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

Well, good afternoon, good evening, wherever you are in the world. Welcome to the Molson Coors fireside chat. With me, delighted to have Gavin Hattersley. So you may not know this but Gavin and I have known each other for, I think, close to 14 years, something, give or take. When Gavin was actually CFO of Miller Brewing, and I was a rookie analyst covering SABMiller. And I just told Gavin as well was ironically, many, many moons ago, I spent a few years at McKinsey and did some work for the old Bass Brewers, which is now Molson Coors U.K. So even though we've just recently extended coverage across the Atlantic, it's lovely that there's some links that go back a long, long way. So welcome Gavin.

Thanks, Trevor. It's good to reconnect and good to be with you.

Great. Thank you very much. So Gavin, let me leap into the questions and answers. Let me also remind the audience, so that -- do my quick sheet here. You can submit questions through the Live Q&A tab that is the right of your viewing screen or indeed, you can e-mail them to us and we'll leave plenty of time at the end to pick up those questions. So through the Live Q&A tab, and I'll try and collate them. Those of you who remember, back in the day physically we used to have the cards. So I'll be doing the virtual equivalent of collating the question cards. So Gavin, around 2 years now, less than 2 years as CEO, how do you think the business has changed? Clearly, COVID's had an awful lot, and you've had change force on you. But if you look at the business, what's changed? Yes.

Yes. Thanks, Trevor. Yes, 18 months, a little over 18 months since I got the seat. Look, the biggest change has been the revitalization plan that we -- that our leadership team implemented in October of 2019. And the biggest visible change is how we're structuring the organization. And I'm really glad we did that before the pandemic. I can't imagine trying to restructure an organization in the middle of a pandemic. But we've slimmed down our organization. We've removed a couple of corporate centers. We've taken out about close -- I mean close to 1,000 changes from a people point of view. We've eliminated a lot of duplication, and I think the biggest change, Trevor, is that we're a lot quicker in decision-making. We're a lot less bureaucratic. And let me give you an example, Coors Light, in the sort of pre revitalization plan days, you had to sort of circle the wagons around a Coors Light person in Canada, 1 in the U.K., 1 in Panama, 1 in the U.S. and then somebody in the corporate center. And you can imagine trying to get all of those viewpoints aligned and how that slowed you down. And certainly, from a -- as it is now, there's 1 person between me and making a final decision on Coors Light. And so, if you talk to, for example, Simon, in the U.K., we're getting things done significantly quicker than we ever did. And I think that's the biggest visible change internally to the organization as well. And then obviously, there's our reinvestment of all those funds behind our brands, which was knocked a little bit off-center last year because of the coronavirus, but really nicely on track this year.

Yes. I guess, you've partly answered this, Gavin. You were running the biggest bet, if you like, MillerCoors for quite a few years and then got the top seat. What has that enabled you to change around the U.S. organization, around the old look of this?

I mean, simply put, Trevor, I mean it's allowed me to implement the revitalization plan because you said it, right, I wasn't in the top seat. So the final decision-maker was not me. And even if I had ideas about how things were going to be done, I wasn't the final decision maker. And now I am. I mean that's obviously got its upsides and its downsides. But it's allowed me to implement the revitalization play. I mean, as a business, Trevor, we were very good, I think, at meeting our commitments on cost savings and by and large, on the bottom line. But we have been similarly unsuccessful at driving the top line. And that needed reinvestment. It needed, I think, a structural change while I put in place, and it needed a reset of expectations of how much we wanted to invest behind our brands, which was supposed to be last year and somewhat delayed into this year. And so being the final decision-maker has allowed me to implement that, frankly.

Okay. Gavin, the revitalization plan is core. I think you mentioned in the past, there's 5 pillars to that. Maybe for those people who are new to Molson Coors, if you could just outlay what those 5 pillars are?

