Q1 2023 Molson Coors Beverage Co Earnings Call

Speaker 1: That.

Speaker 2: Good day and welcome to the Molson Coors beverage company first quarter fiscal year 2023 earnings conference call. You can find related slides on the investor relations page of the Molson Coors website. Our speakers today are Gavin Hattersley, President and Chief Executive Officer.

Speaker 3: Please go ahead. Thank you, operator, and hello, everyone. Following prepared remarks today from Gavin and Tracy, we will take your questions. In an effort to address as many questions as possible, we ask that you limit yourself to one question.

Speaker 3: If you have technical questions on the quarter, please pick them up with our IR team in the days and weeks that follow.

Speaker 3: 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.

Speaker 3: We assume no obligation to update forward-looking statements.

Speaker 3: Gap reconciliation for any non-US GAAP measures are included in our news release. Unless otherwise indicated, all financial results the company discusses are versus comparable prior year period in US dollars and in constant currency when discussing percentage changes from the prior year period. Also, US share data references are sourced from Circana, formerly called IRI. Further, in our remarks today we will reference underlying pre-tax income, which equates to underlying income before income taxes on the condensed consolidated statements of operations.

Speaker 4: With that, over to you, Gavin. Thanks, Craig, and thank you all for joining us this morning. When we reported our 2022 results, I said our ability to grow the top and bottom line was neither an anomaly nor an accident. It's the result of sticking relentlessly to a clear strategy. I also said our north stars to deliver sustainable long-term top and bottom line growth.

Speaker 4: And while we remain cautious about the consumer outlook over the course of 2023, so far this year we have continued to deliver.

Speaker 4: In the first quarter we grew the top line by high single digits and we nearly doubled our bottom line.

Speaker 4: These are clearly strong results following a strong 2022 as well. But I would caution you not to simply apply this growth rate to the entirety of 2023. Certainly the fundamental strength of our business was a driver in our performance. But we also benefited from the lapping of Omicron related restrictions in some of our markets.

Speaker 4: particularly strong pricing in all of our major markets compared to the prior year period. These drivers were expected.

Speaker 4: Importantly, the fundamentals of our business are strong. We're growing revenue in both business units and across our iconic brands.

Speaker 4: And our above premium innovation across the Americas and the May and APAC is truly changing the shape of our portfolio.

Speaker 4: So we see reasons for continued caution in the broader consumer landscape.

Speaker 4: As you are all aware, the consumer packaged goods industry remains impacted by rising interest rates and global inflation, both of which persisted into the first quarter.

Speaker 4: While we are still not experiencing meaningful trade down our US business, we have seen consumers shifting away from mid-sized packs towards singles and larger packs.

Speaker 4: In February I mentioned we had seen a price-sensitive subset of consumers shifting to smaller pack sizes in particular to single serves. Those trends remained in the first quarter. But we are also seeing a shift into larger packs among consumers with higher household income levels. This is a

Speaker 4: combined with channel shifting behavior among these same consumers suggest an increased focus on finding the best value even if it requires shopping at multiple stores. Trends notwithstanding, our brands proved incredibly resilient this quarter, starting with our premium light brands in the United States. Collectively in the US, Quiz Light and Miller Light grew revenue by double digits in the quarter and held total industry dollar share and Miller Light was a top 10 growth brand in the quarter.

Speaker 4: These brands benefited immensely from our first Super Bowl campaign in more than 30 years.

Speaker 4: change versus the prior 13 weeks.

Speaker 4: Coors Light grew displays leading up to the Super Bowl and was a top three brand for all display activity in February due to the strength of our plans and execution. Outside the US, our iconic brands in Canada and in Europe remain strong as well. In Canada, Molson Canadian grew brand volume and is growing share again in 2023 after returning to share growth in 2022. Coors Light also grew brand volume in Canada. In the UK, calling remains the number one beer bar volume across the industry.

Speaker 4: with distribution and velocity significantly ahead of competition in the core segment. More broadly, we grew total financial volume in EMEA and APAC in the first quarter, and our above premium portfolio in the UK has been a major growth driver.

Speaker 4: With re-exception I will continue to grow shear during the first quarter.

Speaker 4: Madrid is now larger than Budweiser in the UK and recently it moved ahead of Stella Artois in the entree where it is now the number 6 beer. We continue to see tremendous potential for this brand as we head into the summer months.

Speaker 4: in the US Peroni grew brand volume in a quarter and in February we introduced Peroni 0.0 in select US regions with a new marketing campaign.

