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

So we'd now like to welcome Molson Coors, represented by CEO, Gavin Hattersley; and CFO, Tracey Joubert. Gavin, Tracey, it's great to have you with us today. Since we spoke at last year's conference, Molson Coors has continued to make great strides in pursuing its ambitions to be a winner in the beer aisle and beyond. So let's just start our discussion here. We're coming up on the 2-year anniversary of the revitalization plan.

And Gavin, it felt to me like there's been a shift of late in your external communications from sort of discussing plans and aspirations towards something more about more real outcomes, what's actually happening in the market. So what gives you the most confidence currently in achieving sustainable top and bottom line growth? Longer term and also this year's guidance, as you've reiterated several times -- you've reiterated the guidance, but you've had these supply chain challenges to grapple with as well.

Well, thanks for having us on, Lauren, and good afternoon or good morning, good evening, everybody. It's great to be with you. I couldn't have said that better myself, right? Because we are in year 2. Year 1 was a lot about telling everybody, the distributors, employees, investors, what we were going to do. And year 2 is about -- has been about delivering against that. So we are landing successes, and we're getting the wins. And if you look -- if you stand back, Lauren, and look at it, right, Miller Lite and Coors Light are in a healthy space. They're gaining share of the Premium Light segment and gosh, Miller Lite has actually gained share of the overall beer category on a few occasions and Coors Light come real close. We've had record above premium share of our portfolio in the second quarter. We're very excited about our 2 seltzer brands, Vizzy and Topo Chico, hard seltzer, and we've gained share week over week through this year as we strive to get to our 10% share goal. Our emerging growth division, we laid out a big ambitious target there of $1 billion in revenue within 3 years. And we're ahead of that goal at this point in time with brands like ZOA and La Colombe on the coffee side. So as we move towards our mid-single-digit growth in revenue this year and flattish profits and drive towards sustainable top and bottom line growth, I couldn't be more pleased with where we are, notwithstanding everything that we've had thrown at us, right, because there's a litany of things that have been shown at us over the last 2 years. We're landing successes. We're pleased about it.

Okay. Great. And I guess, since we're talking about -- that we mentioned the supply chain challenges, I want to talk quickly on on-premise recovery. I mean it's sort of the near term, the unforeseen things that come up. Good deal reopening over the summer. More recently, I think operators take a more cautious stance with the spread of the delta variant. So could you talk a little bit of what you've been seeing on this front if things are slowing in the on-premise, if there's been an offset in at-home consumption?

Well in the U.S., obviously, the delta variant has had different impacts on the on-premise in certain markets, right? But in one of the sub-channels of the on-premise like events, that is back in a meaningful way, much more than it was in 2020. And that does a number of things for us. One is, obviously, it brings more volume for us; but secondly, it gives us a real opportunity to get our new innovation liquid into consumers' hands. And we weren't able to do that last year. We think we've got gold standard world-class liquids and once consumers try them, they agree. And so with brands like Vizzy and Topo Chico and Blue Moon LightSky, this has given us a wonderful opportunity to get that liquid into consumers' hands. And that's why we're putting even more money behind our marketing efforts as sports and events come back. From an on-premise point of view versus off-premise, I mean, obviously, off-premise has got some really big comps that they are cycling. And in many instances, the on-premise can't cycle that. But it's been positive for us as we see Miller Lite and Coors Light big trusted brands that consumers are sticking with and that's been positive for us. We believe we're gaining share in the on-premise with brands like Miller Lite, Coors Light, Blue Moon, Peroni, all brands which benefit from on-premise reopening.

Okay. Have you -- just a longer-term perspective on the channel, have you seen any changes in your account base, additions versus losses? Outlets that didn't reopen, breadth, depth within an account, those sorts of dynamics?

Yes, we don't get back to 100% of outlets reopening. We're probably in the high 80s, early 90%. What we have seen is on-premise retailers being a little more careful about the number of tap handles and variety that they put out there just as we move from one variant to another. So they are tending to overemphasize brands which they know will move well and move quickly and that consumers trust, and that's beneficial for us. As I said, with brands like Miller Lite, Coors Light, Blue Moon as fine examples.

Okay. Is Blue Moon LightSky, is that something you've made much progress in with on-premise distribution? Or is it an off-premise strategy as you establish that brand?