Right. Sure. So on the cost side, where pillar 5 as I would call it, was restructuring the business into 2 clear business units. Europe, and looking after the rest of the world from a license and export point of view; and then the Americas, the U.S. business, Canada business and South America. We took out -- our plan was to take out $150 million. So we added that onto the $450 million, which we had previously announced for a total program of $600 million. And the objective is to invest the $150 million that we generated by this restructuring and slimming down into the other 4 pillars. Pillar 4, which we don't talk a lot about, is capability building. And that was capability building around the e-commerce space, digital. Capital investment behind some of our innovations was sort of pillar 4. And then pillar -- the first 3 pillars. First and foremost was our core brands, making sure that they're as healthy as they could be, allocating a little bit of extra money for them. So the core brands being Miller Lite and Coors Light, Carling in the U.K. and Molson Canadian and Coors Light up in Canada. And then the above-premium space, which was the Peroni, Pilsner Urquells in the United States. A number of above-premium brands in the U.K., Blue Moon, Blue Moon LightSky in the U.S. And then there is the sort of beyond beer emerging growth space. So beyond beer being seltzers, I'm investing heavily behind that. And then moving into new spaces that we've never been in before as a company, which necessitated the change from Molson Coors Beer Company to Molson Coors Beverage Company. And we did that for a couple of reasons. The most important reason was this -- particularly the 21- to 27-year-olds moving into the better for you, in many instances, avoiding alcohol completely. And we wanted to make sure that we had relevant brands to capture the share of throat from that generation and we didn't get left behind. So that's -- that was the core of our revitalization plan, Trevor. And obviously, the coronavirus didn't make it easy. We had to make some step choices to not do. The biggest victim of the pandemic would probably be Saint Archer Gold. We had to make a choice between that and Blue Moon LightSky, and we chose Blue Moon LightSky. We didn't feel we could do both from a capability point of view in the middle of the pandemic. And the brand like Peroni. I think Peroni is a great brand. I'm very happy we've got it in the United States. We don't have it in the rest of the world, obviously, but we have it in the United States. And I think that -- have said quite often that that could be the next big European beer import into United States after Heineken and Stella. And we obviously put that on hold because it's such an on-premise focused brand, and there was no on-premise for large parts of last year. So that summarizes it in total.

I'd love to chase the Peroni question. Maybe we'll come back to that one later. I appreciate -- I understand it's very hard to put milestones here as it relates to the revitalization plan, but can you give us some sense of what degree of turnaround you can expect? Are we thinking about a 1 percentage point improvement, the rate decline per annum or 2 bps or 50 bps or a range? Is there anything you can do to help frame for investors?

There's a couple of things I can help you with. So that sort of third pillar, which is the emerging growth driving that towards a $1 billion business, that requires us to grow that business by 50% over the next 3 years. Coming into 2020, we had less than 1 share of the seltzer space, and we've got this goal to be a 10 share by the end of this year. That's obviously not the end of our ambitions in seltzer. We're not to get to 10 share at the end of 2021 and say, job done, now we can sit back. We obviously have bigger aspirations in the seltzer space beyond that, but 10 share is just this year. The revitalization plan is also about sustainable top line and bottom line growth, Trevor. As I said, we've done, I think, a reasonably good job at the one element of that and not such a great job on the top line side of it. And so getting both of those growing in a sustainable way is another checkpoint for us. And obviously, 2020 was the reset year and 2021 was supposed to be the doing both year. And obviously, the pandemic's pushed everything out a year. But over the -- we want to be a top line and bottom line growth story in the years ahead, for sure.

Am I right to interrupt that, Gavin, saying that, clearly, in the early years, you've taken all the savings and you're putting it into capabilities, marketing, et cetera. But then the after-years, you think that you could get back -- you could get to, call it, organic margin expansion rather than margin expansion through cost cutting?

That is the ambition, yes. And Trevor, you can start to see that a little bit in the last sort of 3 quarters where as we've shifted the portfolio in the U.S., and we're seeing -- it's very early days into more above-premium space, so you're seeing the brand mix come through quite strongly in a positive way. And obviously, as we shift the mix, particularly in the U.S., into that above-premium space, we should see the benefit of that coming through in the quarters ahead. We came into the revitalization plan with the U.S. being less -- certainly, less than 10% of our portfolio was above-premium. Canada was about that twice that, and Europe was about 3x that. And obviously, our ambition is to get the U.S. share much closer to Canada and Europe than it is now. And that will certainly have a positive margin impact over time.

Okay. And I guess related to this, I guess in the 10 days since we've been officially covering, one of the questions that's come up was, "Well, what about all these new products? You've got lots of joint venture partners in there. Are they margin dilutive?"

They're all different, Trevor. So we haven't disclosed the terms of every single deal, but they all have one thing in common, and they all operate in the above-premium space. Some of them operate in their super above-premium space and some of them, NSRs and gross margins are in the super-duper premium space like cannabis, for example, and CBD, the sort of NSR and margins are well north of what our average is. And because of that, they all have a -- there's plenty of profit to go around, right? So there's plenty of profit. Take -- Topo Chico is one that is raised often, right? There's plenty of profit to go around between ourselves, the retailers, distributors and Coca-Cola for us to be happy with the arrangement. And we'll be even more happy when we bring Topo Chico in-house because that will further enhance the margins, particularly on our side.

