Q2 2023 Molson Coors Beverage Co Earnings Call
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Good day and welcome to the Molson Coors beverage company second quarter fiscal year 2023 earnings conference call you can find related slides on the Investor Relations page of the motion close website.
Speakers today are Gavin Hattersley, President and Chief Executive Officer, and Tracy G, but chief financial officer with that I'll hand, it over to Greg Kenny Vice President of S. P N, a commercial finance and Investor Relations.
Okay.
Thank you operator, and Hello, everyone. Following prepared remarks today from Gavin and Tracey, we will take your questions in an effort to address as many questions as possible. We ask that you limit yourself to one question you have technical questions on the quarter. Please pick them up with our IR team in the days and weeks that follow up.
Today's discussion includes forward looking statements actual results or trends could differ materially from our forecast.
For more information please refer to the risk factors discussed in our most recent filings with the SEC.
We assume no obligation to update forward looking statements.
GAAP reconciliations for any non U S. GAAP measures are included in our news release.
Unless otherwise indicated all financial results. The company discusses are versus the comparable prior year period in U S dollars and in constant currency when discussing percentage changes from the prior year period.
So U S share data references are sourced from serco.
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.
With that over to you Gavin thanks.
Thanks, Greg and thank you all for joining today's call.
<unk> just finished the single best quarter of reported net sales revenue since the merger of Molson and Coors in 2000 and fun.
That achievement is not only a measure of those three months, it's a measure of the past three years.
It's about the work we've done to strengthen our business, which puts us in a position to attract consumers when they began looking for alternatives.
That's what allowed us to deliver these results today.
Now to try and remove any skepticism that you may have I wanted to show you one charge in our slides that summarizes exactly what I'm talking about.
Up until three years ago, our biggest brand in our biggest market was losing dollar share quarter after quarter and year. After year. Shortly after we launched our revitalization plan, we changed our marketing approach on Coors light and launched the made to chill campaign and the brand's results began to improve.
In the first quarter of this year, Chris like revenue was up high single digits.
In the second quarter Coors light grew more industry dollar share than any other beer brand and it grew industry dollar shift faster than modelo especial and Corona extra combined.
If you overlay melilot performance it looks remarkably similar and the reason for that is simple.
Three years ago, we generated cost savings and have been reinvesting them back into our brands and back into our business.
Three years ago, we completely changed our approach to marketing and media, which unlock growth for our biggest brands.
Over the past three years, we have improved our supply chain, we've diversified our network of material suppliers and our shipping methods. We've adjusted our brewery and packaging operations, we've streamlined our ordering systems for customers and we've invested in our facilities.
Collectively we believe this has made us much more nimble and much more prepared to meet elevated demand.
Over the past three years, our strategy has made our brands demonstrably stronger in 2023 than they were in 2019.
So while we didn't plan on our largest competitors largest brand declining volume by nearly 30% during the quarter.
If this had happened in 2019, we would surely not as seen in the sales benefit that we did in 2023 or even being able to meet the demand.
Now a lot has been said about the U S beer industry trends over the past few months, but I thought it would be helpful to provide a deeper level of detail than what you've seen in tracked channel data and <unk>.
Give more insights about what we believe the current trends mean for the future.
First Molson Coors is number one in retail display dollar gains year to date. This is the easiest way for retailers to adjust space on short notice. So we see it as a strong early indicator of shelf state sentiment.
And it's also worth remembering that our largest brands had already experienced a display lift in the first quarter due to us for both retail execution.
We also know a number of retailers have moved their shelf reset timing from the spring to the fall.
Which we expect will make some portion of the current trends structural.
For the retailers you stayed with spring resets those conversations are well underway.
Currently nearly 20 of our top retailers are updating the plan agreements to drive more space for our brands and keep them in stock based on the latest demand.
Continue with retail we are seeing particularly strong growth in the convenience channel with both volume sales and dollar sales up double digits in the quarter.
In the United States convenience is the number one channel where we have historically under indexed so to capitalize on this momentum we are planning to increase our investment behind C store shopper marketing in the second half of the year.
In the on premise Molson Coors gained over 12000, new tap handles in the second quarter alone.
And we grew sales at double the rate of the category on leading e-commerce platforms.
We're proud of this execution and we're equally proud of the work our supply chain team has done over the past several years to really us for this quarter.
And in May and June are U S breweries at the highest levels of production since 2019.
And lastly, it is important to note that the competitive pricing moves around memorial day in the fourth of July did not appear to have a negative impact on our brands as our share gains continued.
Given the relative size of Coors light to mid of that in the United States naturally had an outsized impact on our second quarter results.
To put the growth of these brands into perspective, Coors light and Miller Lite, combined with 50% bigger than Bud light, but total industry and.
And 30% bigger than Madela, especially out in the second quarter.
And to put that further in perspective in the second quarter of last year <unk> was bigger than Coors light and Miller Lite combined.
But the momentum we're seeing isn't confined to specific brands segment channel or geography.
Globally, we grew the top line by double digits and the bottom line by more than 50% in the second quarter, we grew volume and share in the United States, We grew volume and share in Canada, We grew volume and share in the United Kingdom, and our top three brands globally Coors Light Miller Lite and Miller high life are all growing volume globally.
In the U S with the top dollar share gainer nationally with Coors light simply sparked and Miller, representing three of the top five franchises in the quarter.
