Molson Coors Beverage Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2022

There are 12 speakers on the call.

Operator

Good day, and welcome to the Molson Coors Beverage Company Second Quarter Fiscal Year 2022 Earnings Conference Call. You can find related slides on the Investor Relations page of the Molson Corp's website. Our speakers today are Gavin Hattersley, President and Chief Executive Officer and Tracey Joubert, Chief Financial Officer. With that, I'll hand over to Greg Tierney, Vice President of FP and A and Investor Relations to begin. Greg, please go ahead.

Speaker 1

Thank you, operator, and hello, everyone. Mosaic. 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.

Speaker 2

MOSI.

Speaker 1

If you have technical questions on the quarter, please pick them up with our IR team in the days and the weeks that follow. Today's discussion includes forward looking statements. Actual results or trends could differ materially from our forecasts. 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.

Speaker 1

GAAP time. Reconciliations for any non U. S. GAAP measures are included in our news release. And also, unless otherwise indicated, All financial results the company discusses are versus the comparable prior year period in U.

Speaker 1

S. Dollars and in constant currency when discussing percentage changes from the prior year period. With that, over to you, Gavin. Thanks, Greg.

Speaker 3

In the Q2 of 2022, we achieved our expectations and continued to execute our revitalization plan despite a soft industry, Global inflationary pressures and the Quebec labor strike at our Montreal brewery. Globally, we have now recorded 5 consecutive quarters of net sales revenue growth on a constant currency basis. Molsom Kors grew dollar share in the U. S. In the 13 week quarter, both of which have not been achieved in over a decade.

Speaker 3

What's more, we were one of only 2 major beer companies to achieve dollar share growth in the 13 week time frame. In Canada, Molson Coors grew volume and share when you factor out Quebec due to the Quebec labor strike. In the U. K, Molson Coors grew share and achieved the highest on premise trailing 12 month average share also in over a decade. And we are currently the largest share gainer of the U.

Speaker 3

K. Beer industry. So in aggregate, across our 3 largest markets, we are outpacing the industry and continuing to grow the top line globally. And these results are no accident. They're not a coincidence.

Speaker 3

These are the rewards of our continued commitment to and execution of the revitalization plan. So our plan is working, And that fact gives us continued confidence that we are on track to deliver on our guidance for 2022. You can see it in our core brands with stronger brand fundamentals and consistent investments since we launched the revitalization plan of paying off. In the Q2, Coors Light and Miller Lite achieved their Best quarterly industry share performance in the U. S.

Speaker 3

In nearly 7 years, while Miller Lite grew share of industry in the quarter. As I mentioned last quarter, these results are driven by clear distinctive positionings of our 2 biggest brands and more effective marketing. We are demonstrating the power of our biggest brands, and we intend to keep investing behind them. Coors Banquet, our oldest brand in the U. S, is also one of fastest growing beer brands with dollar sales up double digits and growing share of the total beer industry fueled by a new generation of drinkers.

Speaker 3

In Canada, Molson Canadian is growing share of the total beer industry for the first time in 8 years. In the UK, Carling, the largest beer brand in the UK, Managed to further solidify its number one position in the total market. And our national champion brands in Central and Eastern Europe are growing share in the majority of their markets. Around the world, our core brands are not just stronger than they've been in many years. Our core brands are outpacing the rest of the beer industry.

Speaker 3

It's an incredible foundation for our business to build on. We also continue to find success in premiumizing our business even in challenging economic times. Our above premium brands again hit a record high portion of our global portfolio net sales revenue on a trailing 12 month basis with positive progress made across the business. The net sales revenue of our U. S.

Speaker 3

Above premium portfolio is now higher than the net sales revenue of our U. S. Economy portfolio on a trailing 12 month basis. That trend was driven by the rapid growth of our hard seltzers, the strong launch of Simply Spike Lemonade And Blue Moon and Peyronie's continued rise coming out of the pandemic. Last quarter, I shared the U.

Speaker 3

S. Hard seltzer segment grew by 25% from just over 7% in the Q1 to over 9% in the 2nd quarter, and our hard seltzers are currently growing share of the total beer industry. That growth once again makes Molson Coors the fastest growing hard seltzer portfolio in the U. S. Not only has Busy grown Seltzer share during this period, but Topo Chica Hard Seltzer has quickly become the fastest growing hard Seltzer in the U.

Speaker 3

S. And was a top 5 industry growth brand in the quarter. We said that Simply Spike Lemonade would redefine the full flavor alcohol beverage segment, And today, the results back that up. In just a few weeks, we have sold over 60,000 hectoliters, achieved a 3.5 share of the FNB segment in the latest 4 week read from IRI, and it is already one of the top FMBs in several major grocery retailers. In addition, brand volumes for Blue Moon were up high single digits, while Peroni was up high teens on a year to date basis.

Speaker 3

And our business globally continues to premiumize as well. In our Latin American business, where most of our brands sell at an above premium price point, we Additionally, in Mexico, Coors Light is back to healthy growth, up double digits versus the prior year, while Milajalas earned a record sales month in June. In the UK, Coors is gaining share of the total beer industry, and Madri's growth is amazing. That the on premise measurement service has been tracking the industry. Less than 2 years after its launch, the brand has most launched in the off premise in March.

Speaker 3

This is a brand new you all should get to know because you're going to be hearing a lot about it in the years to come. Improja, a relatively new at Pulsener from start up from and has earned strong results in Central and Eastern Europe and successfully launched this year in Romania. This will be its 2nd largest market to date, and we believe this expansion has the potential to significantly increase prior hours volumes. Our Canadian business also continues to premiumize. A particular note in that market is our 6 Pints craft beer division, which is growing at about 4x the rate of the craft beer category in Canada.

Speaker 3

Cream or lager specifically grew by over 30% in the 2nd quarter. And our Canadian hard seltzer portfolio continues to grow. We grew share of the segment in the Q2. Poor Seltzer is now the number 7 hard seltzer in Canada and Vizzy is number 5. Combined, we're over 12 shares of the Canadian hard sell for segments in the latest month, and that's before topo cheetah hard sells nationally in Canada.

