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

Good afternoon. Robert Ottenstein here from Evercore ISI's Global Beverage and Household Products team. We're obviously very thrilled today to have Gavin Hattersley, the CEO of Molson Coors Beverage Company. A lot of ground to cover, so let's get right into it.

So Gavin, what I'm going to try to get at today, overriding things, obviously a lot of disruption in the U.S. beer industry. You're benefiting from that and I think what investors would love to know is to what extent you can just change the overall trajectory of your business longer term, taking advantage of the current disruption. And I think the good news is that you had already started to do that even before all of this happened. And specifically, even before the Bud Light controversy, Coors Light, Miller Lite seem to be on a little bit better footing. So I was wondering if you can kind of discuss about what you did to put Coors Light and Miller Lite on a better footing pre the Bud Light controversy? And then how that strategy is developing today.

Yes. Thanks, Robert, and thanks for having me on. You're right. Our core brands are healthy. They've been healthy for some time now. They were healthy coming out of 2022, and they were really healthy coming out of Q1. We've got a good first quarter. And we felt really good about where Miller Lite and Coors Light, in particular, were, and that obviously is before the current situation, which is obviously in front of us. If you go back, the combination of Miller Lite and Coors Light has been growing share of premium lights every quarter now for more than 8 years. It's nearly 9 years now. And it's all the collective efforts since we made our changes several years ago when we launched our Revitalization Plan back in September of 2019. We've built on their strength, we prioritized that. We prioritized our core portfolio. And I think that's positioned us well. Our marketing team has done a really good job of ensuring that Coors Light and Miller Lite have really clear differentiated brand positioning with -- Coors Light owning refreshment and Miller Lite owning beer taste, each of these brands is resonating with consumers. It's -- they're really in culture and they're doing that in a different way that allows really clear swim lanes for each brand. So yes, you're right. We had healthy brands coming into this situation, and we've still got healthy brands.

And how -- if given that you have that momentum, you have more of an opportunity, is -- what -- are you doing anything differently just, again, just focused on Coors Light and Miller Lite to take advantage of the current opportunity?

I guess, Robert, the risks have been compared to Taylor Swift again, I would tell you that our approach and our strategy is not changing. Remember, when we had our earnings call for Q4, and we had it again in Q1, we were very clear about the fact that we were going to increase our marketing investment, particularly in Q2 and Q3 during the peak selling season and sort of leaning into that brand health of Miller Lite and Coors Light. And we presented many of those brands to our distributors last year in September. So we've built our brands very deliberately over the past 3 years, and we've seen the progress because of that. Coors Light and Miller Lite, as I said, were healthy. They grew NSR in 2022. They combined to do it again in the first quarter, and that tells us that our strategy is working. And so you're going to expect us to continue to lean into that same strategy.

Right. But does it -- given the opportunity now, does it make sense to double down on that strategy. So if you were going to spend x, budgeted x, why not spend 20% more given this is a momentum business, right? Beer is a momentum business, why don't you just kind of increase that momentum to keep this going?

I'd answer that in 2 ways, Robert. I mean, we had good and strong plans for Q2 and Q3, right? And so we're going to lean into those plans as we were planning to do. There is a point where you can lean in too much and that you're -- I think we become really much better at marketing effectiveness and understanding what's working and what's not and what's too much and what's too little. And you can overdo something, right? I mean if you're showing a commercial 3x in a baseball game, I'm sure there's much benefit to showing at 4x. So we have our plans, and we're going to execute against those plans. And we think they're robust.

Great. Great. So Miller Lite, Coors Light are working, if I look at some of the other brands, Blue Moon, Peroni, Sol, Vizzy for instance, they're not doing as well as I would think they could do, particularly Blue Moon and Peroni, which are fabulous brands, fabulous liquids. Do you have the opportunity now to maybe double down on those or maybe had you already planned to. But given the extra dollars that you're going to be getting at least for now, can you put some of that to work to improve the trajectory of those brands?