Well, we launched it right at the beginning of the pandemic. So almost by definition, it was launched in the off-premise only. And we had tremendous success with that brand, notwithstanding the fact that we launched in a pandemic. I mean it was the #1 fastest-growing beer last year. It's -- I believe it's still the #1 craft beer in 2021. And as I said, it's benefiting from the on-premise reopening with events and our ability to get it into consumers' hands. So yes, I guess, is my answer.

Yes. Okay. Great. And any thoughts on consumer trends post recovery? I mean whatever that looks like at this point in terms of what post-recovery means or if we just are living with this forever. But yes, I'd be curious how you see that consumer trend evolving, where they're drinking, what they're drinking.

Well, as I said, they did migrate to big trusted brands. We've seen that has been fairly sticky for us. You can see that in the share trends that both Miller Lite and Coors Light are exhibiting, consistently gaining segment share week over week, and we're pleased about that. So big trusted brands are doing well. It's interesting, the above premium -- if you'd gone back to the beginning of the pandemic and asked me what would have happened, I would have expected some trade down. We saw exactly the opposite, and we saw trade up. And that's sticking as well. What they're trading up to has changed. I mean, obviously, from our perspective, brands like Peroni and Pilsner Urquell and Blue Moon are benefiting meaningfully from the on-premise reopening. And we haven't seen much of a trade down at all.

Do you think we need to watch for that to possibly shift once U.S. economic stimulus ends?

We haven't seen it in those states where economic stimulus ended several months ago. So I guess anything is possible. And if it does happen, obviously, that's not something we would want to happen. But if it did happen, we're well-positioned with our portfolio. We have brands in each of the segments. We've always said all segments matter, and they do. And we think we've got big, well-known, trusted brands in the economy if that's where the consumer goes with brands like Miller High Life and Keystone or the Steel Reserve Alloy Series as examples.

Okay. Great. As we look forward to like post recovery and revitalization would imply that you've got a very different portfolio mix than was the case prior to the pandemic, but I still do want to talk a little bit about core brand performance. You've highlighted the share performance has been great. But still, right, the brand -- the volumes are declining, right, with Miller Lite and Coors Light, just the realities of the category and the segment of the market in which those brands compete. So can the total U.S. -- age old question, but can the U.S. portfolio grow if Miller Lite and Coors Light volumes are declining? Do they need to be flat, they need to get to up? Because clearly, the brands are healthy, right? But it's the segment in which they compete is challenged and remains so.

A couple of points I'd make there, Lauren. Yes, you're right. The brands from a health point of view are healthier than they've been in quite some time. I would point out to you that both brands grew in Q2. Now we haven't been able to say that in a long time, but both of them did. Both of them continued to grow segment share. And obviously, a long-term goal for us is not just growing segment share, but growing overall share of the beer category. And we've done that with Miller Lite several times over the last year. We got real close with Coors Light. And there's no reason that both of those brands can't grow overall beer category share. Now the fact that Miller Lite did it in the face of this tremendous growth in the seltzer world, right, is -- I think it's relatively overlooked. Both of those brands are going to benefit from the on-premise reopening. They have disproportionate share in those -- in that channel relative to others. They're going to benefit from events opening up. And we spend a lot of marketing dollars behind Miller Lite and Coors Light in the sort of sponsorship space and the event space, which we weren't able to do in Q3 and Q4 of last year, right? I mean, we just -- a, there weren't that many events going on; and b, the stadiums were pretty empty. So the fact that we're back to what would -- I wouldn't say we're totally back to normal, but we're getting close to back to normal from an event point of view. The football is -- I mean you saw the college football over the weekend, right? And that's why we're ramping up spend in marketing behind Miller Lite and Coors Light in a meaningful way in the third quarter and in the fourth quarter.

Okay. All right. Great. I would say seeing those crowds doesn't make me personally feel so great, but it's obviously good for business. Okay. I also want to talk about the economy portfolio. I mean some of the premiumization math gets helped by the decisions you've made on rationalizing some of that portfolio. It feels like it's a real case of making lemonade out of lemons, and you had supply chain challenges? And then we're sort of given an opportunity to maybe rip off a band-aid that would have been hard to do otherwise. But like you mentioned, Gavin, all segments are important is something you've talked about in the past. So I guess anything -- what had changed in your thinking to give you the room to make some downsizing decisions on economy? What's the response been from distributors? And should we think about there being any impact to volumes just very short term, but over the next several quarters? Should we think about that as something proactive in our modeling?