Speaker 3

Now I can imagine that you're all thinking that premiumization is very nice, But how well are we prepared for a recessionary environment? First, we do continue to see trade up in our portfolio and in the industry across our major markets, as you can see from what I just shared. But it's also true and notable that the economy segment is strengthening in the U. S. And 3 of our 4 key economy brands grew segment share in the 2nd quarter.

Speaker 3

In fact, our economy portfolio has had its best quarterly most performance versus the industry in the last 3 years. And excluding the discontinued brands from the SKU rationalization program, our economy brands grew share of total most. We have long held that all segments matter in the beer industry, and it's never truer than it is in these times. The shape of our portfolio, even as we continue to premiumize it, ensures that we have strong offerings and strong brands for consumers across the range of price points. That gives us the ability to adapt our plans should the need arise regardless of the economic climate.

Speaker 3

While Tracy will go into more detail, I would be remiss if I did not acknowledge some of the one off challenges we faced in the Q2. The 11 week Quebec labor strike adversely affected our Americas and global top line results. The Quebec labor strike ended in June and employees returned to the brewery and distribution center just a few days later. Pleased with the performance as we get the facility back up and running. Out of an abundance of caution, we also conducted a voluntary withdrawal of nearly 2,000,000 cases of beer due to a quality issue at 1 of our U.

Speaker 3

S. Breweries. Importantly, there were no health or safety risks. We have taken steps to correct the problem. And because our national inventory position on these SKUs is Stronger than it has been in years, we were also able to divert production into this market from other breweries and quickly replenish supply.

Speaker 4

So the

Speaker 3

good news in both instances, if there is any, is that both situations have been addressed and we still met the projection that we laid out for you earlier this year. That is a testament to the health of our business. I think it's reasonable to say that 3 years ago, either one of these issues would have been severely damaging to our business. Now they're certainly not helpful and we're not looking to repeat them, but they have not taken us off course. And we owe this improved health of the business to the clear progress Molson Coors has made through our consistent execution of the revitalization plan over the past few years.

Speaker 3

Our plan is working. But I'm also realistic about the challenging global macroeconomic environment in which we are operating. It's created uncertainty for our consumers, our business, our competitors and really all businesses in the consumer goods space. And yet the progress we have made in improving the health of our brands and our business have us well positioned to navigate the current economic climate and to deliver on our full year guidance. Today, we have a portfolio that is well positioned to successfully compete within the entire range of consumer demands, whether that be taste or price.

Speaker 3

We have a timing benefit in the second half of this year as we gradually diminish how much of the last year. In Q4, we will be lapping. Additionally, by the Q4, we will no longer be lapping the shipment headwind from the SKU rationalization program from year. In Canada and Europe, some of our biggest global markets and ones in which the Christmas season is among the most important beer selling occasions. We have the prospects of a strong 4th quarter, thanks to waning coronavirus restrictions.

Speaker 3

And as Tracey will discuss in more detail, we will have the benefits of Q4 U. S. Price increase, which will further help offset inflation. All of this, combined with the strength of our brands, gives us the continued confidence to reaffirm our guidance of top and bottom line growth for the year. And now to give you more detail in the financials and outlook, I'll hand it over to our Chief Financial Officer, Molson.

Speaker 3

Tracey Gebet.

Speaker 5

Tracey? Thank you, Gavin, and hello, everyone. For the Q2, we delivered another quarter of top line growth on a constant currency basis and achieved income before income tax at the favorable end of our anticipated range, while we continue to invest in our business, reduced net debt and return cash to shareholders. We did this while navigating global inflationary pressures, the Quebec labor strike and starting a strong shipment quarter in the prior year. Our performance and our organizational agility demonstrate our successes against our revitalization plan.

Speaker 5

And it's the efforts and outcomes of that plan that provide us the confidence to reaffirm our guidance, Consolidated net sales revenue increased 2.2%, driven by strong EMEA and ATAC growth. As restrictions have eased, we have seen sequential improvement in the on premise performance with variations by market and total net sales revenue returned to 99% of 2019 level. Consolidated net sales revenue growth was driven by strong global net pricing, favorable sales mix from portfolio premiumization and positive channel mix. These factors were partially offset by lower financial volumes. Consolidated financial volumes decreased impact of the Quebec labor strike as well as lower U.

Speaker 5

S. Economy brand volumes driven by our SKU deprioritization and rationalization program that started in the Q2 of 2021. These factors were partially offset by strong financial volume growth in EMEA and ATAC due to higher brand volumes and factored volumes along with growth in our U. S. Above premium portfolio.

Speaker 5

Net sales per hectoliter on a brand volume basis increased 7.1%, driven by global net pricing and positive brand and channel mix with premiumization delivered across both business units. Underlying cost per hectoliter Increased 11.5 percent driven by cost inflation, including higher input and transportation costs, mix impacts from premiumization and effective brands in EMEA and APAC as well as deleverage. This was partially offset by lower depreciation expense. Underlying MG and A in the quarter increased 7.5%. G and A was up due to higher people related cost, including increased travel and entertainment, while marketing investment increased as we continue to provide strong commercial support behind our core brands and new innovations.

Speaker 5

As a result of these factors, underlying net income before income taxes decreased 22.8%, which was at the favorable end of our outlook range of down 20% to 30%. While we discuss our business performance on a constant currency basis, on a reported basis, our 2nd quarter results were negatively impacted by the strength of the U. S. Dollar. This impacted our reported net sales revenue by 280 basis points And our underlying income before income tax by 150 basis points in the quarter.

Speaker 5

Underlying free cash flow was Molson. $287,000,000 for the first half of the year, a decrease of $271,000,000 from the same period last year, primarily due to the timing of cash paid for capital expenditures and lower net income, partially offset by lower cash taxes. Capital expenditures paid were $389,000,000 for the first half of the year, an increase of $177,000,000 from the prior year period and focus on expanding our production capacity and capabilities program. Now let's take a look at our results by business units. In Americas, the on premise has not returned to pre pandemic levels but continued to improve on a sequential quarterly basis.