Robert, our plans obviously are broader than just our core portfolio. Although in line with our Revitalization Plan, our core portfolio is always the area that we look at first. And I'm really glad we did that over the last 3.5 years, but expanding our portfolio in the above premium space and beyond beer has also been a core part of our tenets of our Revitalization Plan. And so we had plans against both of those, other 2 strategies as well. And so we are and have been leaning into brands like Peroni, for example. We've got -- we're leveraging the partnership that Peroni has got with the Formula 1 racing team on 0.0. The -- and so we're leaning into that. We've just launched Peroni 0.0, which will give a nice halo to the Peroni mother brand. We are investing behind Blue Moon and Blue Moon campaigns and not obviously going to share details on this call about some of the areas that we're going to lead into with Blue Moon over summer. I mean Blue Moon has been a little bit affected by the tough conditions out in the West Coast, it has got a strong foothold on the West Coast. So as the weather was so difficult in the first part of the year, Robert, Blue Moon suffered a little bit because of that. But you're right, it's a great brand. It's got great equity. It's got great presence in the on-premise and we'll leverage that.

All right. So if we kind of stand back and just focus on the beer area, and you're doing stuff beyond beer, and we'll get to that later, Gavin. But craft kind of had a nice 10-year run, has kind of peaked out, not really growing much. Hard seltzer was a rocket and came down almost just as fast as it went out. Who knows what's going to happen with the RTD business in general, probably some growth. But when you think of the beer business broadly defined over the next 5 years, where do you see that going? And you're really kind of getting into the position potentially of a -- and you always have been, but really kind of taking the lead in terms of developing the core categories. So there -- are there any things that you can do to drive the core beer business category that maybe you hadn't done given that the focus should be on presumably core beer given that some of these other craft and seltzers kind of petered out now?

Yes, Robert. Look, I mean, obviously, beer has been around for 1,000 years. It's a huge category. It's the alcohol of moderation. And in Q1, it actually took share of total outcome. Yes, well, hard seltzer is down. It certainly helped the beer [ category ]. And it's a big segment, right? I mean I know it's down a certain percentage, but it's still a big space. It's still sort of settling down into that sort of big percent of the total beer category. And it's been very helpful from a category point of view because it's much more sessionable than craft, right? That was always the challenge with craft, not necessarily sessionable. And it's brought new drinkers into the category. And it's flavor is also a very positive momentum driver for the category. It appeals to younger and legal age drinkers and that's an area that we're leaning into strongly with Simply Spiked Lemonade and Simply Spiked Peach. And to your point about premium beer, we see that, that's going to -- we've been a little bit of an outlier there, Robert, if you remember. We've always felt that Core beer is important. Premium lights are really important. And we think they're going to continue to be a strong segment within beer at the same time as flavor is. And I would expect us to see continued premiumization, and we've been leaning into both of those spaces.

Let's touch on the beyond beer space. You made a number of forays there. One of the more notable was the ZOA and I've got -- this is kind of an old can of the ZOA and this is a new one that I'm drinking now, very different. So can you talk a little bit about what you've learned from that process. And are you still excited about ZOA? And what are you doing to drive further excitement with the consumer?

Yes. Look, I mean, as you rightly say, we've made lots of forays into beyond beer. And I think it's safe to say we've learned a lot, and we're pleased with the results that we've got so far. In our direct answer to your question around ZOA, yes, we're excited about it. We think -- I mean this is a massive category. We think we've got a brand that we can really do something with, with gaining distribution. You've highlighted the facts there and did a nice job of advertising how bright and vibrant that new package, Robert. So we like it. We're excited about it. We've got plans behind it. On the flavor side, as I referred to in your last question, it's a growing segment. We're outpacing industry growth. Our partnership that we have has been important. And through that partnership, we've brought Simply and Topo Chico to life in both the U.S. and Canada. We talked about when was it? April. Expanding our partnership with Coca-Cola Company with Peace Tea. And so that's another addition coming to the shelves later on in the year. And we've been successful with these brands. I mean Topo Chico itself is now the #3 hard seltzer in the segment. And in FABs, as I said, Simply Spiked has been a massive success since its launch in the summer of last year. It's the #1 New Innovation of the summer. It was also the #2 new product launch in total beer for 2022. And as I said on the previous question, both Simply Spiked Lemonade and Peach are top 10 growth brands. So it's fair to say that this brand has over delivered on our expectations, and there's lots of runway ahead, lots of other offerings in this space as well. I mean, Arnold Palmer Spiked continues to drive strong growth in [ tiers ]. It's grown double digits every year for the last 3, I think. It's up over 20% year-to-date. Prior to these spirits, we've just launched Topo Chico Spirited, which is our first foray into the spirited world. We're going to put -- a meaningful media retail and sampling behind that brand. We've got Coors Whiskey Company. We launched that about 18 months ago. We're in around 20 states, I believe. We started off with only 1 SKU. We've added 3 limited offerings to that. And this spring, we just launched a new brand, Barmen bourbon. We've established production, distribution, we've learned a lot. We're learning how to drive awareness and like the margins for sure. We're building relationships with the chain of spirit buyers, which is different to the beer buyers. So we're pleased with our progress in beyond beer, and we think there's an opportunity for us to expand our distribution in our portfolio in this space. And that's the plan, Robert.