Okay. Now a hard question. Tough -- what's plan B if revitalization doesn't work?

Well, We don't plan to fail in this one, Trevor, but I'm also not naive, right? Not everything we're going to try is going to work. And we've already experienced that with Saint Archer Gold, right? That was circumstantial. I still happen to believe it was a great brand, a great liquid, and it would have been a really good brand to launch. And so -- but we've had to hibernate that. So I'm into no illusions that not everything is going to work. If everything works, you're not trying hard enough. I do think, though, that the foundation we laid in 2020 was surprisingly good given the circumstances in which we faced. We got a lot done that we -- in fact, we've got more done, notwithstanding the pandemic, than was our ambition for year 1 of the revitalization plan. And now as the market opens up, I'm pretty excited about the foundation that we've laid. We have a pipeline though, Trevor. It's not -- we haven't shot all our arrows out of the bow. We've been, notwithstanding some of the criticism I've heard, we've actually been very choiceful about what we've done. And we -- there are some things that we've chosen not to do in favor of other things. If those other things don't work, we do have plan Bs from a pipeline point of view up our sleeve. Based on what I know now, I'm pretty excited about some of the things we've got going on. I think Topo Chico is going to be a clear winner. I think ZOA has got huge potential in a $16 billion energy drink market. So I'm certainly not planning to fail, but we do have a pipeline if some of the things we're doing don't work.

Okay. Well, we'll come on and talk in more detail about the individual elements of the plan. Maybe just turning a little bit more to the short term. As the British Queen talked about her annus horribilis, you've had a tough time, and not just COVID, with the cyber-attack and the oddities in Texas, the IT problems earlier. Is this it that we touch bottom?

I sure hope so, Trevor. I mean while this was not the year that I was expecting, I mean you missed out on -- you missed the shooting, which happened just as we were getting going. That was a terrible time in our lives and my life. And then we had all the social unrest that came with George Floyd's murder and everything that that required us to do inside our business from a listening point of view and helping our employees deal with a very traumatic situation. And then, of course, we had the Fort Worth storms, which impacted more than just Fort Worth because a lot of our suppliers are based in Texas. So it didn't only impact our Fort Worth, period, it had impacts all along the East Coast, and frankly, even down into Mexico, where large part of the grid in Northern Mexico actually comes from Texas. And put on top of that the coronavirus and the cybersecurity attack, I think the Queen's annus horribilis has got nothing on mine.

Right. Well, there are a few green shoots, Gavin. We were talking about it earlier on today. Is it realistic to think we can get back to 2019? That beyond trade will recover, that we will look back on 2020 and early 2021 as a bit of an aberration?

I do think we can get back to 2019 on-premise levels. I think it will take time. If you'd asked me that question 6 to 9 months ago, a sort of prevailing wisdom based on what we knew at that time was we thought about 15% to 20% of the outlets wouldn't return. Certainly, based on what we know now, I think that number has narrowed a bit. I would say our current view is around 5% to 10% won't come back in the short to medium term. I think in the longer term, we'll get back to a sense of normalcy. I mean you're based in the U.K., you can see the demand that's there from consumers to get out. And we don't see it having a huge impact on volumes once everybody is up and running and open to full capacity. I mean if there's 5 pubs in the village and 4 of them reopened, you'll just distribute the consumers between 4 instead of 5. So I do see a recovery back to 2019 levels. Obviously, not this year from an on-premise point of view, but over time, for sure.

But if you look, of course, the U.S. is an amazingly diverse country. When we look at OpenTable data, it looks like Florida and Texas are already tracking ahead of 2019. Is that what you're seeing from those states as well?

Yes. Florida and Texas would be the best-performing at the moment. And then, of course, it's very different depending on where you are. California is a laggard as far as that's concerned. Bigger states like Wisconsin are playing catch up to Texas and Florida, but you certainly have chosen the 2 that have got back to normal a lot quicker than others. We're also -- I mean we're ahead of where we were expecting to be right now from an on-premise point of view, Trevor. I mean where we are right now from the number of outlets opening, we were really only expecting to hit that by the end of summer. So we're a couple of months ahead of that expectation. Certainly, we didn't expect sports stadiums and events to be back at the level which they are. I mean many teams' stadiums are now back to 100% capacity, which we frankly weren't expecting until later on in the summer.

Okay. Maybe you sort of talked a little bit about the U.S. and the U.K. What about the rest of Europe? And what's the progress like in the rest of Europe?

