Molson Coors Beverage Company (TAP) Earnings Call Transcript & Summary

All right. Let's get started, everybody. It's 1:50. Thank you, everyone, who has dialed in. I hope everybody is healthy. I hope everybody is staying sane. I'm Bill Kirk, the Senior Beverages, Food Retail and Broadlines and Cannabis Analyst here at MKM Partners. I'm honored to be joined by Gavin Hattersley, CEO; and Tracey Joubert, CFO of Molson Coors. I will save the audience from a long preamble. But with the theme of the conference, 2021 and The Road Ahead, there's no better company to kick us off than Molson Coors. With the innovation pipeline they have coming, it seems like there has been a more aggressive shift -- a philosophical shift in corporate strategy. So I'll start there.

Gavin, with the pace of innovation appearing to have accelerated rather dramatically, what has contributed to this philosophical shift from just a couple of years ago?

Thanks, Bill, and good afternoon, everybody, and thanks for having Tracey and I on. We appreciate it and appreciate your interest in our company. Look, it goes back to our revitalization plan, which we launched in October of last year, and that had several different prongs to it. One of them was building capabilities, and so we've done that. We've built capabilities, both in an analytics and insights area. We've built capability in e-commerce, but we've also built significant capability in our innovation team and the folks that actually support that innovation team. So we did have a plan to drive 3 particular areas: one was our iconic core brands; two was our above-premium portfolio; and the third area was to drive beyond beer. And a lot of our innovation has taken place in the latter 2 areas.

And I mean, I've heard it said maybe among some distributors that the pace of innovation is 4x what it normally would be. Is that a correct characterization? Is that how much it's increased?

Yes, that's actually true. It might actually be a touch quicker than that, Bill. I mean, we used to do things about 18 months in a very orderly fashion. And we're still working in an orderly fashion, but we're doing a lot more things parallel. So I would say it's probably 3 to 4 months now. So 4x would be accurate.

And what does the process and time line look like? And maybe this is for Tracey a little bit as she is thinking about how costs get allocated to these projects, but what does the process and time line look like from idea generation to formulation through testing and then into launch? How long does the aggregate process take or even the individual steps?

We can do things as quickly, as I said, 3 to 4 months. One, we've actually done even quicker than that in under 2 months. It comes from a fairly full funnel of ideas, which kind of fills us down into the ones you want to focus on from a priority point of view. And then Tracey and her team are really good about freeing up the funds quickly for us to do what we need to do. And then it's all about working various work streams in parallel, whereas in the past we used to do kind of slimming it down, right, with consumer testing, and then we move on to the next stage, and then we'd go back and test, then we move on to the next stage, then we might start doing something different. And now we're running all of those areas parallel. And if we need to jump back and fix something, the team do it in a very nimble way, Bill.

The one thing that I would add to that, Bill, is also we're making more use of sort of contract partners. So if there's an innovation that we want to launch that we don't have the capabilities for in-house, we will go to a contract partner and sort of pilot it with them until we can build the capabilities in-house so we could actually move a lot quicker with partners. And then once we get to scale or something that we know that there's a future for. So for example, sleek cans. We build the capability of sleek cans in-house or we build the capability to be able to make hard seltzers in-house. But prior to that, in order to move very quickly, we may go and use a contract partner who has already got the capabilities.

Has the selling of the Irwindale facility, has that impacted the reliance on third parties in terms of what you need to outsource or is it kind of independent of that facility?

No, not at all, Bill. Our in-house -- our innovation capability, I mean, we've launched 3 great new brands this year, Coors Seltzer, Vizzy and Blue Moon LightSky. And none of those was brewed in Irwindale, nor was it planned to be brewed in Irwindale. So Irwindale hasn't affected that at all.

Got it. And in the beginning there, Gavin, you mentioned some of the Beyond Beer initiatives, obviously, with L.A. Libations or La Colombe. Those are obviously non-alcohol categories. When we think about what the portfolio looks like, say, 5 years from now, how big is the NA portion versus maybe some of the traditional offerings?