Great. Great. So I'm just looking at kind of the 4-week Scanner data, Coors Light volume up 20% plus, Miller Lite up 15% plus. Would it be fair to say -- and that's the Scanner data. Would it be fair to say that you're actually doing even more when you bring the on-premise in?

Well, look, I mean, obviously, these trends are existing in the on-premise as well. And I think we'll probably be in a better place to give you more detail on that, Robert, at our upcoming earnings call. But certainly, the trends in the on-premise are positive for us as well. And Canada as directional. We'll give you an update on the Q2 earnings.

Well. I would think they're about doing even better on-premise than off. But the bigger point though is, right, is up 15%, up 20% versus trend line of flattish to down a little bit. So this is a dramatic change in the business. And what I'd like to get you to kind of think about, reflect on is how is your brewery infrastructure reacting to that? How is your supply chain reacting? You've done a lot of investment in Golden, you consolidated in Canada. There was some talk at one point of kind of cross-border logistics to optimize North America as a whole. So just really love to get your thoughts on how your brewery footprint and how your supply chain is reacting and are you able to fully capture all the increased demand without incurring sort of like special overtime costs and additional costs that you would normally have.

Great question, Robert. The one thing you forgot to mention was obviously the positive leverage that comes out of this. And so significant extra costs, I would say, no. We've got -- we've always got plans heading into summer to ramp up production. We always bring in summer seasonal workers. We expand shifts, expand over time. So we do that as a matter of caution. Of course, we're leaning into that right now. And because of the increased volumes, obviously, we've got the impact of positive leverage as opposed to negative leverage. I have been -- I've been fairly consistent and we're super proud of how our supply chain team has reacted pretty much on dime, right? And they've become used to dealing with any number of different challenges over the last 3.5 years. And obviously, this is a different kind of challenge. And our breweries ramped up production pretty much from day 1, and they're holding their own. We always see a drop off in inventories coming out of Memorial Day and also coming out of -- we'll see it coming out of the July 4, and we'll see it coming out of Labor Day as well, Robert. That happens to us every single year. In terms of outside of that, I think our supply chain teams are doing a nice job keeping pace. That's not to say you're not find out of stocks, right? We always have some level of out-of-stocks with our distributors. And there might be a particular situation in a particular area with a particular distributor that might be driving lower days. But from a national point of view, our teams are doing a nice job keeping pace with this extra demand. And that's partly because we came into this year with higher inventory levels, and we came out of Q1 with higher inventory levels, really worked well with our distributors to build inventory because we've had challenges of a different nature every year for the last 3.5 years. So we wanted to make sure we were in a good shape from an inventory point of view. Obviously, we didn't, for a minute, think that this was a possibility, but our teams are doing a nice job of keeping pace. Yes, we've invested behind our breweries. We always, as I said, have plans coming into summer. We've also been clear that our contract brewing relationship is coming to an end over the next 18 months or so, and a decent chunk of volume is coming out in the back half of this year and then the rest of it will come out next year. And of course, that gives us flexibility to utilize some of that capacity, which we might have been making different decisions about. We might -- it certainly gives us the opportunity around the shoulders to make slightly different decisions and run Miller Lite and Coors Light and some of our other brands. And as you say, we do have the insurance of the 2 new breweries in Canada, if we needed to do that. Remember obviously, we don't have unlimited capacity, Robert, we just don't. But we're in reasonable shape at the moment. We're in good shape. Our supply chain is doing well.

I mean the breweries, at this point, they're pretty automated. I'm guessing there's not a lot of incremental costs, except for cost of goods sold. Obviously, you have more inputs that you need. So just kind of going through the cost structure, Gavin. What -- obviously, you need more of the raw materials, any supply issues there? And then in terms of your sales force, what's the split between salary and commission, just trying to understand the -- how this can flow through the income statement.