Every single one of our top five U S brands grew dollar share in the quarter as well.
Coors banquet gained share of the U S beer industry for the eighth consecutive quarter, an impressive feat for a 150 <unk> brand of its size.
Our economy brands grew dollar share of industry, including volume growth for highlights and Keystone.
We also gained a second mass dollar and volume share in total flavor in the second quarter.
We now have the number three and number five hard seltzer brands in the United States and simply piece was the best performing new product in the quarter by $1 a share.
And energy drinks <unk> is continuing its upward trajectory.
Since the end of the first quarter of more than 11000 additional retail outlets that place the brand's new 12 ounce cans.
We believe XOMA has a bright future and just last month announced a new marketing campaign, featuring some of the country's most prominent college athletes as brand ambassadors.
All of the points I just shared later, our best quarterly U S brand volume trends since the Millercoors joint venture in 2008.
It led to revenue growth in every channel in every segment and in every region.
And in Canada. The story is similar we saw double digit brand volume growth in the quarter led by Coors light and the Molson brand franchise, which also grew share of the industry.
These trends were actually well on their way even before the start of the second quarter at the end of March Quizlet became the number one light beer and number two overall beer in the country, surpassing Bud light.
While the hard Seltzer segment in Canada was down in the second quarter Molson Coors was the only large brewers to hold share of the segment.
In EMEA or APAC I'll start with our performance in the UK, where we grew volume share and revenue and our on premise share performance hit its highest levels in over a decade.
<unk> delivered triple digit volume growth and is now the fourth largest above premium brand and our global portfolio.
Based on track data in the U K Madrid is not top five brand for on premise value. So.
But this brand has achieved in three years is incredible.
<unk> more than half of our total EMEA and APAC revenue as of the second quarter was generated by brand volumes from the above premium segment.
Just a second largest brand in the region surpassed a 50 share of segment in the Croatian market and is benefiting from new enhancements, we've made to outstanding loans in the region.
So we had an incredible second quarter the best in years by many counts and while our two biggest brands in our biggest market played a large role you can see that our entire business contributed meaningfully.
We are proving this business can grow the top and bottom line sustainably. We are proving we have the resilience and wherewithal to navigate macro challenges affecting our industry and the world.
And we believe we are proving that when we stick to a clear strategy over the long term results will continue to follow.
That's what we've done for the past three years, it's why we are where we are today.
It's what we expect will drive sustainable growth for our business moving forward.
And it's why we are confident in raising our guidance for the remainder of the year.
Before I pass it over to Tracy for more detail I wanted to share that October the third we will be hosting a strategy day in New York City.
More details to come but we look forward to providing a longer term view of our strategy and outlook at that time.
Tracy.
Thank you, Kevin and Hello, everyone.
In the second quarter on a constant currency basis, we delivered tremendous results.
Net sales revenue grew 12, 1% and underlying pre tax income please.
Sure.
Right.
We achieved this while continuing to invest in our business.
J J and return cash to shareholders.
Yeah.
As Kevin discussed, we have built our business to sustain and be glad to.
And bottom line, we achieved this in 2022 and in the first quarter of 2023 before this recent period of accelerated demand in the UK.
And while we remain mindful of the dynamic global macroeconomic environment and recent industry softness.
Foundation, we have made coupled with our strong second quarter performance provide us confidence to increase our full year 2023 guidance.
Meaningful acceleration from our prior expectation.
Now before we get today, let's talk about some of the drivers of the second quarter performance.
Net sales per hectoliter grew 9% in the quarter. This was driven by positive global net pricing due to rollout the pricing benefits from higher than typical increases taken in 2022 and favorable sales mix driven by geographic mix and premium amortization.
Financial volume increased two 8% and consolidated brand volume increased 5%.
Volume growth was driven by strength in our Americas business, partially offset by decline in Ami in APAC business.
Turning to costs.
Lying cogs per hectoliter will at five 9% as expected inflationary pressures continue to be a headwind.
As you may recall, we bucket cogs into three areas.
If cost inflation and other which includes cost inflation depreciation cost savings and other aten.
Second is Nick.
And third is volume leverage or deleverage.
The cost inflation drove 80% of the increase and was mostly due to higher materials and manufacturing costs, partially offset by cost savings.
Volume leverage had a meaningfully.
Positive impact on Cogs per hectoliter in the quarter, providing a 100 basis point benefit.
And the Cogs per hectoliter drivers included mix, which accounted for the remainder of the increase.
This is largely due to the impact of non iron brands as well as premium amortization.
And while premium amortization is a negative for <unk>. It is a positive for gross margin per hectoliter.
Underlying markets General and marketing general and administrative expenses increased four 1%.
The increase was driven by higher incentive compensation expense, which is a favorable expense touch operating performance as well as higher marketing investments.
Now, let's look at our quarter results by business unit.
In the Americas net revenue grew 11, 5% and underlying pretax income grew 40%.
America's net sales per hectoliter increased six 2% benefiting from positive net pricing across the region as well as favorable sales mix.
The strong net pricing growth included benefits from higher than typical U S and Canada pricing in 2022.
As a reminder, in the U S. In 2020, we took two price increases.
And for each averaging approximately 5%.
We lapped last year's spring increased in the third quarter and will begin to lap last year's full increase this September .
Financial volume increased 5% this.
This was due to a four 8% increase in domestic shipments driven by higher brand volumes due to a shift in consumer purchasing behavior largely within the premium statements in the quarter.