Yes. Great question, Bill. Look, when we launched our revitalization plan, driving Beyond Beer was really important for us, and whether that was non-alcoholic projects or whether it was wine and spirits or cannabis, it's an important element of our Beyond Beer strategy, which fits into our emerging growth division. We haven't been particularly specific about what non-alc is going to make up of that proportion. But what we have said is we want to get to $1 billion worth of sales revenue inside or by the end of 2023. So that requires us to grow the total emerging group by about 50%. And non-alc is going to play an important part of that. It started last year when we bought that significant minority stake in L.A. Libations, which gave us capability we just didn't have. We didn't play in this world, right? And we -- through that investment, we accessed a really experienced non-alc team led by Danny Stepper. And you can see some of the products that have come out of that process, including Huzzah, which recently won an award. And then La Colombe doesn't go through that. That's a separate distribution deal. But certainly, as we've done some of these distribution deals like we have with La Colombe, and as we have with Coca-Cola or with Topo Chico, focus on to recognize our capabilities and coming to us.

And another category, I don't think it would go through the L.A. Libations side. But I think this week, the CBD beverages with Truss started to hit in Denver. It's probably too early to comment on consumer reception, but maybe help us understand why Denver? Why now? And how you got comfortable launching that product when the FDA hasn't been, I don't know, super clear on ingestibles for CBD?

Yes. Look, I think Colorado has got the most well-defined and comprehensive set of laws and regulations around CBD and cannabis bills. So that made us comfortable that we understood what was right and what was wrong and that Colorado was the right place to launch a CBD product. Our focus, though, remains on Canada. And Canada we're very, very pleased with the progress that we've made there. We have not invested significant sums of money. We've invested from our point of view, an appropriate amount. And we launched THC-infused products a few months ago. And within a very short space of time, we were the #1 RTD in Québec, which is a big market. And more recently, our data suggested that we were the #1 RTD in the whole of Canada. And there was actually an article out from Bloomberg from a reliable source that supported our numbers. So right now, we think we're the #1 RTD THC-infused producer in Canada.

And while we're on the Canadian THC topic, we were with the folks at Canopy last night, and they started to suggest that some of the restrictions on equivalency for THC and package size could get better, meaning you could sell bigger pack sizes in Canada than you currently can today. Is that something that you're expecting or looking forward to in the Canadian market?

Bill, one thing I've learned through this whole process is nothing moves particularly quickly in this area. It's a highly regulated industry. The Canadian health authorities are very diligent about how they do these things. So I'm not going to speculate on that one. What I will tell you though is that our liquids and our brands are being extraordinarily well received. And so if there are different pack sizes, I'm sure we'll be able to take advantage of it and further entrench our #1 position in Canada.

Got it. And switching back to some of the big initiatives in the U.S., how would we rank the market opportunities for Yuengling westward versus the Topo Chico hard seltzer that's coming?

So those are 2 very different products, honestly. So I mean they both come off a clean slate of paper, so -- in those particular areas. Yuengling, we've got 25 states where Yuengling is just not available. We're actually -- we're super excited about it. Every time Yuengling launches in a new state, it quickly picks up a meaningful market share. I mean in some states, it's got double-digit market share pretty quickly. It does settle back down to the sort of 2%, 3%, 4% area, but those are untapped drinkers for us. And so very excited about that and the team is working diligently on our first market. We're playing our cards pretty close to the chest on that one, Bill, for competitive reasons. But at the right time, we'll let everybody know where we're going to go first. But really excited about that, and we're loving working with the Yuengling family. They've got a great set of values, and our teams are working well with them. Topo Chico, I'm so excited about Topo Chico. When Coca-Cola approached us to see if we would be interested, we obviously laid out what our capabilities were, and we've got a great distribution network. And we've got a great chain selling team, and I think we've got a world-class marketing team. And when Coca-Cola chose us because they had alternatives, I mean they went to all of our competitors, and they chose us to do it. And that was a validation of what we're trying to do in our revitalization plan. And based on the number of consumers that love the Topo Chico mineral water and the market share and growth which it's getting in the markets it is, I think Topo Chico is a big opportunity for us. And I think I say this safely that it's the easiest sell into the chains in the markets that we've gone to. There's not a lot of debate about whether they want to take it or not want to take it. They're taking it. And our distributors want it as well in their houses. So 2 very different propositions. I think Topo Chico will be -- will probably be quicker to market with that in a larger geographical footprint, whereas Yuengling will be more on a state-by-state basis.

