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

Okay. We're going to get started. So we've got Molson Coors Beverage Company, with Gavin Hattersley, President and CEO; and Tracey Joubert, the company's CFO. So thank you both for joining us at the conference. And I hope we won't have any fire alarms. There was a false alarm last year, so [indiscernible] to the hotel, let's keep it together this year.

So I'd love to just jump right in. Exciting times at the company, a lot of very positive developments. So I guess, to start, it would be helpful to just hear your perspective on the health of the -- your U.S. beer category overall. Industry-wide shipments have been more challenging year-to-date and since this has kind of -- even in the last month or 2, maybe, faltered a bit further versus a historical cadence for kind of like a plus 1 to minus 1 type range. So I guess, what would you say then maybe is the primary drivers of this slower performance? And how should we think about medium-term shipment growth for the industry?

Thanks, Lauren and thanks for having us. Good to be here. Yes. Certainly, if you look at the overall beer industry, it is operating outside of that sort of historic minus 1 plus 1 range. And although in the last 13 weeks, as a category, it has improved a little bit to about, I think it was down [ 1 7 ], so little bit better but still outside of that range. If you stand back and you look at it, we got off as a industry to a tough start to the year with the West Coast, in particular, had some very challenging weather conditions. It's a big beer consumption market. And so that was not helpful at all. And then it's helpful that seltzers was a few years ago to the overall beer category growth. So it's been a drag on the overall beer industry this year. And so certainly, I would point to those 2 factors. From an overall consumer point of view, we have seen somewhat of a slowdown in premiumization but still premiumizing. And that's largely driven by the -- all the seltzer phenomena. I would point to those 2 factors with a slight improvement in the last 13 weeks.

Okay. Okay. And if we focus in premium line specifically, just any thoughts on kind of sort of softer volume trends there, again, category-wise and kind of consumer behavior shifts, if any?

Well, putting aside the seismic shift that we've seen in the premium, yes, for sure we'll get there at some point. If you look at the -- it, we look at it from an overall beer category point of view. Our premium line, Coors Light, Miller Lite are actually growing overall category share, which is really important from our point of view.

Okay. Okay. So on the dramatic changes in market share in the past few months. So my understanding is that the '23 outlook -- your '23 outlook reflects the assumption that these current market share levels do hold. So I guess, first, let's confirm that is an appropriate interpretation of the outlook. But then secondly, why do you think the market share shift will prove sustainable? Kind of what are you doing to retain this new higher level for your brand?

So if you look at it from that point of view, it's been 5 months now, right? And whichever way you look at it, if you look at on the rolling 13 weeks, every single week, the numbers are the same. The trend has stuck. It's sticky. It's not changing. You might see a little bump either way in a 1-week number and there's also historical reasons for that. But when you look at the rolling 13-week the trend has stuck and there is no change on what's there in that, what we are seeing. And that's certainly not what you're seeing [indiscernible] and IRR. Now what are we doing to make sure we keep that? Well, partly the additional marketing spend that we're putting behind our brands, some of that was planned. We were always going to do this. We said that at the beginning of the year that we were always going to increase our market spend. But we have increased our marketing spend in surgical ways. We are making sure that from a retailer point of view, they understand and they do what's happening in the marketplace. They understand very well and that -- the reset process reflects that. I said on the earnings call that we had 20 retailers that had already made shifts in the fall, which is somewhat unprecedented. And I also said that every week that I spoke to our commercial folks, more people got on board with that. And the since the earnings call, we've more than doubled that. And so we...

Since the earnings call...

Since the earnings call, we're now closer to 40 retailers that have made that fall reset. So it's somewhat unprecedented but it's reflecting what's happening out in the marketplace. Of course, we'll benefit a little bit from that in this year but the real benefit of that shelf reset is next year because that will make -- that will help us make sure that what you see in the store and what the consumer is able to shop will reflect the momentum and we'll make sure that we retain the volume we've got. The other area of focus for us is in the on premises. We talked about 12,000 tap handle increase in the second quarter. And brands are built and brand loyalty is also built in the on premises. So it's a really important move for us as well. So we're doing a number of things to make sure that we retain this market share that we've got. And I know there was -- there's some skepticism and you were not one of them because I read what you wrote. But there was some skeptics as why you're spending all this extra marketing. But in the same breath, those very same folks have said, why are you spending on marketing, also saying that we're not going to retain the market share. And so we want to retain the market share and we are going to do what we need to do to make sure that we have the best chance of doing that.