In addition, Canada shipments increased in part due to stocking the impacts of the labor strike in the second quarter last year. This was partially offset by lower Latin American.
Contract brewing volumes.
America's brand volumes were up 8%.
Brand volume increased eight 7% largely due to growth in our core brands with Coors Light Miller Lite, and Coors banquet, all up double digits.
Growth was also driven by strength in at that premium portfolio late flavor.
In Canada brand volume increased 11, 3%.
Talking with Big Labor strike was a driver we also achieved growth in each of our Canadian region.
In Latin America brand volume was down five 9% largely due to industry softness in some of our major markets in that region.
On the cost side, and maybe because underlying Cogs per hectoliter increased two 5% inflation remained the leading driver of the increase but the impact was partially offset by the benefits of volume leverage and lower logistics costs.
In G&A was up on higher incentive compensation and higher marketing investments, particularly for key innovation like Synthes spine.
Turning to EMEA and APAC net sales revenue increased 14, 7%.
Underlying pre tax income increased 82, 7%.
Net sales per hectoliter grew 18, 3%.
This was driven by positive net pricing largely related to the rollout of the benefits from increases taken in 2022 favorable sales mix and continued premium amortization in the U K fueled by the strength of brands like Marie and positive geographic mix.
Financial volume declined 3% relatively in line with brand volume, which was down two 9%.
Looking by market financial volume grew in the UK on strong brand volume due to the resilience of the UK consumer and our strong on premise performance as well as high effective brand sales.
But this was more than offset by declines in central and Eastern Europe .
Two industry softness, including the impact of the continued inflationary pressures on the consumer.
On the cost side underlying Cogs per hectoliter increased 17, 7%.
This is largely due to inflation related brewing and packaging materials and logistics costs as well as the mix impact of premium amortization and high affected brands.
And G&A was relatively flat.
Underlying free cash flow was $570 million for the first six months of the year and this was an improvement of $282 million.
Primarily due to higher net income and lower cash capital expenditures.
Turning to capital allocation capital expenditures paid with $335 million for the first six months of the year.
This was down $54 million and was due to the timing of capital projects.
Capital expenditures continue to focus on a golden brewery modernization and expanding our capabilities in areas that we believe drive efficiencies and savings.
We reduced our net debt by $308 million.
The 31st 2022, ending the second quarter with Nic data of $5 $7 billion.
And in July we repaid our $500 million Canadian deck in cash upon its maturity on July the 15th.
As a reminder, outstanding debt is essentially all at fixed rate exposure to floating rate debt is limited to our commercial paper and revolving credit facility, both of which had a zero balance outstanding at quarter end.
And we paid a quarterly cash dividend of 41 cents per share and maintain our intention to sustainably increase the dividend.
Given our strong EBITDA performance and lower net debt our.
Our net debt underlying EBITDA ratio as of quarter end reached a longer term leverage ratio target of two five times.
Our capital allocation priorities remain to invest in our business reduced net dates as we remain committed to maintaining anytime improving our investment grade rating and returned cash to shareholders.
But our greatly improved financial flexibility does provide us increased optionality. Among these priorities and we will utilize our models to determine the best anticipated returns for our shareholders.
Now, let's discuss our outlook.
Please recall that we start year over year growth rates in constant currency.
We are raising our 2023 key financial guidance to reflect the continued strength we are seeing in our core brands in the U S. While remaining mindful of the softness in the beer industry and continued caution around the consumer.
We now expect high single digit net sales revenue growth as compared to low single digit growth previously.
We now expect 23% to 26% underlying pretax income growth as compared to low single digit growth previously.
And we also now expect underlying free cash flow of $1 2 billion, plus or minus 10% as compared to $1 billion plus or minus 10% previously.
Now, let me break down some of the guidance assumptions.
From a top line perspective, given the strong demand in the U S. We now expect growth to be driven not only by rate, but offset by volume.
But we continue to expect a headwind related to the large UAS contract brewing agreement that has begun to wind down ahead of its termination at the end of 2024.
As discussed in our first quarter call, we expect volume to cause under this contract to accelerate in the fourth quarter.
For context, the headwind impact of this.
<unk> to be approximately 2% to 3% of Americas financial volume in the fourth quarter.
We continue to view the termination of this contract as a positive.
Because while a headwind from a volume perspective, we believe it is positive for us in terms of freeing up capacity and enhancing margins.
As for distributed inventories before that we had both higher U S distributor inventory levels at the end of the first quarter this year versus the prior year.
Given the strong demand distributor inventory levels in the U S declined following both the memorial day and fourth of July holiday.
We expect that will further decline following the labor day holiday.
Recall that the client in distributor inventory levels through the summer and particularly post the holidays during this period.
Period are typical.
Also as usual, we anticipate rebuilding inventory and the shoulder quarters being the first and fourth quarters.
While supply is currently taught our brewery operations have done an excellent job of meeting the demand.
As for pricing given the strength of our brands. We continue to anticipate taking a general increase in the U S. This fall.
At this point, we expect our pricing increase to be in line with industry average historical annual levels of 1% to 2%.
In terms of costs, we continue to expect the impact of inflation on Cogs to be a headwind for the year, but we expect it to moderate in the second half.
While spot rates for a number of commodities have declined we like most CPG companies have a hedging program, which we expect will largely smooth out the impact of swings in commodity pricing.