And in terms of partnerships with companies like Coca-Cola, some of your distributors move Coca-Cola products as well. Is there more room and more product categories or brand types that you and Coca-Cola can work on together?

Well, certainly, as I said, we're very proud of the fact that Coca-Cola chose us amongst all their alternatives. We just want to do a great job for them on this first agreement. We want to show them that their faith in us was justified. And if Coca-Cola ever wanted to get into -- or bring one of their other brands into the alcohol space, we would hope that they would -- we had done such a good job on Topo Chico that they would consider us first. In terms of other distribution agreements, yes, sure, we're always looking for brands that would complement our portfolio that we could bring to our distributors and bring them some additional scale. So yes, we would look beyond that.

And on Yuengling, what does your data say in terms of where that sources from? I don't imagine it would source much from Miller Lite/Coors Light, but maybe one of your competitors, lagers, where maybe -- when Yuengling rolls into a marketplace, where does it get its share from?

Yes. Bill, certainly it does get some share from Miller Lite and Coors Light, but the majority of its share comes from one of our largest competitors. So we've obviously done the work. We've done the cannibalization studies and work. And certainly, it will be a net incremental proposition for us. Otherwise, we wouldn't have done it, frankly.

And the Yuengling, is it -- are there plans for the full Yuengling portfolio or will it be start with lager, maybe we see Black & Tan somewhere down the road? Or how do you think about their product suite as you're rolling into new states?

Yes. We'll certainly bring more than just Yuengling lager. We probably won't bring their full slate of brands, but it will be more than just their flagship. Well, I'm not sure we've been public about that yet. So obviously, I know what they are, but I'm going to play that one a little closer to my chest for competitive reasons. But it's safe to say we'll be bringing more than one.

That is fine. I'm in Texas here. And when the Eagles were in the Super Bowl a few years ago as being a Philadelphian at heart, I needed Yuengling lager, and it wasn't available at that time. So I'm looking forward to the next confluence of Eagles Super Bowl, whenever that would be, and Yuengling. Okay. So not all innovation is successful. So I guess, how do you make the determination when to pull the plug on a particular type of innovation or when to reallocate resources away from something that isn't living up to expectations?

Yes. I think, again, I'd refer back to the revitalization plan. I wanted us to be really flexible, nimble, less bureaucratic, make decisions quicker, and you're seeing that reflected in some of our decisions around our brands. So we certainly want to give brands a chance. We certainly want to give them the air to breathe and to be successful. But sometimes, you just need to be decisive and kill something that's not working. I think -- I'm just looking for the stat right in my head, but certainly, no company can ever say that every innovation works. And we're no different. And we certainly want to recognize that sooner rather than later. And we've had praise from some of our distributors in the network, when we have killed some products perhaps a little quicker than we would have been in the past. We've got a -- we've built a fairly robust monitoring and tracking system in our innovation team. And if the innovation is not meeting the hurdles that we expect from it, we'll take the right and quick and decisive decision.

And some of those brands have been -- maybe Henry's or Saint Archer Gold, what were the lessons from those projects that you can apply to some of the newer stuff?

Again, 2 different issues, 2 different answers, right? On Henry's, I mean, bluntly, we had the wrong package, we had the wrong name, and the liquid wasn't up to the gold standard. So besides that, the brand was great. And we recognized that. And so we shut it down. And obviously, we think we've got some great new innovations that have replaced it with Vizzy and Coors Hard Seltzer. And talked about Topo Chico earlier on, and we've also got Proof Point coming. Saint Archer Gold was disappointing. Saint Archer Gold was a victim of the pandemic, Bill. We were really excited about that brand. But it was a great taste. Folks, once they got it in their hands and tasted it, they really raved about it. We thought the proposition had a real chance. But a lot of it was dependent on samplings, and a lot of our marketing program was centered around that. And when the pandemic hit, we just recognized that our plans were not going to work. And so rather than trying to force us down our distributors, systems and consumers, that we would hibernate it, because we like the brand. We think the liquid is fantastic. It's probably that, and our planned double down on Peroni were probably the biggest victims of the pandemic for us.