Yes. Lauren, look, I mean, coming out of the cybersecurity attack earlier in the year, we were very clear about what our priority was. And our priority was making sure that we delivered Premium Lights and above premium to the best of our ability, and we've got those brands and SKUs back into good shape as quickly as we could. And frankly, we did better than we were expecting in terms of getting those inventories back to where they needed to be, which is going to be another benefit for both Miller Lite and Coors Light. By necessity, that meant that we had to make trade-off decisions. And we traded off in the economy portfolio, low-margin complexity, lots of changeovers. And it became obvious to us as the months went on, given the dislocated supply chain that exists in the world at the moment that it would be good on multiple levels for us to make some of these decisions permanent. So many of the 11 brands and 99 SKUs that we've terminated have been out of the market for months, frankly. I mean all the way back to the cybersecurity attack where we just haven't delivered many of them. So some of that impact's already in the base. I mean a lot of our Q2 loss from a volume perspective in -- in fact, I think almost all of it was due to economy brands and SKUs. So sure, it will impact us negatively for the next few quarters but not from a margin point of view. It reduces complexity in our breweries. It reduces cost in our breweries because we have less changeovers, longer run times. It improves these -- the inventory position for our big brands, Premium Lights and above premiums. So there are a lot of benefits associated with this decision. Of course, there are distributors that are not happy about it. And we understand that. I mean some of these brands that we've terminated are important to some markets. But we have a very clear plan with all of our distributors about what are the brands that need to replace the brands that we've moved, because we do have 4 areas that we're focusing on in the economy; economy regular; economy light; malt and ice. And we've got brand offerings that are well known in each of those spaces. And so our objective is to replace as much of that shelf space with our own brands as possible. But we're not naive about that. I mean we're not going to replace 100%. So it will have a negative volume impact in Q3, Q4 and part of Q1. But from an overall benefit point of view, this is going to be positive for us.

Yes. Okay. All right. Great. Now we'll talk about the growthy stuff. So let's talk about hard seltzer. Big opportunity globally. We know the category has slowed considerably in the U.S. and faster, I think, than most people expected, but still growing well faster than beer. So love to hear just kind of latest reads on Vizzy and Topo after the summer selling season and also how the supply situation is evolving for Topo Chico Hard Seltzer? Just broad -- have you been able to roll out more broadly in the U.S. and when you can in-house or decide to in-house production on that brand?

Yes. We're very excited about our seltzer portfolio, not only in the United States but also overseas and in Canada, Lauren. We've always said -- I mean if you go back and listen to all of our transcripts from 4, 5, 6 quarters ago, we've always said that seltzers wasn't going to grow as fast as perhaps others said it was going to. And we've also said that we're going to grow in 10%, 20% or 40%, it was going to be a big segment, and it is. And we want to play in it. And we think we've got 2 very clear winners there that differentiated. And you know what, Lauren, they've got momentum. And distributors love momentum and retailers love momentum. And both Vizzy and Topo Chico have got that. We came into this year with less than a 4% share. I think at the end of the second quarter, we had about a 6% share. I know it's only one week, but in IRR for last week that came out this week we were at 8% share. So we're pleased with the performance of both Topo Chico and Vizzy. Innovation works for Vizzy. We've gone from one big SKU variety pack 1, and we've launched variety pack 2, lemonade, watermelon. We're using watermelon to get to place in a lot of the Coors Seltzer space given that we chose to stop Coors Seltzer and focus in on the 2 brands that were clear winners. And Topo Chico, we're coming out of our supply chain shortages. I mean that brand just got off to such a -- I mean I'll stop at -- even in our most hopeful place was better than that. We've ramped up our third-party contract partners, and they've started to deliver a lot more. So you would have seen over Labor Day, we've turned on features and displays. We're starting to spend a lot more marketing behind Topo Chico because it's been selling itself up until now. And we'll go national when we feel like we can meet the demand that's out there because let's not forget that the share we're getting out of Topo Chico is only in 16 states, of which only 9 of those states are at 100%. The other 7 are in some large cities. So the upside potential, the distribution potential for those 2 is high. And then just quickly on Canada, both Vizzy and Coors Hard Seltzer are doing really well in Canada. We're gaining meaningful share in many of the large retailers. We're doubling down on our investment there. We're putting in more capital so that we can quadruple our production. And Coors Hard Seltzer is doing really well up there as well. In fact, in many markets, it performs better than Vizzy. And then in Europe, with WAI Moment, we've got first-mover advantage in Central and Eastern Europe, and we've got three-folds, which is a very fast follower behind some of the others which have launched in the U.K. And whilst we haven't seen the explosive growth in Europe yet, when you go back and look at how are seltzers developed in the United States, they didn't explode from day 1. There was the sort of gentle -- gradual increase and then they exploded, and we're seeing some of the same traits exhibited in Europe. So as we strive towards our 10% share goal in the U.S., we think we're well-positioned with the 2 brands that have got the most momentum in that space.