Yes. So given the huge role that on-premise plays in the U.K., which is about 75% of our top line in the U.K. is on-premise. That number is less in Central and Eastern Europe. It's closer to 50%. And so that -- they weren't as affected as the U.K. was. They didn't have the mass shutdowns to the degree which the U.K. did, but on the negative side, they kind of missed some of last year, Trevor. And I mean countries like Croatia and the Czech Republic rely quite heavily on tourism. And so we -- but they had a rough time of it last year. Our expectation is it's going to be not back to normal-normal in 2021. But certainly, we see the potential for tourism and summer to be more normal this year than it was in 2020. And that's obviously going to be beneficial for us. These important 3 or 4 months for the Central and Eastern Europe business, more so than the U.K. business.

Okay. Well, let's pick up a little bit in the revitalization plan, Gavin. I mean go through some of the elements of it. Clearly, the core of the business is still the premium lights. It's a subcategory, if you like, that's been in decline for quite a long time. You've been gaining share inside that category. But is that enough?

Well, we haven't -- we obviously would like to gain share of the total beer segment, beer category, right? And you're right, we've done a really nice job of gaining share in the sort of sub segment, but we won't be satisfied until we're gaining overall share. Miller Lite did that a couple of times last year beautifully off the Neilson Reise. And that's notwithstanding the huge growth of seltzer. Miller Lite grew total share of total category several times. Obviously, we're not going to be satisfied until Miller Lite and Coors Light are doing this. I think -- I mean, as you know, I've been around here for a while and certainly, the Miller Lite and Coors Light's brand health, their positioning, how they're coming to life in the market is as good as it's ever been. It's consistent. And if you look at their performance in the pandemic, they both rely on on-premise and the huge surge in seltzers. We're pretty pleased with where we are right now. And as the on-premise opens up, we think that gives us a really big opportunity with Miller Lite and Coors Light because at the beginning of the pandemic, consumers did tend to migrate back to big trusted brands. And that played straight into the strength of Miller Lite and Coors Light. And most outlets that are opening right now, we are seeing some of that manifest itself. We're gaining a tick or 2 of share with Miller Lite and Coors Light. So I guess my short answer to your question is we won't be satisfied until we're growing total segment share with those 2 brands.

Okay. Well, I guess, for me, when I look at your portfolio compared to your larger competitors, the bit missing for the last 4 or 5 years has been in super premium and Michelob Ultra. I clearly -- I understand that Blue Moon, and some people look at it as a craft, others look at it super premium domestic. But Blue Moon LightSky seems to have real traction over the last couple of years. What's driven that?

Well, we're excited about that, Trevor. And when we launched that brand right at the beginning of the pandemic. So it had every reason to fail, and it hasn't. So it's done extremely well for us, notwithstanding the 3 things it had going against it. It was a new brand in the middle of a pandemic, and we were -- we've struggled for sleek cans to meet all the demand that came with it. So it's very quickly grown into a meaningfully sized business with millions of cases. Obviously, it's still small compared with Blue Moon Belgian White. But it's a lighter, more sessionable, flavorful alternative to the Blue Moon drinker. We haven't seen a lot of cannibalization. Obviously, that was an unknown for us, and we did work on it, right? So we expected cannibalization. There hasn't been as much as we were expecting. So certainly, it has the ability to perform against a brand like Ultra. I would say to you though that Miller Lite is -- the -- a lot of our -- not a lot, a portion of our commercials are focused on Mich Ultra and the 1 calorie difference between ourselves and Mich Ultra. And in fact, the brand that Mich Ultra loses -- when Mich Ultra loses volume within the category, the brand it is losing the most to is actually Miller Lite. So Miller Lite is gaining drinkers from Mich Ultra. So it's -- we've got several prongs that we're focusing in on Mich Ultra, for sure.

Okay. Let's turn to another big hot area is seltzers. So let me -- before I ask a detailed question, what's your strategy in seltzers?

Well, as I say, weren't late to the game with seltzer. We just came to the seltzer party with the wrong brand, the wrong package and the wrong liquid. Other than that, it was great. And we obviously learned from that and one thing that became very clear to us because the big successes in seltzer are White Claw and Truly and by and large, they're in the same network as -- distribution network as we are. And so what we had to avoid was becoming a me-too look-alike of White Claw and Truly. It had to be very differentiated. And so that's what Michelle, our new Chief Marketing -- well, she's not so new anymore, she's been around a couple of years. It was very important to us that we came up with brands that were differentiated. And if you look at our portfolio at the moment, Vizzy is very differentiated from an ingredients point of view. Topo Chico is differentiated because it's the only brand that's been around for more than 100 years. It's got Mexican heritage, and it's got a huge following in the United States on the non-alcohol side. Coors Seltzer has the Rocky Mountain sort of water refreshments, which we felt perfectly with seltzers. And Proof Point is something we've just never tried before, right, which is the spirits-focused seltzer. So that's what we wanted to bring is differentiation. I think we've got 2 very clear winners, and we've got more work to do with one. And the fourth, Proof Point, it's just only been in the market a few weeks, so it's way too soon to judge on that one.