Speaker 4: and a global partnership with the Aston Martin Formula One team.

Speaker 4: Just as our portfolio performed strongly in the first quarter across above premium beer, the same is true for our brands across above premium flavour and beyond beer. We have previously referenced these as distinct spaces in our portfolio, but given the recent evolution in our America's operating structure.

Speaker 4: to better align with broader industry definitions we will now speak to Beyond Beer inclusive of all non-beer brands meaning FABs, hard seltzers, first-bake products and non-Alk. Starting with FABs in the US, Simply Spiked is now a top 10 brand in the segment. It was also a top 5 industry growth brand in the quarter and just last month we introduced Simply Spiked Peach.

Speaker 4: On its own, Simply Spiked Lemonade ended 2022 as the number two new item in the total category.

Speaker 4: We brought Simply Sprite to Canada in the first quarter and there is significant runway as we continue to innovate under this brand. And also in Canada we are the only large brewer growing shear and hard seltzer. In the US, despite cycling last year's national launch, Topachica Hard Seltzer grew brand volume in March.

Speaker 4: another new branch of our successful relationship with the Coca-Cola Company. As we continue to premiumize our portfolio, we remain focused on growing Zoa as well. After doubling its volume in 2022, we are excited about the opportunity for Zoa in 2023 with our new and vibrant packaging. And finally, in full strength bottled spirits, we are continuing to expand the whisky with Five Trail and our new Barmen 1873 bourbon.

Speaker 4: Those brands will be in a total of 25 markets this year and just last week FiveTrail was awarded two gold medals at the Denver International Spirits Competition. Our progress in Beyond Bear is just one marker of our commitment to total beverage and it's also a reflection of our successful approach to innovation. But none of this would be possible without continued investment in our capabilities.

Speaker 4: modernizing our production capabilities, we've modernized our structure as well. In February we established a new commercial structure in the Americas and elevated Michel Saint-Jacques to Chief Commercial Officer.

Speaker 4: This new structure is designed to unlock the next phase of growth across our brands, geographies, and capabilities.

Speaker 4: We will also place more emphasis on key growth areas like innovation, beyond beer and digital capabilities. And finally, all of these changes will enable us to make even faster decisions and better ensure our investments match our ambitions across the full commercial landscape. So from the changes we are making within our own team to the progress we are seeing across our global portfolio, the trajectory of our business is becoming clear no matter how uncertain the environment around us might be.

Speaker 4: And the message I want to leave you with today is one of consistency and stability. The results we saw in the first quarter underscore the strong foundation we have built to continue to drive consistent top and bottom line growth.

Speaker 4: and achieving our eighth consecutive quarter of revenue growth proves this out. The emphasis we put in our core brands across global markets shows they can stabilize and grow consistently.

Speaker 4: The strength of our innovation shows we can premiumize our portfolio consistency.

Speaker 4: Even in parts of our business that are completely new, we are showing consistent progress and an ability to reach new consumers. There is power in consistency.

Speaker 4: And in our case, there's power in a portfolio that is strategically built to offer consumers a range of winning brands across price tiers and preferences. And now to give you more detail on the financials and outlook, I'll hand it over to our Chief Financial Officer, Tracey Gebaie. Tracey? Thank you, Gavin, and hello everyone. In the first quarter, on a constant currency basis, we grew net sales revenue 8.2% and our underlying pre-tax income 82.8%, while continuing to invest in our business and return cash to shareholders. While we remain mindful of the dynamic global macroeconomic environment, we are also looking

Speaker 4: and favorable geographic mix across both business units led to 8.4% net sales per hectare to growth.

Speaker 4: Financial volume declined 0.2% as lower Americas volumes were partially offset by higher volume in EMEA and APAC. Consolidated brand volume declined 2.1%.

Speaker 4: Turning to costs, as expected, inflationary pressures continue to be a headwind in the quarter, driving underlying COGS per hectoliter up 7.4%. And as you can see from the slides, we bracket COGS into three areas.

Speaker 4: First is cost inflation and other, which includes cost inflation, depreciation, cost savings and other items. Second is mix and third is deleverage.

Speaker 4: The cost inflation bucket drove almost 80% of the increase and was mostly due to higher material conversion and energy costs.

Speaker 4: Cost savings in our hedging program help to mitigate some of these cost pressures.

Speaker 4: Other cost per hectare of drivers included mix, which was about 20% of the increase. This is largely due to the impact of factored brands in the UK as well as premiumization.

