales and guys and our distributors had a very clear plan to execute against and they did that.

Speaker 1

Okay. Thank you very much.

Speaker 2

Sure.

Operator

We now have Brett Cooper of Consumer Research. Sir, Brett, your line is open.

Speaker 9

Thank you. If there's something you can give us some insight into how you look at attacking and prioritizing categories or parts of the industry in which you have a small presence So clearly, Seltzer was is a big priority. You've had success. But if you look at the beverage industry, there's numerous opportunities. So if you can touch on sort of thoughts or plans or just how you prioritize things like loan card, reflux success in Canada.

Speaker 9

And I guess, Obviously, you had the unfortunate timing with Synarcia Gold or FMBs where you have a relatively low share. Just how you think about that and prioritize that as a company? Thanks.

Speaker 2

Well, I think you can see that in what we're actually prioritizing, Brett. So obviously, seltzers is a priority for us. It remains a priority. And we're With the progress that we're making there. In terms of other prioritization, simply It's another example of that, right, going into the sort of SMB or flavored space.

Speaker 2

We're being much more choiceful than we perhaps were in previous years. We're making bets and putting focus On what we think are big ideas and Topo Chico and Vizzy and Simply are exactly Up in Canada, we have placed focus behind Molson Ultra. And in our Beyond beer space, we're placing Significant focus behind ZOWA. We understand that Our distributor partners want focus, and we believe we're giving that to them, and it certainly helps our own internal system as well. We're not going to be all things to all people in every single space possible.

Speaker 2

We're going to bet what we think is a good ideas and the big bets for us.

Speaker 1

Great. Thank you. Thanks, Berit.

Operator

Thank you, Brett. Our final question on the line comes from Andrea Teixeira of JPMorgan. Sir, Please go ahead when you're ready.

Speaker 11

Thank you. Good morning. Thank you for well, good afternoon. Thank you for letting me in. Can you please help us with the trends quarter to date in Q2?

Speaker 11

And Tracy, you mentioned elevated levels of inventory and wholesalers In the summer and ahead of the summer and as such, are you embedding kind of a more of a mid single digit decline in shipment And for the Americas, and also contributing to the decline in EPS, you quoted the 20% to 30% pretax. And related to that, are you assuming what are you assuming then in terms of volumes for the second half for the Americas because of that Because of the hockey stick improvement.

Speaker 2

Andrew, I mean, Tracy went through that in Hi, lot of detail. So in the when we talk about elevated inventories, all I think the point Tracy was trying to make was we have very low inventories at the end of Q1 last year because of the cybersecurity, and this year, we don't. As I said, our inventory levels are where we want them to be going into summer. We've worked very hard at that. Our out of stocks, Particularly in our SKU our core SKUs are lower than they were pre pandemic.

Speaker 2

So we're well positioned. There just isn't an out of stock problem in our organization.

Speaker 11

Maybe it will be helpful then Quarter to date April numbers, I'm sorry, maybe the April quarter to date or May. Yes.

Speaker 2

Andrea, look, we're not going to give I think we discontinued that practice some time ago. I do think in my opening script or at some point in the I've said that April has sequentially improved. January was tough because of Omicron and then February, March April have all Eventually improved for us. There are different things going on in the back half of the year, Right. So I mean, the U.

Speaker 2

K. Went into lockdown pretty much again in the Q4 of last year, so that will be an easier comp. Canada had some challenges in the 4th quarter from a prior year point of view as well. But Getting into shipment detail by quarter is not something we plan to do. I think the important thing is that we've reaffirmed our guidance And we're comfortable with that.

Speaker 11

Thank you.

Operator

Thank you, Andrea. As we have no further questions, I would like to hand it back to Gavin for some closing remarks.

Speaker 1

All right. Thank you, operator. This is Greg, not Gavin. But if there are any additional questions that all of you were not able to answer, Please do not hesitate to pick them up with me or Tracy Mangini in the days weeks that follow. And with that, look forward to chatting with you all soon.

Speaker 1

I hope everyone has a great day. Thank you.

Operator

Thank you all. That does conclude today's call. Thank you again for joining, and you may now disconnect your lines.

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Earnings Conference Call
Molson Coors Beverage Q1 2022
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