Speaker 5

In the Q2, the Americas on premise channel accounted for approximately 13% of our net sales revenue compared to approximately 16% in the same period in 2019. In the U. S, on premise net sales revenue improved to 93% of 2019 levels compared to 87% in the Q1 of 2022. And in Canada, on premise net sales revenue was 77% of 2019 levels, up from 55% in the Q1 of 2022. Americas net sales revenue was down 1.7 segment as net pricing growth in the U.

Speaker 5

S. And Canada and positive brand mix were offset by lower financial volumes as declines were expected. Americas Financial volumes decreased 8.1% largely due to cycling higher U. S. Shipments due to the prior year period inventory In the U.

Speaker 5

S, net sales revenue declined 2.1% with domestic shipments down 8.2%, outpacing brand volume declines of 1.7%. Brand volume declines were driven by economy brands, which were down high single digits, most, largely due to the SKU deprioritization and rationalization program. To a lesser degree, our premium brand volumes also declined, most reflective of a soft industry. Volume declines were offset by continued strength in the above premium portfolio, which was up nearly double digits for the quarter. In Canada, net sales revenue decreased 2.3% as brand volume declines of 8%, driven by the Montreal Brewery strike, were largely offset by positive pricing, premiumization and channel mix.

Speaker 5

Latin American net sales revenue decreased slightly Net sales per hectoliter on a brand volume basis increased 6.2% due to net pricing growth and favorable brand mix. U. S. Net sales per hectoliter increased 6.7%, driven by net pricing growth and positive brand mix led by the Dove Premium Brands. Net sales per hectoliter on a brand volume basis grew 8% in Canada due to net pricing increases and positive sales mix, while Latin America decreased 4.2% due to unfavorable sales mix.

Speaker 5

Americas COGS Per hectoliter increased 10.2% due to inflation, including higher costs for brewery, packaging and brewing materials and freight as well as volume deleverage and mix impact from premiumization. And this was partially offset by lower depreciation. Brands and innovations, including Topa Chico Hard Salsa and the June national launch of Simply Spiked Lemonade as well as in local sponsorships and events. As a result, Americas' underlying net income before income taxes decreased 20%. Turning to EMEA and APAC.

Speaker 5

Net sales revenue increased 20.5%, driven by higher financial volumes, most. Net pricing growth and favorable mix. Top line performance also benefited from fewer on premise restrictions in the U. K. Compared to the Q2 of 2021.

Speaker 5

Recall that the on premise in the U. K. Was closed the entire Q1 of 2021 and did not fully reopen without restrictions until July 19, 2021. So in the second On premise net sales revenue in the UK exceeded 2019 Q2 levels. EMEA and APAC net sales per hectoliter on a brand volume basis was up 15.5%, driven by positive sales mix with the on premise reopening and strengthening our Buzz premium brands as well as net pricing growth.

Speaker 5

Financial volumes growth of 6.2% was due to higher brand volumes in Western Europe as well as in Central and Eastern Europe MOS, along with higher Factored Brands volumes. Pogs per hectoliter increased 22% due to rising inflationary pressures and increased Factored most brand sales. MG and A increased 14.2% as we cycled lower relative G and A spending in the prior year And increased marketing spend, accelerating investments behind our national champion and premium brands, especially in the U. K, supporting Carling, Magree and Star of Parliament and fueling on premise strength. As a result of these higher costs, EMEA and APAC underlying net income before income tax declined 22.7%.

Speaker 5

Turning to capital allocation. Our priorities are to invest in our business to drive top line growth and efficiencies, reduced net debt and to return cash to shareholders. We ended the quarter with net debt of $6,400,000,000 which included the repayments of our $500,000,000 3.5 percent USD note upon maturity on May 1, 2022, using a combination of commercial paper borrowings and cash on hand. Notably and of particularly importance during these volatile times, I think it's substantially all at fixed rates with a minimal amount of variable rate debt. We ended the quarter with $250,000,000 of commercial paper outstanding, leaving us with strong borrowing capacity with $1,300,000,000 available on our $1,500,000,000 U.

Speaker 5

S. Revolving credit facility. Our trailing 12 month net debt to underlying EBITDA ratio was 3.2x time as of the end of the second quarter, down from 3.35x at the end of the second quarter in 2021. We remain on track to achieve our target net debt to underlying EBITDA ratio of below 3x by the end of 2022 and remain committed to maintaining and in time upgrading our investment grade rating. Also, during the second quarter, In addition to paying a quarterly cash dividend of $0.58 per share to holders of Class A and B common stockholders, We paid approximately $12,100,000 for 250,000 shares under our share repurchase program.

Speaker 5

Now let's discuss our outlook. We are reaffirming our fiscal 2020 Molson 2 guidance, which calls for both top and bottom line growth in 2022, performance we have not seen in over a decade. Before we go through the guidance, please be reminded that year over year growth rates are on a constant currency basis. However, it's important to note that continued strength in the U. S.

Speaker 5

Dollar will result in a headwind to our reported results in the effective period using current exchange rates. For 2022, we continue to expect to deliver mid single digit net sales revenue growth, high single digit underlying income before income taxes growth and underlying free cash flow of $1,000,000,000 Plus or minus 10%. We are confident to reaffirm this guidance as our announced 3% to 5% pricing increase In some U. S. Markets, as Gavin mentioned, are expected to offset volume headwinds given the softness in the industry and residual impact of the Montreal Brewery strike that was resolved in June.

Speaker 5

In terms of top line phasing, In the Q3, we will still have some volume headwinds from the economy SKU rationalization program, which we will not fully lap from a shipment perspective until the Q4. Also, while the Quebec labor strike was resolved in mid June, it will take time to ramp up production, And we don't anticipate returning to normal shipment levels from this brewery until the Q4. In the Q4, we had multiple top line growth drivers. First, we have announced additional pricing in the 3% to 5% range in many markets in the U. S.

Speaker 5

That pricing will take effect in the 4th quarter. 2nd, recall that year over year top line comparisons will begin to ease in the Q4 given the renewed on premise restrictions in the Q4 of 2021, particularly in the U. K. And Canada. And in November, the World Cup will take place, which is a big beer drinking occasion in Europe and notably the U.