Great. And if I just stick with marketing for a moment beyond the core premium light brand, where are some of the higher -- that incremental marketing spend being allocated for the second half?

You're right. It's broader than just Miller Lite and Coors Light. We're putting more money behind Coors Light up in Canada. In Canada it recently became the #2 brand, in Canada it's passing Bud Light, it's not that far away from the biggest brand either, Budweiser. Bud Light is the biggest brand in Canada. So we're probably going to fuel that momentum in Canada. Madri, which is our most successful innovation we've had in Europe. It's certainly one of the most successful innovations that we've had in the company as a whole. We're going to fuel that momentum. That brand is on fire. It has only got 40%-ish awareness in the U.K. So we're putting more money behind that brand. We're putting money behind Ožujsko in Croatia, for example, which recently went past 50% market share. In the U.S., of course, we're putting money behind Miller Lite and Coors Light. But we're also putting increased investment behind a brand like Simply Spiked, which has continued its momentum from its launch year of last year. We will invest more behind Blue Moon. We've got the Blue Moon, we've got the Blue Moon non-alcoholic version, which is launching in the second half and we'll invest behind that. So broadly bigger than just Miller Lite and Coors Light but given that they're the biggest brands in our portfolio, they will get the lion's share of it.

Yes. Okay. So also in terms of incremental reinvestment that's now reflected in the guidance, I mean, how different is it versus what was planned at the start of the year? I know you're not going to give me an actual number. But just thinking about the opportunity to say there are -- every company, every brand manager have a list of -- the wish list of things they want to support. How much of where the incremental spend is going versus the day 1 plan, it's those sorts of things. Are there products that you are going to put forward through in 2024 because it does give the possibility and the P&L is considerable to say the least?

Why won't you take that?

Yes. Look, I mean, we -- if there's good ideas, we're going to invest behind it and we've never no to a good idea. So when our marketing team comes to us with something like an innovation or they want to put a little bit more money to fuel something that's doing really well, we'll do that. But as Gavin said, I mean, we're planning to spend more this year, [ $100 million ] is not sort of totally, if not all incremental, a large part of that is what was planned. And just in terms of the sort of efficiency of marketing spend, it's not always as I said about the quantity but our marketing team has done an amazing job and should be more efficient. Running all of the marketing spend through our investment models, making sure we're getting the highest return. So that's set into a big part of it as well. So I can't tell you exactly what's incremental but the $100 million is not fully incremental.

Okay. And how do you think about balancing reinvestment versus flowing through to the bottom line? And again, given the view that the share shifts are permanent.

Again, I mean, if we -- or investment idea that's brought to us, we analyze it and if it's something that we think is going to drive value for the company, we'll really be behind it. But we want to make sure that we're investing in the business to drive that sustainable long-term top and bottom line growth. So that's how we look at it.

Okay. And this strength in Miller Lite and Coors Light, is obviously a big positive. But how does that impact your premiumization goal?

Yes. I mean, above premium -- premiumization is the second pillar of our overall strategy that we launched a few years ago. And the focus on that hasn't changed. And we've got some really great stories to tell there. I mentioned one of them, which is Madri and Simply Spiked would be another one. Most of the innovation which we are doing and have planned to do, some of which we've announced, some of which we haven't, is focused on the above premium higher-margin space. So it remains a strong focus for us. We have the goal out there to improve that to 1/3 of our NSR portfolio. We've made great strides along that path. It's obviously fantastic that Miller Lite and Coors Light are doing as well as they're doing but it's not also changing our focus on premiumizing our portfolio.

Okay. And you mentioned Blue Moon. I just would love to get an update on the latest balloon campaign. I know it was a focus area for 2023 and then some other things kind of stole the spotlight. Yes, Blue Moon, tell us a little bit -- challenges in some of the track channel data. So I'd love to just hear a bit about development there.