And when you say hibernate, how long is that? Is it just reliant on when sampling and kind of on-premise promotion can resume? Or what does hibernate mean in terms of Saint Archer Gold?

Yes, I'm not going to put a time line on it, Bill. I mean, I'll tell you that we hibernated Batch 19, which we launched 10 years ago, and we brought it back into the marketplace last year. We brought it back in Colorado, and I think Wisconsin and some parts of Illinois, it's doing really well, I'd say. We had Batch 19 in hibernation for 10 years. Now I'm not sure Saint Archer Gold will stay in hibernation that long, but it depends what we've got going at the time. And yes, it's a little tough question to answer, but hibernation means exactly that.

Okay. And then back to the seltzer topic, it's a topic that we get asked on the most. Some manufacturers have what is basically like one brand family. You obviously are going with a multiple family approach led by maybe Vizzy and the Coors brand. Why is multiple branded the right strategy?

Well, we just think that there is space for more than one brand. And we think the 4 offerings we're bringing to the marketplace, Bill, are highly differentiated. Vizzy's differentiation is clear. It's an ingredients differentiation; its packaging stands out at retail like no other seltzer does. And we've had real early -- really good early success with it. Coors Hard Seltzer is differentiated because of its name. Our data suggests that it's got a real chance to be the most successful beer in the name seltzer. We've differentiated it with its partnership with Change the Course, which is looking to restore American's river system. And the heritage of the Coors name, Rocky Mountain Water plays really well. Topo Chico, that brand has been around for over 100 years. It's got a mass following. Its taste profile is different, and we think that that's differentiated as well. So we -- and of course, there's Proof Point, which is a spirits-based seltzer. Each of them are playing in completely different areas within the Seltzer segment and has an opportunity to really contribute meaningfully to our goal of getting to a 10 share by the end of next year. I don't want to pick a favorite child. We think all of them can contribute.

And maybe I've missed it, but have any received the lemonade treatment yet? It seems like a lot of competitors are launching lemonade versions of their seltzer portfolio. Have you done that yet or is that part of the plans?

Well, we do have an innovation platform around the -- not going to say all 4 of them, but certainly, 2 of them. And I'm not sure that we've been real public about that. But certainly, we're innovating around Vizzy. We're innovating around Coors Hard Seltzer, and we've got some ideas on Topo Chico as well. So yes.

Okay. And we used to spend more time talking on the craft beer side, but I think you have a national launch in the IPA category with Hop Valley. So I guess how are distributors reacting to that launch? That style has been popular but crowded. So maybe some thoughts on the craft beer segment in regards to Hop Valley's launch?

Yes. We're launching our Stash Series of brands, Bill. And we've had our Hop Valley Stash series available at our distributor conventions for a while now. And distributors have raved about it and have been pushing us to launch it more nationally. So Walter does a really good job of selling the proposition from the stage, and it's landed well with the distributors. So it is differentiated. It's got the cryo technology, which does reduce the bitterness and brings out the juicy flavor a little bit more. So it's a very drinkable range of products and yes, we're pretty excited about it. I mean I know it goes maybe somewhat contra-trend, right, because there was this mass increase in crafts and IPAs. And now you've got it in the seltzer space. But we think there's an opportunity for a company like ours, which has got a long track record of being able to cope on a national basis. We certainly think we'll see a good reception from retailers and, in fact, we are.

And then how will that play with some of the Tenth and Blake stuff maybe or even Blue Moon LightSky, I guess? What are the marketing plans for LightSky for the year? I mean we saw Saint Archer Gold get a Super Bowl spot, is that style of marketing in play for Blue Moon LightSky where you've had a lot of success?

Well, now that we've got the new capacity up and running in our Milwaukee brewery, we're able to meet the full demand that's existed, which is the first time now. I think it's this week or last week, Bill, that we've been able to meet the full demand of our distributors' orders. So now we've turned on the advertising. So you will certainly see more Blue Moon LightSky in the month of December, and you'll certainly see a lot of Blue Moon LightSky next year. We'll do it in combination with Blue Moon. We'll do it separately from Blue Moon as well. But you can expect a meaningful increase in our Blue Moon LightSky. And in fact, the whole Blue Moon family of brands are spending next year.