Further our business in EMEA and APAC is expected to continue to experience relatively high inflationary pressure.
In addition, we expect favorable volume leverage partially offset cost increases.
This combined with continued premium amortization and lower contract brewing volumes are expected to drive gross margin expansion for the year.
Underlying in G&A expenses is expected to be approximately $100 million higher in the second half as compared to the first half of this year and up approximately 15 sustained basis, the second half of 2022.
This is primarily due to higher marketing spend which is expected to be up approximately $100 million.
As well as higher people related costs as compared to the same period last year.
As for our secondary guidance metrics, we continue to expect capital expenditures incurred a $700 million plus or minus cost of things.
Underlying depreciation and amortization of $690 million plus or minus 5%.
And an underlying effective tax rate in the range of 21% to 23%.
However, we are reducing our net interest expense guidance of 225 to 225 million tons, a modest 5% as compared to $240 million plus or minus 5% previously.
This decrease is driven by the July payoff of the Canadian date maturity higher interest income due to higher cash levels and high interest rates on deposits.
Lower short term borrowings than previously anticipated.
In closing we are extremely pleased with our second quarter performance.
While we could not have foreseen the shifts that we have seen in consumer behavior that began in the second quarter.
<unk> has positioned us well.
With a strong portfolio of brands across all price segments, and the financial flexibility that enables us to continue to invest prudently in our business, we have confidence in our ability to sustainably deliver top and bottom line growth not only in full year 2023, but also beyond.
We look forward to sharing more details on our strategic initiatives capital allocation and longer term outlook at our upcoming strategy day on October the food.
With that we look forward to answering your questions operator.
Thank you if you'd like to ask a question you may do so by pressing star followed by one on your telephone keypad.
Thanks for your question and stuff on it by chain.
When preparing for your question. Please ensure your phone is on mute here lately.
Our first question comes from Bonnie Herzog from Goldman Sachs. Your line is now open. Please go ahead.
Alright, Thank you hi, everyone.
Okay.
I had a question on your guidance.
You raised your underlying pretax income growth guidance, a fair amount, but you know given the Q2 beat it does imply a healthy deceleration in the second half. So I guess I wanted to better understand the drivers of this and really ultimately how much of the topline strength you now plan.
To reinvest versus maybe letting it flow to the bottom line also are there any other headwinds we should be aware of for the second half or is there may be some level of conservatism baked into your updated full year guide.
Thanks, Rick.
Thanks, Bonnie let me start with just a couple of effects and I'll pass it over to Tracy Firstly I would tell you that the momentum behind our brands in the third quarter has not slowed down.
Maintained.
And then secondly, we intend to invest very strongly behind the momentum that we've got.
Hence the $100 million extra marketing, which Tracy referred to in her remarks.
Our job is to maintain those gains that we've that we've got we've gained over 12000, new tap handles.
We're working closely with our retailers to change the shelf rates to meet this.
This new reality with a number one share gainer in dollars in displays.
And we're going to invest behind the momentum that we've got mostly in the Americas business unit, but also.
EMEA and APAC business unit behind brands, such as such as <unk>. So I'll make those two points Tracey Mizuna, yes, there's more you want to add to that yes.
One thing that I would add is the.
The pecs contract that's winding down as I mentioned in the prepared remarks, we will be a headwind in terms of volume and revenues from from that contract we expect on a volume.
Volume basis for that to have a headwind.
In Q4 of around 2%, 3% of our American volumes and then just also.
Don't forget the sort of pricing as we lap the larger price increases that we took.
The Clos in 2022.
So we will see that that impact and declining through the back half of the year as well.
Thanks, Good morning, Thank you.
Yes.
Thanks, Tony Our next question comes from Bill Quirk from Roth.
Your line is now open. Please go ahead.
Thank you Ed I, just wanted to follow up and try to be Super clear so.
The guidance in the U S includes U S volume increases and rate.
Is that has that changed just from what you've experienced year to date.
As you are now is your guidance now, including those market share shifts that you've seen for them to continue in the back half of the year.
Thanks for that question look I don't think we're going to breakdown individual components of our of our dogs, but.
I'll reiterate that we haven't seen any slowdown in momentum for a four hour for our brands.
One big difference is the extra $100 million.
Versus the first half of this year and actually also versus the back half of <unk>.
Last year.
To Tracy's point pricing.
We are and have already left one of the big price increases we put through last year and we left the other one obviously in the fall.
We've been pretty consistent about the fact that we're <unk>.
Spectrum pricing to fall back to more historical levels is that sort of 1% to 2%.
Range and then of course, there is there are some.
Employment related costs, which we referred to in our script as well. So those are the sort of big four things which are.
You too.
Next question operator.
Thanks, Bill. Our next question comes from Andrea <unk> from J P. Morgan. Your line is now open. Please go ahead.
Thank you good morning.
Kevin.
You're obviously embedding.
A strong deceleration in the second half and even accounting for.
The 2% to 3%.
Headwind that you mentioned in the fourth quarter in particular.
Can you comment on the underlying assumptions, perhaps for Depletions.
As you go into the second half and then embed into that you had this 5% increase in cost per ask too.
I understand you mentioned that it's going to it.
It's going to actually decelerate inflation is going to decelerate in the second half of which is.
Obviously, it makes sense to the extent that you can comment on the margin.