Yes, it is. I mean, Blue Moon, as I had said, just like craft as a whole, as a segment that has suffered from some malaise and Blue Moon is obviously part of that segment. Notwithstanding that, it's still the largest craft brand in the country. It's price figures its nearest craft competitor. Some of the challenges, which I talked about earlier from an industry point of view, impacted Blue Moon a little disproportionately because it's got quite a big market share in the West Coast. That's its highest volume state. And so challenges in California hurt Blue Moon disproportionately. Having said all that, we recognize we've got more to do on Blue Moon. And we have our distributor convention next week. We'll be unveiling some new plans for them from an overall brand point of view. We have reannounced the Blue Moon non-alc version, which I think our brew masters have done an amazing job of matching the taste of Blue Moon non-alc with the alcohol version. So that we're expecting to give a halo effect on the overall portfolio. So we're not blind to fact that we've got work to do with Blue Moon. Some of that you'll see coming up in the next 3 months or so. But the bigger impact for us from a overall campaign brand point of view will be for next year and we'll be unveiling those plans next week.

Okay. On the non-alc version, curious as to your thoughts on, I guess, launching a nonalcoholic brand underneath an existing halo versus kind of stand-alone discrete nonalcoholic brands and just sort of the interplay of those 2 things, you think it's important to have something that's simply non-alc versus just the knock on brand extension, I guess?

Yes. We've tested this one, every which way, as you can imagine, right, as to what we think will work best in our portfolio. And Blue Moon non-alc rose to the top. I mean it's a very well-known brand. It's got great quality credentials. And it's got a huge consumer following. And coming up with the nonalcohol version of that, that is -- meet the expectation that you would have from Blue Moon from a craft and a taste point of view, rose to the top of the pile of a number of different ideas. So we're pretty excited about it.

Okay. Consumers of a certain age are very appreciative of some of these launches, non-alcoholic. [indiscernible] And let me switch a bit and just ask how you're feeling about kind of current capacity and brewery network and the ability to keep up with demand. I mean, the only thing I hear from my industry contacts has been gold stars all around, the ability to keep up but would just love some commentary on that.

Yes. I mean, our brilliant supply chain has done an amazing job through summer. Part of that was because we did build up inventories coming out of Q4 of last year and we made sure that we kept them as high as we could in Q1. So we asked our network to take their inventories up, not because we expected this, right? Of course, not. But we were actually expecting something negative to happen, this happened every year for the last 3 years. And so when this positive thing landed, we were in a great place with healthy inventories because you can't just turn on a dime to make more beer. So that gave us the breathing room for a couple of weeks to ramp our breweries up and they've done an amazing job this summer. I talked about it in the second quarter call and we're almost, we're through Labor Day now and our breweries kept up their great work. I mean they've done -- they've actually overdelivered what we were hoping for from a shipment point of view. They've performed really well. It's going to give us an opportunity in the fourth quarter to perhaps do something we haven't been able to do in the -- for a while. And our workforce has really risen to the challenge over holidays, July 4, Memorial Day and it might give us an opportunity over Thanksgiving and Christmas to give our employees a lot of time off. Frankly, the amazing performance that they've achieved through summer. So, again capacity is great. And of course, there are going to be some out of stocks in the -- somewhere, with some brand, or some pack, or some SKU. But as you rightly point out, you've not heard it -- it hasn't been in the trade. There hasn't been a lot of chatter about it. And that's been our experience. But we've had some distributors which have had seismic shifts in volume trends, growth of 50% and their warehouses aren't big enough and it's certainly, you would see some level of out of stock there but their performance has been amazing. The -- we've got [ peps ] coming out. A big chunk of [ peps ] comes out in the fourth quarter. That will give us -- it has less of an impact for us from a capacity point of view in the shoulder quarters but it will certainly help us next year once we get into summer and that volume is out of our system, we'll be able to meet the demands that we've experienced with our joint venture partner, Yuengling, in the extension markets. So we're feeling really good about our capacity.

Great. Just one question here. Are there any operational risks to running the network tighter for longer than usual? Like is that pushing maintenance, things like that?