Okay. That's great. And then if I take a step back a little bit and just think about overall above premium, can you remind us kind of what your aspiration is for above premium as a percentage of the total portfolio? And within that, I'd love to talk more about emerging brands. You mentioned tracking above the -- your path to that $1 billion target. But how do emerging brands kind of fit into the above premium portfolio aspirations overall?

Yes. I mean emerging is our best example of moving from talking and telling to actually doing and executing. We've got some great examples there as well. We haven't put a specific target out for what we want our above premium portfolio to look like. But what I have said generally is Canada is probably about twice as big as the U.S. from a share point of view of overall portfolio for above premium, and Europe is probably 3x that. And we'd like the U.S. business to look a lot more like that over time than it does right now. And as I said, we had record performance in Q2. The targets that we have put out there is, obviously, the seltzer 10% and then the $1 billion revenue goal that we've got out there for emerging growth. And as you rightly said, we are ahead of that goal. And we've -- the area we've made the most progress on is in non-alc with ZOA. We're entering into a totally new space there. We said we wanted to get to 100,000 distribution points by the end of summer, and we did. In fact, we exceeded that, and we're returning on new big chains as we speak. And Pete, who runs the business, has been clear publicly many times that we've actually already exceeded our full year expectations for that brand. So everything from here on out is upside for us. We've also, as you know, launched La Colombe. And we had initial targets for that brand before new channels were unlocked. And in fact, fortuitously this morning, we announced that we've hit those targets, and we have unlocked more channels for our distributors, which is not really going to excite them because our distributors execute C-store like no other distribution network does. But they -- now they've got grocery to go with that. So that's been turned on. We announced that this morning, and that will come on stream as the quarter develops. Beyond that, our Latin American business has performed exceedingly well, notwithstanding some of the challenges that we've got down there from a coronavirus point of view. We've talked a lot about how cannabis is doing up in Canada. And we've now got -- I think we've said we've got 6 or 7 of the top 8 brands. Well, now I can tell you, we've got 5 out of 5 of the top THC-infused brands up in Canada. So we're very pleased with the progression of our share up there. So there's a lot of positive going on, Lauren.

That's great. What -- very briefly, I was curious that the American whiskey launch. Yes, small. So it's a point of curiosity and we'll keep it tight. But just, is -- are spirits actually an area where you think you may focus where you would look at that as another piece of the story? Or is this a fun experiment?

Well, I'll go quickly seeing as I've got the clear message from you. No, it's not an experiment. I mean, remember, when we changed from Molson Coors Beer Company to Molson Coors Beverage Company, it was always our desire to get into areas that we've never been in before. And wine and spirits was one of them. And we've -- this is our first foray into that space. We have also launched ready-to-drink spirit cocktails, whether it be Proof Point or Superbird. But Five Trail from Coors is our first move into that space, and we're -- it's very limited at the moment. It's only recently launched. I think we've launched it in 4 different markets. But the distributor network that have taken -- well, not that they've taken way, we only going to those 4 markets are very excited about it. So whiskey seems to be -- although they're very brand loyal, they also experiment. So this is, as you would like to say, our first foray into the spirit space. We've only been in a couple of weeks, but the initial reaction is positive.

Okay. Great. Tracey -- the reason I was rushing is I have to get to Tracey. So Tracey, inflation and freight remain headwinds to cost of goods, but you've got this extensive hedge book cost savings to help offset the impact. Just how should we think about margin cadence kind of through the rest of the year and even into '22 as some of those hedges start to roll off?