And by the same token I think it flows through not only the deceleration in top line, but also more conservative assumptions for reinvestment. If you can comment on that thank you.
Okay.
Sorry.
Sorry Andrea.
As I said.
Momentum has not slowed down.
At all and we're not towards the towards the end of July .
Our guidance assumes U S brand volume growth in the second half of the year.
Which implies continued share growth based on current industry trends.
It does consider continued caution around the consumer and the competitive environment.
We have Tracy referred to the to the Peps winding down in price increases and then of course, there's the extra $100 million that we've got going through from a from a marketing point of view so.
<unk> all of those items into into our guidance, Yes, and then just on the Cogs inflation question Sir.
As we said, we do expect the impact of cost inflation to continue for this year, but then moderates in the back half of the year and if we've got good line of Scott Jack Cogs right now based on hedging.
Our contract prices and the expected cost savings to be again do you expect inflationary pressures to continue particularly in our EMEA and APAC region. As we've mentioned so from a from a margin expansion point of view.
First of all.
Some of these sectors as well as the <unk>.
Benefit from our efficiency project.
<unk> invested more in our business around efficiencies and cost savings.
And really looking at a more normalized cost of goods sold environment in the medium term, we are expecting a margin expansion.
And when that better capacity increases I also want to make sure that we all own silicon that the 2% to 3% headwind right that you spoke about volumes that you remind producers.
This contract. It also gives you more capacity right. So are you together with what you mentioned gathering in the beginning of your call. Your prepared remarks that you have some of the top 12 retailers in the U S. Taking on adjusting shelf space for you.
Would we see that capacity flipping into your own brands or we should wait for that to settle before we can count on that as you go into the balance of the year. Thank you.
Thanks Andrea.
Got it.
<unk> retailers that are going to make changes in the in the full reset some of them actually have already made those changes and frankly that number grows every week, we're not talk to to talk to our head of sales. So it's actually somewhat higher than that.
And what it was.
<unk> made these prepared remarks.
From a supply chain point of view I think our supply chain team has done an amazing job keeping up with it.
Such short notice, we always run close to full capacity and from us.
And of course, we are going to be a little tighter than the normal and so there are some distributors in some pockets where they may be out of stocks, particularly where the momentum is really strong we've got some distributors growing 30 40, 50% at the moment.
We rebuilt inventory coming out of Memorial day.
Doing the same now as we as we rebuild hitting into labor day.
And we came into the second quarter with.
With good inventories.
I think we're doing a great job of keeping up with the with this unexpected demand I think we've got the capacity to do that and of course, we and perhaps thoughts coming out we will be able to replace that volume with our own with our own brands. It will free up a little bit more capacity for us as we head into into.
2024.
Thanks, Sanjay our next question comes from Vivien <unk> from TD Cowen. Your line is now open. Please go ahead.
Hi, good morning, Thank you.
Gavin and Tracey I'm hearing some concern from investors that there seems to be perhaps a disconnect in terms of what would've been expected from a depletion standpoint, using the publicly available data I have Nielsen you guys are obviously fighting our corner relative to the shipments I think we've certainly.
Covered the capacity point pretty well at this point, but were there any other timing factors to consider in terms of understanding.
Y ear America shipments.
Fell below what we would've seen in Nielsen tracked channels from a volume growth perspective. Thanks.
Your couple of points I'd make one is that we came into the into the second quarter was very high.
Very heightened which came in with higher inventories than we normally do it because we wanted to make sure we could supply.
Consumers and distributors through summer, we obviously weren't planning for the for the current.
Situation, but.
Certainly at higher shipments coming into Q2, we always run close to full capacity in summer so.
Frankly, there isn't a lot of.
From a shipments point of view.
No.
A significant increase possible as we as we operate in from a notwithstanding that.
<unk> had a record may and June since 2019.
Functioning extremely well so those are the two factors that I would that I would.
Q2 <unk>.
From a capacity point of view.
Of course, we don't have unlimited capacity, but we're keeping up.
Think amazingly well given.
The short notice of this of this demand shift and we will we will rebuild our inventory hitting into labor day, and we will build rebuild inventory post labor day, as we head towards the back of the year.
Our next question comes from Nadine <unk> from Bernstein. Your line is now open. Please go ahead.
Hi, Thank you good morning, guys.
Last time, we spoke I know you mentioned your expectations at the time, where that shelf resets could be more modest in the fall than some other brewers were extended expecting but it sounds from your prepared remarks that you believe these are going to be bigger than initially expected. So could you provide a bit more color based on what youre seeing I know you touched on it but.
The puts and takes of this fall resets and then how youre thinking of going into the spring next year and then one more if I may ask in the U S. Where you are on trade and off trade trends meaningfully different are broadly in line and if so a little color on that as well. Thank you.
Thanks, David and I'll take your second question first yes, or on premise trends were better than our off premise trends in the in the U S.
As far as your shelf reset Christian is concerned yes, we are in a better place now than then.
Then we were necessarily thinking at the end of the first quarter.
A lot more retailers have have already moved some of this shelf resets and are planning to move the full shelf resets than we had initially.
Expected.
As I said nearly 20 of our retailers update getting the 10 agreements right now that number grows.
Every week as I said, our talk to our head of sales that number grows we are working really closely with our retailers to recommend space and assortment solutions too.
Just drops a sustained category growth for the for the retailers.
And given those recent trends we have seen a number of retailers make interim adjustments to two two displays and space.