Speaker 4: And while premiumization is a negative for COGS, it's a positive for gross margin per hectolitre. De-leverage had a negligible impact on COGS per hectilis in the quarter.

Speaker 4: And while premiumization is a negative for COGS, it's a positive for gross margin per hectolitre. D-leverage had a negligible impact on COGS per hectolitre in the quarter. Now let's look at our quality results for our business unit.

Speaker 4: In the Americas, net sales revenue was up 6.5% and underlying pre-tax income grew 37.7%.

Speaker 4: America's net sales for Hectoliter increased 7.1%, largely benefiting from strong net passing growth as well as favorable brand and geographic mix.

Speaker 4: The strong net pricing growth included benefits from higher than typical US and Canada pricing in 2022. As a reminder, in the US in 2022 we took two pricing increases, a spring and a fall, each averaging approximately 5%. The spring increase was taken in January and the beginning of February .

Speaker 4: which was earlier in the first quarter than usual and the fall increase began in September 2022.

Speaker 4: Financial volume declined 0.5% and this was due to industry softness as well as lower Latin American and contract brewing volumes.

Speaker 4: This is partially offset by a 1% increase in US domestic shipments to bring our distributed inventory levels, primarily for our core brands, to stronger positions compared to a year ago.

Speaker 4: Brand volumes were down 1.5%. Looking at brand volume by region, the US declined 1.2% on software industry performance and lower economy volume. There was also one more trading day in the quarter, so on a trading day adjusted basis

Speaker 4: US brand volume was down 2.8%. In Canada, brand volume increased 4.9%, driven by growth in core brands and lasting Omicron on-premise restrictions in the prior year period.

Speaker 4: In Latin America brand volume was down 12.4%, largely due to industry softness in some of our major markets in the region. On the cut side, America's underlying COGS per hectare increase 5.6%, while MG&A was flat. Thanks to me and APEC.

Speaker 4: Net sales revenue increased 16.1% and underlying pre-tax income increased 27.6%. Positive net pricing included the role of the benefits from increases taken in 2022, favorable sales mix on continued premiumization fueled by the strength of brands like Madri.

Speaker 4: and positive geographic mix drove net sales per hectare growth of 15.1%.

Financial volume grew 0.8% on the strength of our above premium portfolio and higher effective brand volume.

brand volume declined 3.9%. Looking by markets, brand volume grew in the UK, but this was more than offset by the times in our export and license business in markets impacted by the Russia war in Ukraine, which we exited in March 2022.

as well as by declines in Central and Eastern Europe due to the impact of inflationary pressures on the consumer. On the cost side, underlying COGS, the HEX really increased 15.2%.

This is largely due to cost sensation related to materials, transportation and energy, as well as mixed from premiumization and the impact of factory brands. The underlying free cash flow was a negative $174 million for the quarter.

This was an improvement of $185 million, primarily due to higher net income and lower cash capital expenditures.

Turning to capital allocation, our priorities remain to invest in our business to drive top-line growth and efficiencies, reduce net debt and return cash to shareholders.

Capital expenditures paid were $181 million for the quarter. This was down $62 million due to the timing of capital projects.

Catholic percentages continue to focus on our golden brewery modernization and expanding our capabilities in areas that drive efficiencies and savings, like our variety factor that Gavin mentioned earlier.

We ended the quarter with net debt of $6.3 billion, which is essentially all at fixed rates.

Exposure to floating rate debt is limited to our commercial paper and revolving credit facilities, which had zero balances outstanding at quarter end.

Our next date to underline EBITDA ratio was just under three times.

We remain committed to maintaining any time, improving our investment grade rating and 5 towards a longer term leverage ratio target of approximately 2.5 times.

And we returned cash to our shareholders with a quarterly cash dividend of $0.41 per share.

The dividend represents an increase of 8% from the fourth quarter 2022 level. It is our second increase since we reinstated the dividend in 2021, and it aligns with our intention to sustainably increase the dividend.

Now let's discuss our outlook. But first please recall that we cite year over year growth rates in constant currency.

And when considering the first quarter in relation to our full year, remember the first quarter is our smallest quarter.

So percentage changes in the first quarter are off much smaller basis.

Onto our gardens, we are reaffirming our 2023 gardens which include low single digit growth for both net sales revenue and underlying free tax income and underlying free cash flow of $1 billion plus a modest 10%.

This guidance anticipates full growth despite softness in the beer industry, caution around the consumer and impacts of continued global inflationary cost pressures.