Okay.

We're expanding seltzers beyond just the United States. I mean Canada has launched Vizzy and Coors Hard Seltzer. So both of them doing really, really well, which has necessed out of us announcing an expansion of capacity by 300% in Canada for seltzers. We've launched Three Fold in the United Kingdom, and we've just launched [ Vyne ] in Central and Eastern Europe. So our seltzer play is much more than just a U.S. thing.

Tell me a little about Vizzy, Gavin. When you said you've got 3% share with 1 SKU, I was going, "Really?" That says something about the -- looking at market share just too narrowly.

Yes. We're pretty -- we were excited about Vizzy, Trevor. I mean we launched it, I think it was early second quarter of last year. So we didn't even have it for a full year. And we launched with essentially one 12 pack variety pack. This year, we've launched the second variety pack, and we've launched a Vizzy lemonade, hard lemonade, it's second fastest turning lemonade after Truly. So we're excited about the potential for that. If -- for those folks that are listening that frequent stores in the U.S., you will see that Vizzy jumps out and really hits you in the face with its orange packaging. And right now, because of the additional SKUs, which we've launched, extensions, it's starting to get a much bigger billboard effect in retail. And so it's differentiated. We've got more than enough cans. We're meeting all the orders, and I'm certainly excited about that one.

Okay. Topo Chico, your clearly really hot start. It's clearly resonating incredibly strongly in the Southern U.S. states, in particular, the Heartland of Texas. Any reads, though, from beyond the Heartland? Does it resonate with somebody who's never heard of Topo Chico mineral water?

Yes, it does. And you'll be surprised how many people actually have heard of Topo Chico mineral water. We've launched in 16 markets, so 9 states and 7 big urban markets. So Topo Chico, you can find in Chicago, for example, but you can't find it from the whole of Illinois. It's launched in some parts of the Northeast regions. But from a total state point of view, it's largely focused on Texas, Oklahoma, New Mexico, Southern California, Florida are the big states that we've launched in. Trevor, the velocities are growing. They're growing strongly. The demand in Chicago, right, it's not a Southern state, not a lot of Topo Chico mineral water in Chicago, and it's doing very, very well. I don't have it -- I don't want to guess, but I -- the stats from the retail chains in Chicago are very strong. I can't remember exactly where on the ranking it is, but it's high. And again, 20% share of seltzers in Texas in week 1. We knew -- we thought we had something here. But we we're working very hard to meet the demand because it is high. It is strong. We're working with our third-party contractors, together with Coca-Cola to get as much Topo Chico out as we can. We've said that we're going to bring it in-house, which we'll certainly bring it into our control and we can control our own destiny. We do expect supply to increase over the months ahead. And the launch has been spectacular. I mean they're folks that have been around this beer business for 40 years. I said they've never seen anything like it before. As fast as we can put it in our distributors and they could put it into retailers, so it's going out. The constraint on Topo Chico right now is not at -- not an excitement at retail point of view. It's not a consumer excitement. It's -- the demand is so high we're playing catch up. But we're catching up.

So a longer-term question on seltzers, Gavin. A lot of people are putting in a lot of capacity to fill very ambitious plans on seltzer. And if seltzer doesn't -- if it just slows a bit, that's going to end up being a lot of excess capacity, both in contract brewing and in manufacturers themselves, brewers themselves. Any indication that some of that could be disruptive to the industry that you may start to see price competition coming in? Or go for this that people take that capacity and start to brew cheap light beer?

Well, there's not a lot of enthusiasm from a retailer or a distributor point of view for messing with the above-premium pricing and the margins that exist in seltzer. So I do think that that's a, in a better comment, a sort of control point or a checkpoint. From our perspective, the biggest cost for us in getting seltzer capability has been putting some can lines into our -- the breweries, where we've got seltzer capabilities, so Forth Worth in Milwaukee as a prime example. That's been the largest part of our capital expenditure. We're balancing ourselves the demand, both with internal seltzer capability, but also with third-party contractors. So we're doing both contract brewing. I don't see a place where we will have too much capacity in-house. I mean, actually, what we're trying to do is bring Topo Chico in-house because as soon as we do, the margins a lot more, and we will have control over our own destiny.