Summer and we do expect that to continue into the fall and also next spring and as I said I think in my prepared remarks, so maybe in Q&A I cant remember, but in a more.
<unk> is the number one retail dollar display gains year to date so.
We're working hard at making sure that.
<unk> reflect the current reality in the marketplace, which shows that there is a strong momentum behind.
All of our core brands.
Thanks <unk>. Our next question comes from Philippe <unk> from Citi. Your line is now open. Please go ahead.
It looks like we may have lost <unk> from Citi.
No not Canadian operator.
Phil API.
Your line is now open please ask your question.
Okay moving on to the next question.
Our next question is from Eric <unk> from Morgan Stanley . Your line is now open. Please go ahead.
Sounds like Eric's there either operator.
Hello can you hear me.
Yes, now we can hear.
Hey, Hey go ahead.
Oh.
Sorry about that.
Just wanted to circle back on the shipments versus Depletions.
Not to beat a dead horse here, but.
Is the implication correct that.
Shipments will are expected to again lag depletions for the third quarter.
That inventory rebuild would happen largely in the fourth quarter and do you expect shipments and depletions to still.
Be broadly in line for the full year or do you think it will take until.
First quarter early next year in order for that to converge.
Yeah, Hi, Eric It's <unk>, so look we're going to monitor this very closely obviously.
Distributor inventory levels as Kevin mentioned over this but.
Holiday periods will fall and then we'll grow it again typically because on the shoulder quarters.
The first quarter and the fourth quarter, and but we're monitoring it very carefully I mean right now we focus on making sure that we have enough inventory to meet the demand.
And that our distributors have enough inventory to meet their demand so no.
As we get further into the year, we will continue to balance that.
And again, just really focused on making sure we've got there on the floor.
Great and then a bigger quick bigger picture question for you Kevin.
You referenced several times the weaker U S beer industry trend.
Hoping you could unpack what you see as the key drivers there.
Do you think that the situation at your competitor is having.
Having a spillover effect in terms of overall industry.
Yeah.
We've seen the beer industry from a volume perspective weaken this year at a time when spirit's volume growth has certainly slowed quite dramatically.
So any color as to your take on what's driving the industry weakness would be helpful.
Sure. Thanks, Eric.
Yes look I mean, the U S industry in 2023 has been softer than had been expected. There are obviously a number of drivers behind that.
The West Coast, particularly California.
Drinking market.
Had some some really difficult weather conditions in the first part of the year and so that challenge. The overall industry and then I think it's true to say that we've had higher than expected declines in the overall seltzer segment.
Our data would from <unk> would suggest that this would be actually been a slight improvement in Q2, when you compared with them with Q1 and an improvement overall.
Industry point of view versus second half of last year.
We do think that some of the bigger drivers of these trends are lifestyle choices.
Buyers shifting to other categories.
However, core beer drinkers are incredibly loyal and have maintained this year.
And volume.
MBS.
We have seen some some pretty seismic shifts across the industry.
Fueled by the continued growth in Mexican imports in Fabs and obviously, the the disruption in the ABR.
Portfolio.
Our brands Coors light Miller lite growing industry share.
What really matters.
For us is that more consumers are reaching for obvious.
<unk>.
Competitors peers, regardless of the of the segment.
That they are purchasing from.
So those are the comments I would head from an overall industry point of view Eric.
Thanks, Erik our next question comes from Peter Grom from UBS. Your line is now open. Please go ahead.
Thanks, operator, good morning, everyone. So Gavin this is maybe a hard question to answer is we're still really only halfway through this year, but I would love to get your perspective on how you see the company's growth algorithm evolving in light of this share shifts we're seeing obviously great to see the share gains, but you also kind of increasing your exposure to an area again.
History, where growth has been challenged for some time and I know you had previously communicated that you expect to exit this year with stronger bottom line growth versus the low single digits originally targeted for this year.
I would just be curious how do you think about the ability to kind of grow off of this elevated base, especially if some of these share gains prove to be less durable. Thanks.
Yes, Thanks Peter.
Look obviously, we'll share a lot more detail when we have our strategy day in October , but I'll make a few points ahead of that when we started on the journey of our revitalization plan, we wanted to deliver top and bottom line growth on a sustainable basis not just once every now and then so that's the first thing I would say to you that that's how we met.
Measure ourselves secondly, we're seeing share in <unk>.
Brand improvements in every single one of the markets that we operate in so this is not just the United States, we're seeing it in Canada, we're seeing it in the United Kingdom.
In the U S with the number one dollar share gainer.
In the second quarter of Canada's up one and a half four points from a volume perspective thats through may because we don't have a more recent data then then that we grew.
Premium lots dollar share almost.
Almost 11%.
Canada premium beer is up to four.
In the F&B segment, we grew industry and the segment. We grew all of our core brands in the United States and Canada grew industry.
Sure.
We continued to grow our economy segment performance from pro from an improvement point of view our job is to make sure that we maintain and retain.
As many and frankly more of these consumers that are moving to our brands is one of the reasons were investing.
Hundred million more in the back half of the year, that's a significant investment and commitment to the momentum that we're experiencing and we're seeing that in the data. We're seeing the 12 the handles the new tap handles we're getting we're seeing the shelf set changes we're seeing the display.
Share gains.
And we're going to.
Pushed hard to maintain that and.
And more.
Peter So.
I think.