As we discussed on our fourth quarter call, our underlying assumptions assume that top-line growth is more rate than volume driven as we continue to benefit from the strong global net pricing that we took in 2022 as well as benefits from portfolio premiumization. Please be in mind that due to the timing of our 2022 year-end

to its more historical level of 1 to 2 percent.

In terms of financial volume, recall that we have a headwind as a large contract brewing agreement begins to wind down ahead of its termination at the end of 2024.

We expect significant volume declines under this contract in the second half of the year with acceleration in the fourth quarter.

And as I previously mentioned, we build stronger US distributor inventory levels at the end of the first quarter versus the prior year, with US shipment trends roughly 4% ahead of trading day adjusted brand volume. We expect this inventory build will unwind in the subsequent quarter as we maintain our goal to shift to consumption for the year.

In terms of cost, we expect the impact of inflation on COGS to remain elevated in the second quarter before moderating in the second half of the year. And we continue to expect it will be a headwind for the year.

However, utilizing our levers, which include pricing, ongoing cost savings efforts, our hedging program and continued premiumization, we expect gross margin dollars per hectometer to increase for the full year in both business units. We also expect to continue to strongly support our core brands and key innovations, such as Plover and

With a strong portfolio of brands across all price segments and the financial flexibility that enables us to continue to invest prudently in our business, we are confident in our ability to sustainably deliver growth in full year 2023 and beyond.

With that, we look forward to answering your questions. Operator? Absolutely. We will now begin the Q&A session. If you'd like to ask a question, please press star followed by one on your touchtone keypad. If for any reason you'd like to remove that question, please press star followed by two. Again, to ask a question, press star one.

As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking a question.

Our first question is from the line of Bonnie Herzog with Goldman Sachs. You may proceed. All right. Thank you. Good morning. Thank you.

So I had a question on your guidance. So given the strength you saw in Q1 and then the share gains you're seeing maybe in the last few weeks from Bud Light pressures, your guidance feels pretty conservative, especially on pre-taxed income.

with your guidance implying probably a low single digit decline for the remainder of the year. So I guess I'm trying to understand the drivers of this and you know maybe if you're assuming some of these short-term gains you're seeing won't necessarily be sustainable or are you now planning on stepping up you know reinvestments possibly not letting any of the incremental top lines

we saw in the first quarter we were expecting.

You know there's obviously a lot of uncertainty out there from a macroeconomic environment and how that might impact or not impact the consumer base. And you know frankly we haven't even got to the to the peak setting season yet. The other point I would make is that we haven't factored any of the trends that we've seen in April into our garden suite.

really and I'm sure nobody has any idea how long these are going to continue. So they're not factored into into our guidance at this point. So yeah, we didn't raise our guidance at this time for those reasons.

Thank you. The next question is from the line of Kevin Grundy with Jefferies. You may proceed. You may proceed.

Great. Thank you. Good morning, everyone, and congrats on the strong results here.

Just to come back, maybe just to spend a moment on this. It sounds like specifically the issue with your key competitor, because I kind of feel like it's the elephant in the room here. So just to be clear, there's nothing embedded in your guidance. April clearly off to a really strong start.

How do you see this sort of playing out? I know it's a difficult question to answer, but based on your long history in the industry, I know there's sort of a uniqueness to this. How do you potentially see this playing out? And you may have not embedded some of the favorable trends we've seen in April . Is there sort of a Dr. sensors coming out that look pretty often, or have any evidence online of changes on the news am authorizingtoe try to come in and41 ôe

your guidance to contemplate what will likely be sort of a step up in investment. Maybe across whether we're talking price, whether we're talking advertising and marketing from your key competitors, they would naturally attempt to sort of stabilize trends. So maybe just a little bit more time on this in terms of how you're contemplating it I think would be of great interest to folks. So thank you very much.

Thanks, Kevin.

Yeah, just a couple maybe additional points to that. Obviously, our focus right now is on our brand completely and not looking at what our competitors are or aren't doing.

You know, I'm particularly proud of the work that we've done over the over the last three years because we've built our brands very deliberately And and you know Kevin we're seeing Progress across our portfolio as a result of that and that tells us that our strategy is working So, you know no matter what happens with our competitors. We're going to continue to make the right direct decisions for for our brands and the long-term health of our Brand as I said to you we haven't factored in the current situation in

after that as we go into 4th of July . Our guidance did include supporting our brands in a meaningful way.

And I guess that's about all I can say on that at this point, Kevin.

Thank you.

The next question is from the line of Vivian Azare from TD Cowen. You may proceed.