What are the thoughts with LightSky on its place on-premise, when and if, I guess -- when on-premise returns in a bigger way? How does LightSky play with Blue Moon that maybe already has a tap handle?

Well, initially, we've resolved to have Blue Moon as the tap handle offering, and Blue Moon LightSky will be in its sleek can format, Bill. So that's the approach that we've taken at the moment. Blue Moon is one of the largest tap handles out there for us. It's the largest craft brand in the country, as you know. And obviously, on-premise, it's struggling at the moment. Off-premise, it's growing really, really well as consumers go back to brands that they know and they trust and have seen in the on-premise. So that's going to be our approach. So real focus on Blue Moon and the sleek can, at least, in the beginning stages.

And we've talked about it in regards to maybe some specific brands, but very generally, I guess, how is marketing or the style of innovation? How is it different in the current environment? Maybe in off-premise with retailers, maybe rationalizing SKUs or on-premise where there's more volatility and unknown and uncertainties. But how -- I guess, how in general just has marketing and style of innovation changed?

When Michelle took over about -- it was 18 months ago, one of the things she wanted to do was change the culture of our marketing organization, make -- live in the speed of culture, was one of her sayings, I believe I'm getting that right. And doing things much more quickly, much more nimbly was what she wanted to do. And I think the way that the marketing team have reacted to the pandemic shows that, that shift in culture has been monumentally successful because programs that we were on the point of launching, we had to -- on a dime, we had to shift. I mean, think about Miller Lite, which is we're so focused on-premise and getting folk together and putting social media to one side. And in one fell swoop, on-premise disappeared, and we're all living like this, right, Zoom and social media. And Miller Lite just pivoted in very short order. And you can see that in its results. I mean it's growing share of the total alcohol segment several times in the last few Nielsen reads, and between it, and Coors Light continued to gain over 100 basis points of share in the segment. And you can see that in every single one of the campaigns that comes out, right? It's in culture. It's quick. We've done -- she's done stuff overnight, sometimes within 48 hours, if it's a little bit more complex. So I think that's the biggest change that we've seen. And then, of course, one of the legs of the revitalization plan was building capability. So she -- we built out e-commerce capability. We've now got an in-house digital agency folks which is able to turn things around a lot more quickly. And as to Tracey's delight, a little cheaper. And so everything about our marketing department is different to what it was 18 months ago. And I think you can see that. And certainly, that's getting recognized in the industry.

And I guess when there's so much volatility with the on-premise accounts, have you seen a general reduction in the amount of tap handles that are willing to stand back up just because it's unknown how long they're going to be up for? And if you're seeing that, is that something that plays to your strong brand strength benefits, right? I guess if they are reducing the number of tap handles that they have active, is that to your share benefit?

It is, absolutely, Bill. You've hit the nail on the head. We are seeing less tap handles come into the market. We're seeing consumers go to known and trusted brands, so that plays into our strength. And the proprietors, the bar owners and restaurant owners want brands that are going to move and turn quickly, so that if there is another shutdown a third or fourth or fifth or whatever, that they're not caught with brands that take months sometimes to turn. If they're caught with Miller Lite and Coors Light and Blue Moon, which they know they can turn very quickly. So we're absolutely seeing that trend, yes.

And related -- I think you were one of the first -- maybe the first to split some of those stranded keg costs when the first lockdown happened in the spring. Are you sort of seeing that as a benefit when the retailers or distributors are thinking about those keg packages?

We absolutely were the first, Bill. And the pandemic shutdown couldn't have happened at a worse time, right? Because we were going right into St. Patty's Day, we were just about to have March Madness launch, spring season was just about to start. So the level of inventory in our distributors and at retail was probably at its highest point as we headed into those 3 dynamics. I would say right now, folks are much more prepared for it. There's -- as I said, there's a higher reliance on faster turning products. Shutdowns are not dragging on in a 100% basis for a long period of time its reduced capacity. So we haven't followed that process this time around. Everybody is a little bit better prepared for it.

That's good. That's good news. And I guess being mindful of time, I guess that's as good a place as any to stop. So thank you again, Gavin. Thank you, Tracey. And cheers to what looks like a very innovative 2021. Thank you, both.

Thanks, Bill.

Thank you very much.