I think I'll stop there ahead of our strategy day, but we will share more with you in early October .
Thanks, Peter next question comes from Lauren Lieberman from Barclays. Your line is now open. Please go ahead.
Great. Thanks.
I was curious if you could talk a little bit about operating leverage because I know a couple of times Gavin.
Gavin and Tracey both referenced that <unk> is normally a time when you are producing pretty close to full capacity.
As we think about the balance of the year and starting to see these structural share shifts in.
In marketshare persist.
If the higher volume growth that we start to see more operating leverage kind of on a year over year basis, because the delta is bigger in the so-called shoulder quarters.
And then would have been for example in <unk>, meaning the upside in your production volume is actually higher later in the year versus <unk>. Because this is already a seasonally very strong volume production period.
Yes, So maybe let me let me help.
Give a little bit of color and maybe a little bit more detail.
Around our leverage and operating <unk>.
And on an enterprise basis.
<unk> cost comprised back at 20% of our enterprise underlying Cogs.
Now that does differ by geography and.
The composition as the composition composition of a year over year volume changes that can influence that but but on average for enterprise Cogs makeup is about 20% fixed.
And then obviously as we look at operating leverage.
Our marketing strategy also supports flexibility, which does allow us to.
Put the rock commercial push it behind our brands and so as Kevin mentioned, we are going to be spending $100 million.
More in marketing in the back half of the year.
And then.
Just from a from a.
Overall sort of margin driver as well we've mentioned the pet contract coming to an end that safely.
Thank you Hal.
R.
Our margins, even though it is a revenue loss, but overall.
Our margin expansion as well as a lot of these efficiency projects that we've been working on and our ongoing cost savings that's all going to help.
Drop in margin expansion of the medium to end this year.
Our next question comes from Rob.
Steve <unk> from Evercore. Your line is now open. Please go ahead.
Great. Thank you very much just a couple of follow ups gab.
Gavin.
First you mentioned that on premise was stronger than off but I can't I'm not sure I heard by how much.
How much the on premise was up and you mentioned that you won 12000 tap handles.
I think in Q2 can you give us a sense of what that is as a percentage of total cap.
GAAP handles.
And then second.
We're seeing and hearing about some weakness in the market overall and the below premium side is that something that you are also seeing in your.
Not just in your business, but in the market overall, thank you.
Yeah.
Lots of questions there.
I'll take your last one first no we're not seeing any slowdown in our economy portfolio.
As far as on versus off premise you didn't hear because I didn't say it.
We're not going to get into that level of detail, but suffice it to say that on premise grew.
I would say, maybe low single digits better than.
Then the.
And then the off premise.
Was your second question.
Oh and the tap handles.
It's a meaningful number Rob and Thats already Miller, Coors light and Blue Moon, which are which are our reference and let's say.
I'm not sure we've given this before but let's say around 10% higher.
Meaningful for us.
Thanks, Rob Our next question comes from Chris Carey from Wells Fargo Securities. Your line is now open. Please go ahead.
Hey, everyone.
One quick question just on the investment plan for the back half of the year.
Just given the year to date strength. Thanks makes total sense I'm trying to understand.
The tight capacity relative to the investment.
It sounds like Youre, keeping up with demand, but just.
Have you contemplated a dynamic where this accelerated investment in the back half year accelerates demand, but you are not able to keep up with the demand I totally understand the brand building for the medium to longer term, which.
It makes complete sense.
But it does sound like this is going to be supportive of.
Perhaps even higher demand at them I'm, just trying to frame how much. Thanks.
Yes capacity you might you might see in the system. If indeed, you do see.
A step up in line with this.
Increased investment activity in the back half so thanks, so much for that.
Thanks, Chris.
Tightest period, obviously as always during the during the summer.
Always see a falloff after major holidays, just like we did in July the fourth and we're currently rebuilding the inventory.
As we speak and we will continue to rebuild the team in August .
And then we will have a falloff coming out of out of September .
Then.
Overall consumer.
Consumer takeoff traditionally does fall off in the in the fourth quarter. So it provides us.
A good opportunity to get inventories back to where we would like to have them going into into next year.
Our marketing activities as I say it is not just limited to the United States, we are putting more money into other markets as well behind the momentum of a brand like my three behind because lots of Molson trademark brands.
I've been in Canada behind some strength in certain territories in our Latin America business.
This is also true to say the lion's share is in the United States.
Frankly there.
And at a very very high levels, two kinds of marketing and selling expenses some drive shorter term behavior, which we're investing behind and some drives longer term.
And health and we are going to be doing so.
As I said, we don't have unlimited capacity.
But certainly perhaps coming out of our system.
In the <unk>.
So older quarters as I think.
Lauren referenced in the fourth quarter, and the first quarter give us ample opportunity to to maintain.
Maintain inventory and suppliers, where we want them to be.
Thanks, Chris Our next question comes from Bryan Spillane from Bank of America. Your line is now open. Please go ahead.
Hi, Thanks, operator, good morning, Kevin Good morning Tracy.
Yes.
Just had two sort of related question is about free cash flow.
One Tracy.
Could just talk about the.
Two five times leverage target and.
Just just.
Why that.
Kind of.
Desirable target just given how.
How much cash flow tap.
The company throws off and.
It just seems a little bit conservative so just kind of what the thinking was there in terms of getting to the two five times and then I just had one other related follow up.
Yes.