Hi, this is Victor Ma on Provivianaser and thank you for the question. While it's hard to know how durable the faster growth in April will prove to be, can you speak to the flexibility in your supply chain to accommodate outsized consumer demand for course light and low light in the US?

Yeah, thanks Victor, thanks for that question. Yes, certainly I can do that. I'll do that by saying that we came into this year with inventories in really good shape, and that was the good starting point. And then as Tracy said in her remarks, we came into this year with inventories in really good shape, and that was the good starting point.

We shipped ahead of consumption in the first quarter as well. So we came out of Q1 in good shape from an inventory point of view. Our inventories were healthy and our inventories have remained stable in the last four weeks. So we are keeping up with the demand that we're seeing.

Certainly in April , many of the changes that we made over the last year or so, and decisions that we've made, put us in a much better position from a supply chain point of view than we have been for quite some time.

If you remember our economy skew rationalization, we expanded our supplier base and that's just allowed us to be much more nimble from an overall business point of view. As a result, we have improved our ability to react to potential sharp changes in...

in supply. So thanks for the question. Thank you. The next question is from the line of Andrea Texera from JP Morgan. You may proceed. Thank you. Gavin, you spoke a little bit on the demand in April .

So how can you kind of think about all these forces and you correct and I think it's prudent not to assume that this is going to continue in history of brands having those points, right? I wouldn't say. I wouldn't say.

how it will change the consumer perception of a specific brand. But thinking of what you described as the package dynamics that happen in the US, how can you kind of shift a little bit of your price-back architecture going into the summer and if any changes you are envisioning.

And have you seen conversely, as you pointed out, the most affluent consumers actually looking for more value also in the bigger packs? Are you seeing on trade some deceleration that we saw at the end of March, I think, in the data? Are you seeing that happening through as the weather in some places is still challenging?

I'll keep my comments there. You know, we had a number of dynamics that played out in the first quarter. In January , it was certainly positive for us because we were cycling Omicron, which certainly benefited the on-premise volume trend versus the prior year. But, you know, in March, we did see on-premise trends slow a little bit.

didn't provide us the offset to the off-premise performance, which remained reasonably soft during the quarter, mostly because of what was happening out in the Pacific region, and specifically California. That was the biggest geographic driver of industry softening, frankly, Andrea.

particularly pleased about.

And you know, when you couple all of that with the current macroeconomic environment, and the fact that we haven't built any of this.

current trend change into our guidance. It's just a bit cautious in the short term, but very confident that our portfolio, the work that we've done over the last three years has strategically positioned us to navigate the dynamic environment that we're seeing. The story can be note rebacked to the start. Talk about the next vivo or Jasper dribble

Thanks for that question. That's super helpful. Yes, super helpful. Can you talk then the same similar view on Europe ?

Yeah sure, so in Europe from a UK point of view the consumers remain frankly remarkably resilient and so we haven't seen much degradation in consumer behavior in the UK and you know certainly from a sales revenue point of view our on-premise trends are above what they were in 2019.

A little different in Central and Eastern Europe . I mean the consumer there is less discretionary disposable income and with the inflation being where it is and particularly in the consumer durables.

sorry, not durable, fast-moving consumer goods, we've seen more of an impact in Central and Eastern Europe than we have in the UK. In Canada, we saw a similar trend as we did in the US, excluding the, obviously, the California situation. And we were very pleased.

the fact that our volumes in Canada were up 4.9%. So thanks for that, Andrea. Thank you. Thank you. The next question is from the line of Rob Einstein with Evercore. You may proceed. Great, thank you very much. Um, Gavin. Um.

The beer industry is very high fixed costs. So any kind of increase in volumes.

You get a lot of operating leverage from that. Given that your supply chain sounds in great shape and the ability to meet increased demand seems very solid, at least for a short period of time, who knows how long, you will have some windfall in terms of profitability.

It's kind of in the books already, right, for April . So how should we think about you spending that money? Would you step up marketing even more? Do you bring it to the bottom line? Do you think about different capital allocations? Just trying to get a sense of how you're thinking about spending that windfall.

Robert, you're right, I mean our supply chain is in much better shape than it was several years ago and as I said, they've done a brilliant job of meeting demand as we've gone along. And you're right, the more volume you get through your breweries, the more volume you get through your breweries.

and see how sustaining it is. We always were going to increase our marketing spend as we headed into summer, Memorial Day and into Fourth of July , in fact for the whole of summer. So we feel that we have really strong plans for summer behind all of our core brands, whether they're...

here in the United States or up in Canada or across the ocean. So, you know, we'll continue to spend what we think is right behind our brands. If we saw an opportunity, we could change that, obviously, but that's factored into our guidance as we put it now.