Speaker 5

K. 3rd, as I just mentioned, we will have fully lapped the shipment headwind from economies to rationalization by the 4th quarter. On the cost side, we expect margins to continue to be impacted by inflationary pressures in areas including input materials and transportation in the second half of the year. That said, we have multiple levers to help offset inflationary pressures, which include pricing, mix from premiumization and our cost savings and hedging program. When comparing year over year COGS per hectoliter growth for the second half of the year to the second quarter, it's important to note a few things.

Speaker 5

First, The second quarter was meaningfully impacted by volume deleverage, which we would not expect to continue in the second half of the year. And due to the timing and ramp up of initiatives, the realization of savings and our cost savings program is weighted to the Q4 of this year. In terms of marketing, we continue to expect to invest more in 2022 than we did in 2021. But in the second half of the year, overall marketing spend is expected to be down compared to the prior year period. We anticipate higher year over year investment in the 3rd quarter.

Speaker 5

However, in the 4th quarter, we do not anticipated increases. We are comfortable with our level of marketing investments in the second half of the year and would remind you that in the second half of twenty twenty one, We had ramped up marketing levels to those exceeding that of the respective period in 2019. In terms of our other guidance metrics, we continue to expect net interest expense of $265,000,000 plus or minus 5%, underlying depreciation and amortization guidance of $750,000,000 plus or minus 5%, and an underlying effective tax rate in the range of 22% to 24%. In closing, our strategy is working, and we expect that to continue to play out in our long term financial and operational performance. To be sure, these are dynamic and uncertain times, but we have built our business to manage through challenges.

Speaker 5

Molson Coors is a highly cash generative business with a dramatically improved balance sheet, enhanced flexibility in its operating and cost structure and a product portfolio that addresses all segments of the market while consistently evolving its concentration to areas of growth. We are proud of the progress we have made against the revitalization plan, and the successes achieved under that plan give us confidence in our 2022 guidance and in our long term goal of sustainable top and bottom line growth. And with that, we look forward to answering your questions. Operator?

Operator

Our first question comes from Kevin Grundy of Jefferies. Kevin, your line is now open.

Speaker 6

Great. Good morning, everyone. I wanted to pick up on your guidance. So perhaps a question for both of you. So reaffirm for the year, the back half still implies A pretty sharp ramp in underlying EBT growth.

Speaker 6

Tracy, thank you for all the details. So I'm not asking you to kind of go through or parse through all of that again. But it would appear that the market seems to harbor some concern on the achievability of that. Maybe just discuss your visibility On the mid single digit underlying sales growth for the year, some of the building blocks around that category growth, brand growth, etcetera. And then also Just touch on the visibility from a cost perspective and some of the margin drivers in order to deliver sharply higher EBT growth in the back half of the year.

Speaker 6

Thank you.

Speaker 3

Thanks, Kevin. Look, you're right, J. K. I won't brief Hash everything Tracy said in the opening remarks. But let me just start off by saying we did in the second quarter exactly what we said we were going to do.

Speaker 3

In fact, we did it at the lower end or Better end of the guidance that we gave the market after the Q2 the Q1, sorry, in Q2. So where do we stand right now, right? I mean, we had a 11 week strike in the Q2, which we obviously knew about the strike, and that's why we guided you to where we did. But we grew dollar share in the U. S.

Speaker 3

On a 13 quarter week basis, and we're one of only 2 major peer companies To actually achieve dollar share growth in the 13 week time frame, we've got the fastest growing hard sell through portfolio. Coors Light The Middle East are really strong, and they had their best quarterly industry share performance in the U. S. Our above premium brands hit record highs. Our U.

Speaker 3

S. Economy beer portfolio has had its best quarterly performance versus the industry in 3 years. Our revenue is holding up. That's evidenced by the fact that our share is doing really well despite the fact that we Put a price increase in the earlier part of this year. It gives us confidence to put another price increase in, as Tracy said, In the back half of the year.

Speaker 3

So notwithstanding everything that's happened, our brand portfolio is strong, whether that's in the United States or whether it's in Canada or whether it's in Europe. And we feel very good about building off of that. And as I said, look, I'm not going to rehash everything, Tracey, said, and I don't think you should either. But I mean, do you want to make a comment about the cost environment that Kevin referenced?

Speaker 5

Yes. So Kevin, maybe just a little bit of context. I'll just talk about our firstly, our COGS per hectoliter in Q2. So we reported an 11.5% underlying cost per hectoliter increase. So if I break that down, inflation was 5.70 basis points of that.

Speaker 5

And then the mix, our premiumization of our portfolio was 300 basis points. So we always look at that as a good thing, driving the premiumization. And then deleverage was 210 basis points, driven by, As we said, the inventory build last year in the U. S. And the Quebec strike.

Speaker 5

So those are the big drivers of our COGS per hectoliter in the 2nd quarter. As we look out then to the balance of the year, I mean, we expect inflationary pressures to continue, But we do expect to mitigate some of that through our hedging and our cost savings program. So In terms of the hedging coverage, as we look out over the balance of 2022, we're very comfortable with our hedge position. MOS. We continue to make good progress against our cost savings program, and we expect the realization of of those savings under our program to be weighted to the Q4 of this year.

Speaker 5

And then as I also mentioned, I think It's very important to understand that the deleverage that we saw in Q2, we don't expect You see similar deleverage impact in the second half of the year to what we saw in Q2. So I would just consider those big drivers as you look at the back half of the year as it relates to our costs.

Speaker 6

Okay. Very good. Thank you, Bob.

Speaker 3

Thanks, Kevin.

Operator

Thank you. Our next question comes from Eric Sarota of Morgan Stanley. Eric, your line is now open.

Speaker 1

Great. Thanks for the question. I know you guys don't give monthly STRs anymore. But Gavin, hoping to get some at least qualitative color for you from you As to what you're seeing in terms of the beer market, the U. S.

Speaker 1

Beer market, as the summer has unfolded, heard July 4 was generally solid for most of the industry, but then I've heard some mixed things as July unfolded. Hoping to get your perspective.

Speaker 3

Yes. Thanks, Eric. Look, you're right. I mean, we don't give monthly guidance. We stopped doing that a while ago.