Robert, I think the best way for me to answer that question is the positive benefits of leverage. And there was a quarter last year, I think it was Q2, where we had the opposite effect of the strike. We had a fairly significant down quarter from a shipments point of view. And so as you look at our business, it will work roughly the other way around, right? So we're certainly experiencing the positive benefits of all this extra volume that's flowing through our system from a leverage point of view. Other than that, the sort of costs of our business don't really change that much from a sales point of view. We don't provide slips from a base and an incentive point of view, Robert. So I can't help you with that. But the best way to look at our business is through the lens of what happens when we have meaningful shifts in volume. And over the past few years, those have tended to be negative, and this is a positive, but it works both ways.

And in your relationship with the distributors, is there anything there that's volume-driven? So do you get operating leverage or deleverage just in terms of the terms with the distributors in what you pay them? Or is it kind of a straight amount per case?

Yes. Look, our cost structure with our distributors wouldn't vary from a volume point of view, Robert. So there's no up or down there.

Okay. Great. We've talked in the past, and we haven't talked about it too much, just changing topics for a bit. On the international potential of Coors Light, Miller High Life, particularly outside of Europe. And there were a lot of initiatives that you had been working on a number of years ago. We haven't heard much about that recently. Is -- are those initiatives still happening? Or have you kind of just really redirected the focus of the international business now?

No. Not at all, Robert. I mean, Coors is one of the -- it's a focused brand for us. Unlike the U.S. where it's a core brand. Outside of the U.S., it's an above premium brand. So it's one of the focus brands that we have in our above premium strategy. It's currently having a tremendous performance in the U.K. and Ireland. And you're right, we probably should talk more about it, right? It's performing really well in a couple of export and license markets, and we're expanding its footprint across some of the export and license markets in which we operate. The Miller brand family, our focus is actually on expanding MGD. We've obviously had some tough comps given our decision to exit the Russian business right at the beginning of the war, also operates in the above-premium space. And we have expanded into some other export and license markets where we see potential for growth. So yes, our global brands are performing really nicely outside of the U.S. in an above-premium space. And I don't think I alluded it to on this call, I think it was the previous one, but in [ Madri ], we've got an above-premium, brand new innovation in the beer category, which certainly is going to be our best new brand launch in the European business maybe ever. It's already one of the -- I think it's in the top 5 above-premium brands and our total portfolio around the whole world. It's growing very strongly. It's past brand Budweiser, on and off combined. It's bumping up again still Stella Artois in the on-premise. And we're very excited about that brand. And whilst obviously, the U.K. is our primary focus with that brand, it's certainly something which we look at beyond that as well. So there's a lot of exciting activity in our European business as well.

Circling back to the U.S., we haven't talked that much in many of the calls on the economy brands, the so-called value brands. But if you look at the trends on Keystone Light, Miller High Life, those brands have gone from being pretty flat to down to also being up, right? And that is a sector where actually your major competitor, Busch Light had been doing pretty well. It's gone south now. But Busch Light had been doing well because they had actually tried to invest in the brand and build out that brand, which is something that most of the brewers had not paid much attention to on the economy side, they made all their investment, obviously on the premium. So given kind of the change of the landscape now, Gavin, is there anything specifically that you're thinking or now doing in terms of Keystone and Miller High Life to take advantage of the current disruption?

Yes, Robert. Look, I mean, we've always said all segments matter, right. That's been a mantra of ours for a long time now, right? There is a drinker that wants their brand and they happen to be in the economy space. And so again, I think we've got a strong and focused economy segment. And we haven't seen any trade down, but -- I've also been clear about the fact that if we did see trade down. I think we've got a really solid 4 priority brands, which consumers can come to, Keystone Light, Miller High Life, Icehouse and Steel Reserve Alloy Series being the 4. And again, we're benefiting from the fact that -- I think it was 2021, where we had that SKU reduction primarily or almost entirely in the economy space. It's certainly made it easier for us keep up with demand now from a simplification point of view, but it's also allowed us to really focus in on those 4 priority brands. And yes, but Busch Light had a strong run. They've had some great marketing campaigns. But our economy portfolio has been doing well. In Q1, those 4 brands grew NSR. And yes, we're seeing recent strength behind Keystone Light and Miller High Life, and that's the result of the focus that we put on those priority brands.