So should we expect that perhaps given the momentum that you have in the market, you would look to take advantage of that and perhaps pick up spending in marketing while you have the wind behind your back? Yes, already. Yes.

You're kind of implying where our focus is, and our focus remains on our brands, and not really focused on what the competitors are or aren't doing. And as I said, we've built our brands very deliberately over the last three years, and we've made great progress on our portfolio. I think our portfolio, particularly our core portfolio, is a really great spot from an overall health point of view.

to support that brand strength before all this happened.

Great, thank you very much, Gavin. Thanks Robert. Thank you. The next question is from the line of Brian Stellane with Bank of America. You may proceed. Hey, thanks operator and good morning, Gavin and Tracy. I actually had two quick questions, if you will. The first one is just in the first quarter in the US.

in the first quarter and then have a follow up.

Brian , look, I mean, frankly, we're living in such uncertain volatile times that it has been our practice when we can to make sure that we're at the top end of where we would like our inventory to be. And so that's how we felt coming out of 2022. And that's why we were where we were at the end of the first quarter. You know, it feels like over the last three years, there's always been something, right. And so we wanted to make sure that we had our inventories at the right level to make sure that our outer stocks were as effective.

And then just a quick one on MG&A, it was a little bit lower than what we were expecting in the first quarter. And I think, Tracy, in your remarks, you talked about more of the spend in the middle of the year. So just wanted to make sure that that was there wasn't anything unusual in the first quarter. And what we're seeing is just sort of...

the anticipation or the expectation that you'll have more marketing spend in the middle of the year? Yes, our NG&A was flat. If you have a look at the marketing spend in particular, as Gavin said, we always plan to spend more marketing dollars in 2023.

In Q1, we obviously did put a lot of investment around our Super Bowl ad, but we spent that money very wisely. We went into two, three weeks before Super Bowl talking about Mililas and Chris.

in Q1 we had the big launch of Topo Chico hard sulfur and so there was big spin that we were letting from last year. All right that's helpful thanks Tracy thanks Kevin.

Thank you. The next question is from the line of Steve Powers with Deutsche Bank. You may proceed.

Thanks. Good morning. Just going back to the supply chain, I guess should these share shifts prove to be structural and the trends continue or even extend, I guess I just want to go back to it and think about over the course of the summer, is there any risk that you can't keep up if these trends continue all the way through the peak selling season and then we...

We hit thin inventories and potential for out of stocks over the summer. Just want to kind of sanity check that. And then on the volume leverage that you're getting, again, assuming these trends continue, is there a tipping point where the positive leverage in the economies of scale through the course of your factories and supply chain become 10. Right.

sort of too much to handle and you start to get into diseconomies of scale trying to keep up with much faster than expected volumes. Just want to think that through as we think about the remainder of the year. Thanks. Thanks, Steve. Look, to answer your second question first, no, there isn't. So, you know,

the benefit of spreading our fixed costs across a larger volume set doesn't have a reduction as things move forward. I wouldn't factor that in in any way. From an overall capacity point of view, it's a...

It's a little bit of a hypothetical question, right, because it's hard to predict how big or how long these current trends are going to continue. I would just tell you that in terms of where we're positioned, we're as good as we could have been. And obviously we weren't planning for this, but as I said, we've...

a point of view. So we'll just have to see how that plays out.

Thanks, Steve. Thank you. The next question is from the line of Nadine Sarwat with Bernstein. You may proceed. Hi, morning, everybody. Two questions from me. So first, do you anticipate that the recent share shifts between you and your...

retailers right now on the ground in terms of changes in consumer preferences. Thank you. Thanks Nadine. Look from a consumer point of view and from a distributor point of view, you know, frankly I don't think anybody can say how long the situation is going to last. And that's why our focus is squarely on our brands and taking advantage of the momentum.

that we created coming out of 2022 and also out of the first quarter. In terms of spring resets, look, the retailers only make meaningful changes to their resets coming into the spring and then they do minor ones in the fall. Most of the retail chains have finished their sets and have actually begun the reset process. And as you can expect, there was a bigger upgrade in shelf service for winter while on- Jordan is now Husband T customers. T sites

You know, we don't have a complete picture of all the the resets that have taken place, but where we do have a read we're growing both distribution and we're growing physical space and frankly we've seen growth, strong growth in distribution and space due to innovation, but we're also growing space in the core of our portfolio as

well. So you know the biggest opportunity for us to gain additional retail space aligns really well with the category segment trends we're seeing in SELTA and and and Craft and we're feeling really good about our biggest bits and innovation for 2023 like somebody sparked.