Speaker 3

I think you can see our performance in the share data that comes out from a Nielsen or an IRR basis, which is publicly available data. And I can reiterate what I just said from a share point of view. Our brands are growing share, not only in the United states from a dollar point of view, but also in Canada and also in our 3rd other big market, which is the U. K. So we're Continuing to build on the strength which we delivered in Q2.

Speaker 3

We've got some really positive innovations which have only just hit the market. I talked about Simply Spiked. That brand has really just taken off. We've already exceeded our business case for the year. We're ramping up supply as quickly as we possibly can to meet demand, which has frankly surprised us.

Speaker 3

We've accelerated the in housing of Simply into the Fort Worth Brewery for 2 I mean, We weren't planning to do that until next year, frankly, but the demand is so strong that we brought it in house and we did that in record time. I think it took us about 6 weeks So I would expect our share trends in the flavored malt beverage space to accelerate as we're going forward. And without wishing to rehash everything I said About Millerite and Coors Light in our above premium space, we're in a great The share position and you know, Casey mentioned some of the headwinds which go away for us in the second half. I mean, we essentially lost Christmas in the UK and Europe, and it's a really important time period for that business last year, and we're obviously not expecting to lose it again this year. And we're coming out of the Canadian Montreal Quebec strike.

Speaker 3

All of Canada's volume loss that took place in the Q2 came out of Quebec. If it hadn't been for the strike, we would have well, we did grow volumes Outside of Quebec. And as we ramp up supply into the Q3 and specifically the Q4, I would expect to see the improvements there. So I think we had a strong quarter. We had a strong quarter despite the soft industry, despite the global inflationary pressures And the labor strike, and we delivered what we said we're going to deliver and at the better end of that.

Speaker 3

Thanks, Eric.

Operator

Our next question comes from Nadine Sarwat of AllianceBernstein. Nadine, your line is now open.

Speaker 7

Hi. Thank you, guys. So first question, you mentioned 3% to 5% pricing in certain markets in Q4. Can Can I just confirm that this is incremental, so in addition to pricing taken year to date, what is the pricing impact at a national levels and not just certain markets, but national. And is this fully baked into your mid single digit top line guidance?

Speaker 7

And then one very quick Follow-up. I appreciate you already gave some comments on COGS and you touched on your hedging strategy So imply you do have good visibility into next year. So are you expecting your COGS headwinds from input costs in 2023 to be smaller or greater than the headwinds you're expecting to face in full year 2022? Thank you.

Speaker 3

Thanks, Nadine. I'll let Tracy answer the COGS question. But from a pricing point of view, just let me just clarify some of those comments you made. So the 3% to 5% is on a national average basis. So we expect to take pricing in that range on a national basis on average in the it will hit primarily in the 4th quarter, Although that will come towards the end of the 3rd.

Speaker 3

That means that in some markets, we'll take above 5%, and in some markets, we'll take below 3%. But on average, we expect it to land in that range. And then secondly, yes, it is incremental to the pricing we already took in the beginning of this year. And yes, it is baked into our expectations for guidance for the full year. Tracey, do you want to take COGS?

Speaker 3

And did I cover all the pricing? I think I covered all

Speaker 5

the pricing initiatives. You did. So Nadine, from a COGS point of view. The one thing I can tell you is, I think I've spoken about our hedging program and how we hedge. And so if I look at 2023, I mean, we're comfortable with our hedge position as we stand today.

Speaker 5

In terms of other drivers of our costs For next year, we haven't yet given guidance on that. But I mean, there's a couple of things. Obviously, we're looking at commodities all the time. We've seen freight rates coming down. There's some commodities that are going up.

Speaker 5

So it's a little bit of a mixed bag at the moment. And cost going forward is there's still a lot of uncertainty, but it's something that obviously we continue to look at. And as we get Into next year, we'll talk a little bit more about our outlook for 2023.

Speaker 3

Thanks, Trish. Thanks, Nadine.

Speaker 7

Got it. Thank you.

Operator

Thank you. Our next question comes from Bryan Spillane of Bank of America. Bryan, your line is now open.

Speaker 4

All right. Thanks, operator. Good morning, Gavin. Good morning, Tracy. So I just again, just thinking about the back half of the year, I guess, if I'm just Replaying what we've heard on the call today, you've got some incremental pricing, which will flow through the Q4.

Speaker 4

There is a residual impact from the Canadian strike, which now you have to absorb. And then the only other piece that's really changed is, I think Gavin, you talked about just, I don't know, some expectation for the market to moderate. So I have that right And I'm not sure how big the Canadian residual is, but it really just seems like, if anything, the pricing still gives you net a little bit more cushion, if you will. And with regards to which way the market might move if it gets more slows more or not. So just want to make sure that I'm Contextualizing that right, because I think again, as I think Kevin Glendy pointed out, I think there's still a lot of concern about the back half.

Speaker 4

And it Seems like 2Q, you landed right in the middle of the fairway. It always implied that a lot of the leverage in the back was always going to be in the back half of the year. It just seems like you actually have a little bit more cushion with the pricing now Than you did before, even

Speaker 8

in the context of some

Speaker 4

of the maybe incremental headwinds.

Speaker 3

Well, Brian, to advance that golf analogy, I think we landed In the middle of the fairway, maybe about 10 yards further than we expected.

Speaker 2

Yes, yes, yes.

Speaker 3

We didn't really Well, we didn't obviously have into our guidance the voluntary product withdrawal. And frankly, the Montreal strike went on just a couple of weeks longer than we were expecting it to. And despite all that, as you say, we land in the middle of fairway. Well, what's changed, right? I mean, We knew we were going to take a price increase in the fall.

Speaker 3

We're probably going to get a little more than we were expecting. So it was our expectation that we're going to get it. But we're probably taking a little bit more, as I said. I think the overall industry is maybe just a little softer than we had expected. And When you add all of these things up, that gives us the confidence to deliver What we've said we're going to deliver, Brian.

Speaker 3

I don't know if that's helpful.

Speaker 4

Yes. No, that is helpful. That is helpful. And Gavin, if I could just follow-up, the softness, is that more on premise Versus off premise, just could you give us a little context of just where you're starting to see a little bit of that softening, just as we're watching it from the outside, maybe what we should be monitoring? Thank you.