Lauren, so -- I mean, certainly for us, and I think really for all CPG companies, the inflation and trade costs have been the headwinds in 2021. We've seen it sort of coming out of last year, and we continue to see that going into Q3. Freight is really tight and that inflation continues. Just to give you a little bit of context, in Q2, our underlying COGS per hectoliter increased a total of 8%. And approximately 580 basis points, 5-8-0 basis points, of that was from inflation. And over half of that inflation is coming from the freights' higher transportation costs, largely due to the continued tightness in capacity and the driver shortages that the freight market has been seeing. But as you mentioned, we've got a really robust multiyear hedging program. It does help us minimize some of the impact of the fluctuations we see in commodity pricing. We hedge all the commodities that are hedgeable. And the way that we hedge is in the first year, we've got more coverage; second year, a little bit less coverage; the third year, a little bit less coverage, as our hedging team understands [indiscernible] and what is happening with commodity pricing. So that certainly does help offset some of the inflation. And then you mentioned our cost savings programs. I mean, really, it's really important to us that we deliver on those cost savings programs because it does help mitigate the inflationary pressures we've seen. And of the $600 million cost savings program that we announced at the time of revitalization, the majority of those cost savings is coming out of the COGS line. So it is helping to offset some of that inflation. But having said that, again, the freight market is the one that's driving most of the increases at the moment. And even though we do have contracts, if the drivers don't turn up because the carriers don't have drivers, we have to go to the spot market and so we're exposed to those spot rates. Just another thing on freight is as we see it continuing in Q3, the freight costs are now higher than the levels that we saw back in 2017 and 2018, if you remember what that market looked like then for freight. So it's certainly a headwind to COGS. But in terms of the rest of the year, look, we don't provide margin guidance, and we know we're going to continue to see high input cost inflation. And as we announced on our Q2 earnings when we reaffirmed our guidance, we took all of the commodity inflation that we're aware of and freight costs, et cetera, that was all contemplated in giving the guidance around the sort of flattish bottom line.

Okay. That's great. And even with all this cost headwind in the environment, I found it really encouraging to see so many companies, inclusive of Molson Coors, protect investment spending. So '21, a big year of reinvestment as planned. Second half spending is planned to step up as supply improves in the local markets and events, as Gavin mentioned. Can you speak to how you're allocating support across core brands versus new innovations? And any changes, just given delta variant, into what you are planning to spend in the second half?

Yes. So let me start and Gavin, you just -- you jump in. But for Q2, we probably didn't go into as much detail, but we certainly did increase our marketing investments behind our key innovations in our core brands. So Miller Lite, Coors Light, our hard seltzers and Blue Moon LightSky, in particular. In North America, our media was up nearly 80% over prior years. And in the U.S., we more than doubled our media spend. So we certainly are putting that pressure behind our brands. The local tactical spend is where we didn't spend as much just because of the restrictions. In the first half of the year, sports weren't back at 100% capacity, still limited on-premise festivals, fairs, those kinds of things. So -- and from a local marketing spend, we weren't spending against sports and live entertainment events as we were anticipating because of COVID and the continuing impact that it has. But certainly, our revitalization plan is about spending behind our brands, and we are doing that.

Okay. Great. And my final question was just, Tracey, if you can speak to capital allocation priorities, it's great to see the dividend return. So just [ seeing the headwinds and the ] miscellaneous buckets of balance sheet, cash returns and revesting in growth going forward?

Sure, Lauren. So look, our capital allocation priorities haven't changed. Our first priority, as I just mentioned, is to invest in our business to drive that topline growth and also to drive some of the cost savings. So we'll continue to invest behind our brands and our innovations, and we plan to continue to really prudently invest in our brewery modernization, production capacity capabilities like we've done with the seltzer capacity to support some of those growth initiatives, drive some of that cost savings and also advance towards our sustainability goals. So that's our first bucket is investing in the business. The second is continuing to pay down debt. It is our desire to maintain our investment-grade rating. We've said that many times, it's really important to us. But in time, actually upgrade that investment grade. So that is the plan. Our guidance supports this. As we said, we expect to be around 3.25x by the end of this year and below 3x by the end of next year. And then our final priority is returning cash to shareholders, and that was the declaration of the dividend that's payable September 17 of this year. So we've reinstated a dividend after a lot of analysis, discussions with our Board, benchmarking, et cetera. It's a dividend we believe is sustainable, and it gives us room for future increases as our business performance improves as well.

Okay. That's great. We are exactly at time. So Tracey, Gavin, thank you very much. It's great to see both of you, and I really look forward to be able to do it for real in person, hopefully, very soon.

Good. Us, too. Thanks, Lauren.

Thank you.