No. I mean, look, that is really important to us to make sure that we maintain our breweries and some of the capital spend that we've put in to make our breweries more efficient, to run better, we expect that this year we'll continue to spend. But no, there's nothing that I would point to that would be out of ordinary.

We always do our maintenance in the shoulder quarters anyway, right? So we always do it in Q4 and Q1 and it's planned and we'll do it again this year.

Okay. And then just you typically plan to shift the consumption each year. Is that sort of what you're expecting to do this year? Or is it a shift ahead to also rebuild?

And look, I mean, our aspiration is to shift to consumption every year. This year, what we've been really focused on is meeting demand. And so, as Gavin mentioned, marketing has done a magnificent job and keeping up with the demand and as you sort of over shifting to what we had said. So this gives us a bit of an opportunity, as Gavin mentioned, to maybe, give the employees time to enjoy the holidays this year. And then the other thing, just to mention, as Gavin said, [ peps ] comes out, a big part of [ peps ] comes out in this quarter. So at the moment, what we're focused on is just addressing demand actually.

Okay. Great. And then I know compared to like the second quarter that usually runs pretty close to full out anyway. Our math has been that you'd see a bigger benefit from positive operating leverage in the shoulder months or quarters. Is that fair? Because I think there has been some [indiscernible] struggle and Gavin's monologue, we thought it was more of a -- the operating leverage is more [indiscernible] later.

Yes, so look, I mean, obviously, it's more volume. We [indiscernible] breweries, the more leverage there if so we can spread those things out over more volume. And now it does, the composition of that volume, it does make a difference. We said that on the enterprise basis, our fixed cost is around 20% of total cost and depending on the composition of that volume. And so our different geographies have a different percentage cost saves. We've got a higher volume in EMEA, APAC relative to the higher that's [indiscernible]. But yes, you're thinking of it correctly. I mean the more we spend the better the leverage we can get out of it.

And the change in that year-over-year because they're up, the volumes are equal to...

The volume change year-over-year makes an impact.

Okay. Great. And then just more broadly, the rate of inflation is expected to moderate in the second half. So can you just walk us through the key drivers for that easing in the back half of the year?

Yes. So we've got a line of sight right now to our COGS. I mean, we've got a good idea of what commodities are doing. We've obviously got our hedge program, that gives a good line of sight too. We know what our contractual [indiscernible] are. So we do have a lot of contracts that determines our cost and then also our cost savings programs. So yes, we can see the inflation moderating now, it's picking [indiscernible] depending on the geography. So EMEA, APAC has had a much bigger inflation impact. And in North America, for example, where expect to continue to see in the APAC still having this high inflation but certainly North America, we're starting to see that inflation come down.

Let's move to pricing. So I guess, first, you're still expecting to take a fall increase. What are you seeing in terms of the promotional environment in the category? And then just a little bit overlay to it. I mean, one of the things that I've been thinking a lot about is, how much has changed in the category, in terms of category leadership, right, and ABIs will historically on the pricing in the industry? And how that may or may not change the cadence of -- and that to, frankly, of pricing that comes through?

Yes, we will be taking a price increase in the fall. It will be, as we always do that, brand-by-brand, market-by-market, SKU-by-SKU. So we won't take a price increase in every market. We won't take on every brand. We won't take on every SKU, right? And we'll be surgical about it. I do expect that the comments that I've made in the past about reverting back to the historical sort of average of 1% to 2% is the most likely outcome for next year. In terms of the overall category, we've long punched above our weight from an overall category [indiscernible] shipment point of view. And we -- it's a competitive advantage for us. And certainly that's helping us now as we work with retailers on shelf resets as we show it in the facts and the velocities and what needs to change. And for those changes that have already taken place, frankly, we're the big winner. There are 3 clear winners of this shelf reset space that we're seeing at the moment, is ourselves, [ peps ] would be out there and Yuengling, not only in the markets in which we operate with them but in their home markets, those are the 3 clear winners we're seeing that's -- it's something we're emphasizing.

Great. Let's switch back to Europe. So you've brought up Madri a couple of times. Madri, I guess, I should say, provide emphasis on the right side. What is it about that brand that's just such an overwhelming success in the year?