Speaker 3

Well, if you look at our 3 big markets, Brian, in the UK from an on premise point of view, It's settled down very close to 2019 levels. I think in the first part of the quarter, it was a tad below, and in June, it was a tad So call it 98% of 2019 pre pandemic levels in the U. K. In Canada, it's a little bit more tricky for us, right, because Quebec is an important on premise market. And we were constrained in supply in Quebec.

Speaker 3

But even outside of the Quebec market, Canada has lagged the rest of the world in terms of consumers' propensity to get back into the on premise. And in the U. S, Brian, which is obviously our biggest market, it is settled down in the sort of 85% The top end sometimes 90% level. And I think that's probably where it's going to settle until folks get back Into the big cities like New York and Chicago and start visiting bars and restaurants on a more regular basis. I think Commuting and office work habits have changed fairly meaningfully through the pandemic, and obviously, that's hitting the bigger market.

Speaker 3

So I would say to you, it's probably more in the off premise side than in the on premise side that, that comment applies to.

Speaker 4

Okay, great. Thanks Gavin. Appreciate the comments.

Speaker 3

Thanks Brian.

Operator

Thank you. Our next question comes from Chris

Speaker 2

of the most

Speaker 9

Hi, guys. So I just had one quick confirmation and then just a follow-up on Ryan's question around pricing. So just on the confirming one thing around the economy SKU exit, had you always effective those that go into the back half of the year. My understanding was those would mostly be done by Q2, but perhaps it's just taking a little bit longer to get those out of the system. So that's just kind of a follow-up.

Speaker 9

And then maybe just Trying to maybe frame just a level of confidence on the pricing in Q4, specifically if you're pricing against the category, which you expect to be a little bit softer in the back half from a volume perspective, right, because the volumes are weaker and that was kind of what drove the deleveraging on the cost per hectoliter line. And so it sounds like you're being pretty targeted about the pricing, some areas over 5, some areas below 5%. So it certainly sounds like you're pricing in areas where you have confidence that brands can withstand the higher rates. But I'd love to maybe just get a little bit more context on just the level of comfort that the pricing won't accelerate elasticity. So Thanks for the follow-up on the SKU access and that commentary around pricing.

Speaker 3

Thanks, Chris. Okay. So on the SKU rationalization and the discontinuation of some of our economy brands, there's two sides to this, right? From an SDW perspective, That has a quicker impact than an STR or brand volume perspective because obviously from an STR perspective, both our distributors and our retailers had inventory on hand of the brands that we had inventory on hand of the brands that we discontinued. And so they continue to sell those until they sort of ran out, right?

Speaker 3

And that would take place, frankly, more towards the back end of Q3 and into the 4th. From a shipment point of view, Obviously, when we had the cybersecurity attack, we stopped shipping a bunch of economy brands and we started picking those back up again, Some of them towards the end of Q2, but predominantly in the end of Q3. So from a shipment point of view, the benefit Is sooner than from an SDR point of view. So is that I hope I'll explain that okay. From a pricing point of view, look, I mean, we feel confident about putting pricing into the marketplace behind our brands.

Speaker 3

If you look at beer CPI versus the national average CPI, even After putting these price increases into the market, we'll still be less than that. And we're substantially less than some of the other products which consumers are buying, whether it's eggs or Bread or milk or gas, whatever. I mean, we're substantially lower than those levels and lower than overall national average CPI. Our brands have also held up really well in the last sort of 4, 5 months since we put the overall price increase in place. I mean, it's I don't think it's a coincidence, as I said, that we're growing share.

Speaker 3

We're one of only 2 major beer companies in the United States to deliver dollar share growth in the 13 week time period. So we feel very good about the strength of our brands and the ability of them to absorb more pricing in the fall. Thanks, Chris.

Speaker 9

Okay. Thanks, Gavin.

Operator

Our next question comes from Kamil Gajrawala of Credit Suisse. Kamil, your line is now open. Please go ahead.

Speaker 8

Hi, thanks for the question. A question on the volume deleverage, 210 basis points, I guess. Are you able to break out how much of that was one time related to the brewery issues and such versus Just a slower overall industry volume growth rate?

Speaker 3

I guess you're asking to break down the industry the shipment decline, Komal. And I would say that the overall North American shipment decline was driven primarily by Two things, right? One was the strike in Canada, which was the entirety of the Canadian volume loss. And the second one was obviously the I think I said this on the call last time around, we pulled out every stop we could in the Q2 of last year to try and recover from a devastating cyber security attack. So we were shipping beer all over the country.

Speaker 3

We were Folks were working long hours, overtime, everything, to try and make sure that we got as much beer out to the distributors. And it was Inefficient and it cost us a bunch of money last year to do that. Obviously, this year, we're in a much more normal environment given our inventory levels. And we're not making sort of our service levels are where we need them to be. So we're not having to ship beer all over the country At a high cost in the second and the third quarters to meet that demand.

Speaker 3

And because of that, obviously, our shipments Or a lot less. So that would be the biggest impact from a delevering point of view. And the second biggest would be obviously our Canadian volumes. Our overall plan for the year is to ship to consumption, Komal. So that's generally our plan.

Speaker 3

We have Ship less than retail so far. And we'll get the deleverage Benefit going forward. I don't really think deleverage will be a driver for us In Q2. In other words, a negative Okay, got it. Sorry, not in Q2.

Speaker 3

In the second half, yes. It won't be a negative driver for us in H2. Thanks, Tracy.

Speaker 8

Got it. Okay. That's what I was going to clarify. Just to make sure on the spread between shipments And takeaway, obviously, you've got this wild comp. But if you're happy with inventory levels, does that mean in the back half shipments should roughly align with STRs?

Speaker 3

And our plan for the full year is to ship to consumption, Carmel, we've got work to do in Canada to catch up with what happened with the strike, right? I mean, obviously, having an 11 week strike at a really big plant like that MOS. It's not a positive for us. And it will take us the whole of Q3 and into Q4 to recover from that. So certainly, from a Canadian point of view, we will be shipping my expectation would be shipping higher than we were selling.