We did a lot of analysis.
What was the desirable and leverage target for us to have and we got to the two and a half Thompson no remember we.
Been very and.
Vertical and made sure that we maintain our investment grade rating and and over time, we want to improve our investment grade.
Writing and so.
It makes sense for us to continue to look at that leverage ratio.
<unk> reduced our net debt and drives us towards that debt.
And in terms of investment grade.
Yeah, and it's just really important to us and so we'll continue to look at that.
Brian .
Okay, and then the $1 $2 billion of breakeven plus or minus 10% free cash flow guidance increase for the year.
It is.
One of the questions. We're getting today is just if you were to hold onto the benefits that accrue to the company this year.
Would that be a normal cash flow or.
Or are there other things like capital spending coming down or just all the things that the free cash flow conversion.
We're sort of if you were sort of Rebase the company from here.
Could be higher.
Or put another way.
Free cash flow necessarily be higher even for this year, if there werent. Some some other sort of unusual things pulling on cash.
No I mean look obviously.
Capital expenditures is one of the things that we look at but I think we've been quite consistent with our capital expenditure and we are also state that.
And any investments we make is not going to drive our capital expenditure up significantly and even the basis that we've made in new breweries in Canada, we focus to new modern breweries in Canada, we busy modernizing <unk> brewery in Colorado, we both capabilities in our breweries with equity flavor Kate.
Abilities or variety packing and capabilities all of that within that range of around $700 million, which is the guidance that we've given for this year as well.
I don't see a significant uptick in in anything capex related or anything unusual I mean, the one thing is at the end of the year, obviously working capital will be a driver of our free cash flow.
But yes, nothing nothing out of the orderly.
Thanks, Brian Our next question comes from Steve Powers from Deutsche Bank. Your line is now open. Please go ahead.
Hey, Thanks, and good morning.
I wanted to just revisit the capacity question in the U S. Maybe from a different perspective.
Zinc both in the quarter and year to date.
The financial volumes you shifted in the Americas lags, what you were able to ship in the first half of both 2020 in 2021.
Im just is that is that is there a reason for that is that reflective of capacity that you've taken out of the system at that point.
And I'm thinking about it.
As I look to the back half I'm, just trying to think about a theoretical Max on what you might be able to ship.
<unk>.
Same logic I think in the back half of 2020 in 2021 you shipped.
$32 million to $33 million extra leaders I just is that is that feasible in 2023 or as the capacity just not there.
Yeah, Steve look we don't have unlimited capacity is as I said that.
But obviously.
We we had.
Strong may and June shipments well above anything that you would have seen in 2000 22021 and 2022.
This.
Obviously, I think I've made the point, we had higher inventories coming into the second quarter at the end of March and that might have affected.
Some of our some of our shipments in the in the sort of first part of <unk>.
Of April so there is that as well.
We have long had a.
A very robust program of seasonal workers and temporary workers.
Frankly, if we needed to we could we could continue even into the shoulder quarters.
Traditionally haven't found that to be to be necessary, but in the event that it did we could we could extend.
Some are.
In our brewery performance into into the shoulder quarters.
Also I think.
Steve just to remind you that we are seeing perhaps come out and that will free up a lot of capacity for us and that will free up and simplify our breweries there won't be so many.
Changeovers there'll be longer runs much more effective.
Inefficient.
Tracy said, we start to see the benefit of that coming through.
Foster right in the second half of this year in the fourth quarter than we did in the first half and then obviously that will accelerate even further into.
Into 'twenty 'twenty four so.
Based on what we know now we've got the capacity to supply the market demand.
Thanks, Steve Our next question comes from Philippe <unk> from Citi. Your line is now open. Please go ahead.
Can you guys hear me Okay now.
As we can for labor.
Okay, great. Thank you.
So I just wanted to go back to your guidance for net sales growth on a constant currency basis of high single digits. It seems like Kevin you mentioned the momentum continued in Q3 in terms of Coors Light Miller Lite.
At the consumer level, you should have a little bit of a.
Financial volume kind of recovery as you ship.
Net of depletion to recover the inventories so what.
Help me square like what are the other headwinds other than the pubs volume coming out in Q4 that youre assuming that we can.
Slow the momentum you're expecting the second half and the other things that we should be aware of thank you.
Stephanie if any maybe I'll take that so the other the other thing also just to note is the pricing.
And recall the impact of our costing increases stepped down in the second half of this year compared to the first half because of the pricing that we took in 2022 and then as you mentioned, we expect that pricing for this year to be more than the historical average of around 1% to 2% in the UAE.
We also.
A little bit cautious around the consumer.
Particularly in central and Eastern Europe .
<unk> mentioned in his remarks as well.
Looking at the competitive environments.
And and.
And then you mentioned the contract brewing volume coming off as well. So I would say those are the those are the big things to consider.
We have no further questions at this time.
With that I'll hand back to Greg Kenny for final remarks.
Okay. Thank you operator, and thanks to everybody for joining us today.
If you do have additional questions or may have additional questions that we weren't able to answer today. Please follow up with our IR team.
Look forward to talking with you. Many many of you as the year progresses.
And certainly looking forward to seeing seeing you at our strategy day in October so with that.
Thank you all for participating in today's call.
Have a great day.
This concludes today's call. Thank you for your participation you may now disconnect your line.
Yeah.
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Okay.
Sure.
Yes.
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Yes.