Great. Great. So what I'm -- I think I'm hearing from you is that you're already in a good trajectory, you've already -- you've got plenty of capacity, you don't have to step up advertising very much. It sounds like the operating leverage here is really going to be pretty tremendous, and it sounds like you're going to let most of that fall to the bottom line because I don't -- I'm not hearing anything about additional, I mean, spending plans, you talk about lean in, but that's a fairly gentle term. So would it be fair to say that most of the windfall here is likely to go to the bottom line?

Robert, I'm not going to get into providing guidance on this call. We...

That's not guidance. That's just sort of a high-level sort of which way the wind is blowing question.

Yes. Look, I mean we -- as I said, we had strong plans behind marketing. We plan to increase meaningfully in Q2 and Q3. We can always be -- and we're consistent about this, that we're flexible from a marketing point of view. We can lean in if we chose to. And because, as I said, we shifted 50% into the digital space, we can dial in or dial out depending on what's working and what's needed. I will be in a great position come Q2 earnings, which I think is in that first week of August to give an update. We'll be pretty much through summer. I mean, obviously, we'll have a few weeks of August left, but we'll have a really good outstanding. I mean, we're already starting to gain an understanding of the stickiness of this. You can see it in the Scanner data yourselves, Robert. It's the fact that our market share gains are holding. And yes, I think we've got great plans.

The pushback or the concern that obviously people have is that your competitor is going to have to promo their way out of things, and there's mixed views on whether that's happening or not. They say that basically, they're just playing with their own game plan that they had at the beginning of the year, and it just happens to be timed for the summer, other people beg to differ. What does the promo environment look like to you going into -- or actually, I mean, we started the summer really at this point. So is it more promo than pre-pandemic? Is it more promo than usual? Are you starting to get concerns there? I'd love to get your thoughts on that, Gavin.

Thanks, Robert. Look, I mean I think the first point I'd make is that promotional activity is not as broad as what you might conclude based on what you might see or hear in the media. Obviously, there were some well-publicized promotion activity around Memorial Day. And I think it's fair to say if you look at Scanner that we held our market share gains that we've had over the last 8 to 10 weeks. As far as our pricing decisions go, it's -- we're going to do what we always do, which we make that decision on a brand-by-brand basis. We look at it by SKU. We look at what's right for our brands and making sure that we take into account the impact of anything on brand perception or brand health. And so we'll take all of those factors into account as we decide how we want to price our brands.

Great. So Gavin, I'm going to give you a few minutes to sort of summarize things. And maybe, I don't know, pretend that you're talking to your Board of Directors and that -- there's this pesky person on the board saying, look, Gavin, it's better to be lucky than smart. In a way, you guys have been lucky. What are you going to do that smart to really capitalize on this for the long term for investors. So let me kind of throw that out there and just kind of give you a few minutes to address that and summarize things.

Robert, I'm going to answer that by saying we launched our Revitalization Plan 3.5 years ago, right? And we had a very clear objective with that Revitalization Plan is that we wanted -- through the 5 pillars that we put in place, we wanted to drive the top line and the bottom line of our business. And it's fair to say that we made some challenges over the last 3.5 years. Some of them potentially have our own making and many of them not. And despite all of that, our strategy is working. We're executing against it. And we delivered top and bottom line growth last year. Our guidance is for top and bottom line growth this year. And our Revitalization Plan is designed to make that a sustainable, consistent sort of algorithm for our company, driving top and bottom line growth at the same time. And lucky, it was a very conscious decision of ours to increase inventory at the end of last year in Q1 because we felt based on all the negatives that had happened to us over the last 3.5 years, that it wasn't even conceivable that we'd faced another bump or rock in the road. Now as it happens to be the case, it's been on the positive side. And I think we've put ourselves in a great position with our inventory levels, working with our distributors to make sure that we can meet the -- this unprecedented demand that's out there. And as I said, our brewery is doing great job on that. So that leads us to -- we've got a strong balance sheet. We've worked very hard over the last 3.5 years to delever our business. We got below 3x at the end of last year. We've got that goal out there to get to the 2.5x level, and that gives us optionality. And we're not going to deviate from our string of pearls M&A approach. And we'll -- I would be telling the board we can have conversations around what capital allocation priorities and decisions that we want to make. So I feel like our strategy is working. It's at the right focus areas with core, and above-premium, beyond beer and building capabilities. And I'm feeling really good about our ability to execute against that, Robert.

Terrific. Gavin. Thank you. Really appreciate the time today. And best of luck through the summer season. Thank you.

Thank you so much.