Speaker 3

In the U. S, I think we shipped below STRs in the first half. And so You can expect that we will align that over the full year.

Speaker 1

Thanks, Karel. Got it. Thank you.

Operator

Our next question comes from Andrea Teixeira of JPMorgan. Andrea, your line is now open.

Speaker 8

Hey, good morning. This is Drew Levine on for Andrea. Thank you for taking the question. I just really had 2 clarifications, if I may. On the incremental pricing slated for the Q4, it Sounded like the company is not really building in any sort of incremental volume decline or elasticity from the pricing increase relative to kind of what was built into the guidance before.

Speaker 8

And then the second one is just on the MG and A, I think in the Q1, you said it was slated to be up double digit on marketing in the second quarter and it came in somewhat below that. Just curious if there was anything you saw to pull back on or if it was just kind of didn't see enough opportunity to deploy more spending. Thank you.

Speaker 3

Thanks, Drew. Look, I mean, from a marketing perspective, obviously, We don't manage our marketing spend on a quarter by quarter basis. We manage it over the year, and we manage it long most. For the long term, and we frankly don't always spend marketing in the same quarter as we did in the previous year depending on what happens. Specifically to your question, though, obviously, the Quebec strike went on a little longer than we expected, and it made no sense for us to be marketing up in Canada When we were not able to supply.

Speaker 3

And so we did spend less in marketing, particularly in Canada, than we were originally intending because of the That we had to strike and at some points, we didn't have any beer to sell. So that was, I think, probably a good decision on our part. Outside of Quebec, we increased our marketing spend across the board. We and we had some out of cycle marketing Simply Launch, as I said, has been off the charts good, and we don't normally launch innovations MOS in the time period that we launched some, so we normally do them earlier than that. So there's a bit of marketing spend that's coming through in Q2 there.

Speaker 3

From a pricing point of view, obviously, we do watch what our brands performance is when we put pricing into the market. We watch very carefully how it performs and what the Elasticity is, I think we said on Q1 call that elasticity wasn't as high as one would have expected Given the pricing that we put into the marketplace in January February of this year, and we'll do the same thing again with this price increase. We'll watch the activities, and we'll watch how our brands perform in the market very, very carefully. But without rehashing what I said, Our brand performance from a share point of view is strong and we're pleased with it. Thanks, Drew.

Operator

MOS. Thank you. Our next question comes from Vivien Azer from Cowen. Vivien, your line is now open.

Speaker 10

Hi, thank you. Gavin, I wanted to get your perspective on the interaction that you're seeing in some of the important subcategories that you participate in the U. S. We've heard from one of your key competitors in the hard seltzer category that they believe that there is some heightened interaction between hard seltzers and premium lights. I'd love to get your perspective on that.

Speaker 10

Thank you.

Speaker 3

Thanks, Vivien. Look, I mean, the strength of Miller Lite and Coors Light long predated the softness of some of our competitors, Celtas. So you can take from that what you wish, but I think our Miller Lite and Kurzweil brand performance has been very strong for quite some time now, and that's because they've got great differentiated marketing programs and are really nice and healthy. I mean, we had the best quarterly industry share performance in the U. S.

Speaker 3

In nearly 7 years. And occasionally, because I look at the outstanding performance of Topo Chico Hard Seltzer is something which might be driving the softness of some of our competitors. I mean, Our market share is growing 25%, as I said, and that's largely driven by Topo Chico, which is actually doing really well in markets where the

Operator

next question comes from Lauren Lieberman of Barclays. Lauren, your line is now open. Please go ahead.

Speaker 5

Thanks so much. We've covered so much on the call, so I'll let it go and look forward to catching up with you guys in person soon.

Speaker 3

Thanks, Lauren. Thanks, Lauren. That was an easy question, Arren. Thank you.

Operator

Our next question comes from Steve Powers of Deutsche Bank. Steve. Your line is now open.

Speaker 9

Okay, thanks. I'll ask one just to

Operator

keep it going. Hey, so I wanted to

Speaker 2

pick up On the marketing comments, Gavin, you explained the 2 key dynamics, I think, pretty clearly. And Tracy called at the start your overall comfort with second half marketing plans. I guess what I'm just left with is on a full year basis, have marketing intentions or plans undergone any changes versus where we were coming out of the Q1, whether either in overall magnitude or focus given what what you've seen in the marketplace, some of the pockets of softness you called out. Number I mean, that's really the main question. I guess the second part of that would be Things trend a little bit better than maybe your base case in the back half, given places where you've got momentum Like simply or Tapachika or what have you, would be is the bias that you would invest some of that upside against some of those momentum or is the marketing plan pretty well fixed at this point?

Speaker 3

I think, Steve, one of the if there are any positives that come out of pandemic. One of them is that it's driven us to be way more flexible and agile than we were maybe 3 years ago. And our marketing team is a particular personification of that. They really are agile in terms of how they spend their money and where they spend their money, Pushing behind things that are working, shifting dollars to things that are really doing great and maybe dialing back on things where they're not doing Yes, well. So I would say to you that we are very flexible.

Speaker 3

We're very agile, and we're very happy to lean into things that are working. I think Simply would be an example of that. It's performing so much better than we expected, and I would expect that we'll put a bit more fuel behind That fire as we go forward. So we're very flexible, Steve. We obviously do have a plan that we come into the year with.

Speaker 3

And the team adjusts as and when it makes more sense for us. I mean, MOS. The work that they have done together with finance and the other teams from an ROI point of view continues to get better and better, and The teams know what works and what doesn't work and pretty flexible in changing that on the fly.

Operator

Thank you, Rob. Our next question comes from Rob Ottenstein of Evercore. Rob, your line is now open. Please go ahead.

Speaker 8

Great. Thank you very much. Two questions, maybe, maybe borrowing one from Lauren. First, can you Give us I mean, a lot of moving pieces here trying to understand the U. S.

Speaker 8

Business, given The rationalization of the economy SKUs and then the addition of all the different seltzers. I was just wondering if you could give us a sense of what kind of core the core traditional beer business did on an apples to apples basis in terms of volumes. Is that something you can ballpark for us?