Thank you. Thanks Nadine. Thank you. The next question is from the line of Chris Carey with Wells Fargo. You may proceed.

Hi, thank you. Hi, Chris. So, um. Tracy, I think you mentioned that, you know, built into plans were for, you know, a price increase in the US that would probably be more in line with your typical pricing.

contemplating. And so I guess in the context of you're going to be increasing marketing spending through this year, which makes total sense. Can you just maybe frame how you would be thinking about that fall price increase should there be a fall increase?

You know, broader price competition within beer, perhaps, you know, just over delivery on volume gives you enough flexibility to work through that if you didn't want to price. But maybe just any thoughts on your sensitivity to that fall price increase. And how firm you view it. Thanks so much.

Thanks Chris. Look, I mean, I'll make the point upfront that we're not seeing competitive moves from a promotional point of view to the degree that you may have seen being reported. It certainly isn't a full market thing, it's not a full portfolio thing and certainly notDean

in the media. We continue to do pricing as we've always done it, right, which is on a brand by brand, market by market basis. We're holding steady on what we said on our last earnings call, that obviously we've cycled through the spring price increases from last year and we've now got the fall price increase we put through last year which was...

in the sort of five to six percent range holding steady through.

through this coming fall and we still continue to believe that the full price increases will revert back to more historical levels in that sort of one to two percent range. But obviously there's plenty of time between now and when we have to make a decision on that to determine exactly what

what we'll do for a pricing point of view for our brand portfolio. Thanks, Chris.

pricing point of view for our brand portfolio. Thanks Chris. Thank you.

The next question is from the line of Lauren Lieberman with Barclays. You may proceed. Great. Thanks. Good morning. I have two questions. The first was just knowing that you said the recent shared momentum that you've seen in recent weeks is not included in the guidance and who knows what happens from here. In your MEAS Congress today you're facing north-violentHAVE 770,000 kov

But I was just curious how to think about that in the context of the four point spread between brand volume and financial volume in the US or four-ish. So the thought was what is in the guidance is it kind of takes all year or through the year that you work through that. The recent market share dynamic holds the volume trends that we see in Nielsen.

Would that gap be closed sooner? Would that be something that we should just think about in closing more quickly? That was kind of question one. And the second was on the contract manufacturing exit. I know you've spoken to it before, but in not quite as specific fashion. And I think the language previously, or at least we heard it, was a gradual sort of wind down until the contract terminates.

but now you're speaking to an accelerating and significant pressure from that in the back half. So I was just wondering, and more so in the fourth quarter, if you could put any kind of quantification around that, because that might also help with tying in some of the decision to hold the line on guidance despite such a significant outperformance in Q1. Thanks.

Thanks, Lauren. Tracy, you'll take the second question. But from an overarching point of view, Lauren, as I said, we haven't built in any of the current trends into our guidance and reiteration, right? Obviously it's...

it's too soon to tell where this is all going to go. And to point you towards Tracey's comments, where she said, our plan is always to try and shift to consumption for the full year. So, you know, as we said, we overshipped in first quarter very deliberately to make sure that we could weather any unexpected issues which...

which may rear their head through summer, and our inventory levels have remained pretty steady through the whole month of April . So our supply chain has been able to meet the increased demand that you can obviously see through the publicly available channel and scan data.

So that's about all the color I can add for you as it relates to shipments for the year and then contract brewing trade. Yeah, so again, I can't quantify this because it is with a contract brewing partner, Lauren, but...

You know, it is a large contract brewing agreement. It does wind down at the end of 2024. And we do expect based on forecasts, et cetera, that we do receive to see a significant declining volumes related to this in the second half of the year. And as I mentioned, accelerating in Q4.

So, you know, other than being able to quantify which we can't, that's about as much color as I can add to that.

Thank you. The next question is from the line of Filippo Filorni with Citi. You might proceed. Please answer Fridaysates by collecting your W without Fatima out of your way.

Hey, good morning, guys. Good morning. So, question on – just a question on, again, the pricing that you're assuming in the balance of the year. I know, obviously, you mentioned the competitive dynamics. You haven't really seen anything yet. But do you see a need maybe for the beer industry to step up a bit from –

Thank you.

Thanks, Filippo. So a couple of things in there. From a pricing point of view, I can't really add much more than what I've already said, other than that we don't approach pricing on a one-star split-sault. We certainly look at by brand, by pack, by market very specifically. We will continue to do that and...