Speaker 3

Look, from an overall perspective, I think Miller Lite and Coors Light, which is 2 thirds of our U. S. Business, Robert, Both of those brands grew the top line in the quarter and they grew share In the quarter, they are doing they're well positioned and doing well. In terms of individual brand volumes, Robert, we don't have plans to disclose that at this point.

Speaker 8

No, I understand that. But just in aggregate Is just in terms of a volume number in aggregate the core beer volumes, so we can adjusts for the impact of the economy brands and all the seltzers.

Speaker 3

Yes. Robert, I'm not going to give you Individual brand volume, their brand volume performance. We don't do that and I don't really plan to Okay.

Speaker 8

Well, you're gaining share, as you had mentioned, and that was one of the main drivers goals of the vitalization. So kind of stepping back at this point and looking at that plan, Are you pretty much done? Is it just kind of continuation of the measures that you've put in place? Or are there particular Finishing elements of the revitalization plan that still need to be done. And over the last number of years, you've taken out a lot of costs.

Speaker 8

Is that part of the program pretty much done now? So just trying to kind of get a sense of where we are with the revitalization planned given that you've turned around, as you said, Coors Light and the loan gaining share. Thank you.

Speaker 3

Thanks, Robert. Tracy has pointed out that I can tell you that our brand volume declines in the U. S. Were driven by the economy brand. So you can assume from that, that everything else in total grew.

Speaker 3

So just that piece of context. As far as the revitalization plan is concerned, Robert, from a cost basis cost point of view, I mean, we're pretty much done. There is a little bit more costful to come out From the revitalization plan, but it's not meaningful. From a cost point of view, though, we are always looking at taking more efficient ways of doing things in our business. We invest capital in a variety of ways to achieve that.

Speaker 3

The Simply in housing, for example, is a fine example of Right, where we can take our costs down without actually much capital investments in the process. So Revitalization costs pretty much done ongoing. We're always been looking for ways to be more efficient and that won't change. From a revitalization plan point of view, obviously, our goal ultimately with the revitalization plan was to drive top line and bottom line growth At the same time and on a consistent basis. And that obviously remains our goal.

Speaker 3

And this year, we've got guidance out there that that we will do it and it's obviously not intended to be a one off goal for us. It's supposed to be an ongoing goal for us. In terms of making sure that our core brands are healthy and strong, I don't think that one We can never say that's done. We need to stay strong and vigilant behind that, but I think we've made amazing progress there. And we've still got lots of work We want to do in the above premium and beyond beer space, Robert.

Speaker 3

We are doing well. Above premium is exceeding our economy share of our portfolio, but our ambitions to drive our above premium volumes and revenue up, it doesn't stop there. So we'll continue most. To invest behind that space, to invest behind the innovations and to drive our emerging growth division with some of the great new brands and relationships That we've got in that space, ZOWA, obviously, being one of the lead ones.

Speaker 8

Terrific. Congratulations on the progress.

Speaker 3

Thanks,

Operator

Robert. Thank you. Our final question of today comes from Peter Grom of UBS. Peter, your line is now open.

Speaker 11

Hey, good morning or good afternoon, I guess. Hope you're doing well. So, Tracy, I know last Quarter was a bit of an anomaly in terms of providing a quarterly outlook, but I guess a lot of the commentary from the call today seems to suggest a much stronger 4th quarter versus Q3, you mentioned pricing, fully lapping the economy, headwinds, kind of the brewery disruption in the rear view. So is there any way to kind of frame how we should be Thinking about the weighting of growth in the Q3 versus the Q4?

Speaker 5

Yes. Let me just say look, we've reiterated our guidance for the full year. But let me kind of add some color for you for the 3rd and 4th quarter. So firstly, from a phasing point of view, I would tell you that in Q3, it's just Remember that we're still going to be cycling to some degree the economy SKU rationalization. And again, as Gavin mentioned, the correct labor strike, even though it ended in most June, it will take time to ramp that brewery back up and with normal shipments not resuming until Q4.

Speaker 5

So that's in Q3. When we look at Q4, there's several positive drivers, as I've mentioned, that's going to help offset the headwinds in Q3. Molson. We spoke about incremental pricing. We've spoken about the top line comparisons really beginning to ease in the 4th quarter With the on premise restrictions in the Q4 of last year, I mentioned the World Cup, which is taking place in November.

Speaker 5

So that's That's the big beer drinking event. And then just from an investment point of view, I think Gavin mentioned that We expect to invest more in 2022 than in 2021. But in the second half of the year, we expect marketing investment to be down. But in Q3, higher relative year over year investments in the Q3. And then in the Q4, we don't anticipated increases.

Speaker 5

And then just the final thing to mention is the deleverage impact in the second half I mean, we don't expect to see that deleverage impact that we saw in Q2 of this year. So yes, that's about as much color I think that I can give here.

Speaker 11

Thanks, Peter. Okay. No, and then just that's helpful. Okay. Yes, no.

Speaker 11

Maybe it's just a follow-up on the 4Q. I mean, just what is embedded in terms of the on premise or related COVID related restrictions? Are you assuming A return to normal or pre pandemic like environment or is it just is that comment simply just an expectation for stronger performance versus a year ago?

Speaker 3

I think what we're trying to say there is that we're not expecting to have the situation in the Q4 of last year as we had in the 4th So this year as we had in the Q4 last year. So if you think back to what was happening in Q4 of 2021, Omicron was fairly rampant And the we pretty much lost the Christmas season in the UK, which is a big season for us. So we're not assuming that the same thing to happen. We're not also Assuming unrealistic expectations in terms of if the U. S.

Speaker 3

Is at 85%, we're assuming something pretty similar to that. But We are assuming better performance out of Canada and U. K. When you compare it with last year, yes.

Speaker 1

All right. Very good. Thank you, everyone, for joining us today. I know we did run a little bit over and there may not there may be additional questions we weren't able to answer today. But if you do have further questions, just please follow-up with me and the Investor Relations team, and we will look forward to talking with many of you as the rest of the year progresses.

Speaker 1

Thanks everybody and have a great day.

Operator

Thank you all for joining today's call. You may now disconnect your

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Earnings Conference Call
Molson Coors Beverage Q2 2022
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