As I said, there's a lot of uncertainty from a macro environment point of view and what impact that may or may not have on the consumer. We are still seeing premiumization though, albeit at a slower pace. We're not observing significant segment trade down.

We're seeing the value that segment trends are stabilizing. And as for consumers, we continue to see trips and dollars being up primarily due to that pricing, buyers and units down, which is obviously impacting overall industry volumes. And as I said, consumers continue to make trade-offs as they look for value.

The next question is from the line of Eric Serrata with Morgan Stanley . You may proceed.

Eric.

Eric, your line is now open.

Maybe Eric had his question answered already. Sorry about that. I was on mute there. Most of my questions have been answered, but one for you. You previously had the billion dollar revenue target for your emerging growth unit.

With the reorganization, my understanding is that business unit doesn't really exist anymore or doesn't exist anymore. So wondering how you're thinking about growth prospects for the brands that used to be part of that unit. I understand if you can't fully reconcile it exactly, but

How are you thinking about growth for that portfolio with the progress that we've seen to date and the reorganization? Thanks Eric. Look, I mean, you're right. I mean, we don't have an emerging growth division anymore, so the billion dollar goal is no longer applicable.

But the changes to the org structure that we've made here in the Americas is completely designed to support accelerating future growth. We're going to have more aligned priorities, we're going to have more aligned leadership, the collaboration between sales and marketing is going to be much more, and it allows us to have more scale beyond beer.

with total beyond beer coming together because they were sort of housed in different houses. You know like Topachica Spirited and expanded relationships with Coca-Cola with Peaceheart Tea, full-strength spirits like Five Trail and Barman and Non-Alk with brands like Zoa. All of the activities that now fits into this one big house.

is designed to drive that even faster. And we're seeing that with Simply, we're seeing that with Zoa, we're seeing that with our full strength spirit. So, you know, we're only about 45 days into the new structure, but the benefits of it are already becoming really clear. So I'm very pleased with the...

So the first month or two of our new process. So thanks for that question, Eric. The next question is from the line of Peter Grom with UBS. You may proceed.

Thanks, operator. Good morning, everyone. So, Tracy, I appreciate the commentary on inflation, and I know you still expect gross margin for Hecholider to increase, but when you look at your kind of inflation basket today versus earlier in the year, has anything materially changed? Is it broadly similar? And then just, you know.

Given the strong starts of the year, how should we think about the phasing of gross margin more on a year-over-year basis, particularly as inflation moderates? Thanks. Okay, so thanks for that, Peter. So the inflation buckets are pretty similar. It's driven by our brewing and packaging materials, some brewery inflates, some

driven by the on-premise performance and the portfolio premiumization, we did have a higher COGS in Q1. But as we look at the balance of the year, we've got a good line of stock to our COGS based on our hedging programs, contract prices.

as well as our expected cost savings. And so, you know, that helps us to moderate some of the inflation increases we see. And, you know, that's why we, with this good line of thought, we are able to look at the COGS moderating, or at least the inflation moderating in the back half of the year.

So, I mean, I think that there's nothing significantly different other than maybe the premiumization.

I mean, I think that there's nothing significantly different other than maybe the premiumization. Thanks, Peter.

Thank you. The final question will be from the line of Gerald Pasquarelli with Wedbush Securities. You may proceed. Hi, good morning. Thanks very much for the question. Just on Simply Spiked, it's obviously been incremental to your top line growth and you're going to come up on cycling your national launch in June . So how do you think about cycling these distribution gains that you've been achieving and then going back to shelf research.

Topo Chico is on track to be the number three hard sell. So it's number four coming out of the first quarter. SimplySpiked has just been, as you say, a massive success since we launched it in summer of 2022. And frankly, it caught us a little bit by surprise and we weren't able to meet all of the demand that existed. And with the work that our supply chain team have done to in-house that and with a variety packet coming online now in May, we feel very, very.

Canada, very late in Q1, so really had no impact on our Q1 performance up in Canada, but it's off to a really strong start with some of our key retailers. We're feeling really good about our position from a full flavor point of view, which is how we're looking at it right now. Thanks for that question.

Thank you. That concludes our Q&A session for the call this morning. I would like to turn the call back over to Greg Attirney for concluding remarks. Thank you, operator. I know there may have been additional questions that we weren't able to answer today, so please follow up with our investor relations team in the days and weeks that come. We look forward to talking with many of you as the year goes by.