You know, I would -- that's a great question. I pointed 2 things, right? We met a consumer need, there was a demand from the consumer for refreshing Mediterranean-style lagers. And we [indiscernible] acquisition of a Spanish brewery and we launched that brand and we used our strength in the U.K. to do that. Our strength in the U.K. is the on premises. It hurt us, obviously, during COVID but it's -- we've come out of it, out of COVID from an on premises point of view, capability point of view, than we were getting in. So we leveraged the strength we had, which is the on premises and we met a consumer demand that they wanted. And the success of that brand has been astronomic. I mean it's beyond our wildest expectations. And we think we've got a significant upside for the brand given the low awareness that still exists. But when something is super successful in the on premises, that's where you build brands as we build consumer loyalty. The demand for it then came in the off premises, which does move into the off premises faster than we were, perhaps anticipating. So right now, our focus is on the U.K. and meeting the needs and growing the brand in the U.K. But it is certainly a brand that we will look to expand beyond the U.K., either in Europe or elsewhere. It's just phenomenal success.

Great. We do keep hearing about the tough [indiscernible] backdrop in Central Europe, you have real exposure. So what are you doing to kind of keep up consumer engagement in those, that region in particular, just given the challenging macro?

Yes, we've long talked about that one as being the most challenged market area that we operate in, disposable income is tough, inflation is high. There's consumer sentiment, given what's going on around them. It has been tough. So there's no doubt that that's a more difficult market for us. Inflation was higher, we get large price increases into the market. We probably won't -- well, we will be more, we won't be putting in those levels of price increases into the market in the coming year. And we're investing behind those brands, which are working and working well, like Ožujsko we just got in Croatia. Staropramen is doing really well with its new campaign. Obviously, Madri is a investment focus for us and then we've recently upped our spend behind [indiscernible] and Coors Light in the U.K. market. But in Central and Eastern Europe, more surgical, I would say, those brands which are working and working well. We're putting a little bit of extra focus behind it.

Okay. Let me shift gears to look at beyond beer. You made an interesting spirits acquisition in August, with Blue Run. Along with an announcement, you shared the plans to establish the Coors Spirits Company. So that will have all of the other brands in it. So what's the strategy there? This is something new, so it's a good opportunity to talk a bit about it. And how should we think about the opportunity and necessity to scale that business for it to be something that can move the needle?

Now if you remember back when we launched the Revitalization Plan, we just -- we said we wanted to move beyond beer. Whilst core was always going to be our focus and light premium beer was going to be the second focus. Going beyond beer was our third big priority. And we've felt homed in where we want to focus. So certainly, in the non-alc space with an energy drink focus, particularly and potentially something else and then in the spirits world. So we launched the Coors Whiskey Company last year or the year before. We launched Barmen and we've spent a lot of time looking as to what brand fits with our overall strategy from a premium point of view or margin point of view and just an overall brand point of view and we landed on Blue Run. It's a wonderful brand. We're very excited about it. We're excited about the partners that have come with it. We think there's tremendous upside for that brand. And then, of course, we get economies of scale with what we already had, which was Coors Whiskey Company. So it's right in there, it's right in line with our strategy and it's right in line with our string of pearls, in M&A approach, which we've talked a lot about as well. We think we're good at string of pearls approach. I think it's added value for shareholders, also something we wanted to focus on going forward. And this is an example of that.

Let's talk a little about the market for RTDs. So there's so many brands out there, right? And the consumer has been super experimental. I mean you could even argue, I know seltzers are going to be but you've kind of seen that dynamic as well as the experimentation, the big surge, now we're going the other way. This great partnership with Coke. How do you see it all shaking out? Like, kind of, what's the right business model to participate in this space, given there's seamless churn, right, where's so much activity.

Yes. So we for quite a while now, have been looking at this more from an overall flavor point of view, so not just seltzers but also flavored malt beverages because of this churn that has taken place. And so if you look at total space, flavor, I think from an overall growth point of view, it's still growing. Seltzers is down a lot and some brands within seltzer are down quite a lot. But then flavor with brands like Simply Spiked are growing very nicely. Some of our competitors like [indiscernible] growing very nicely. So the overall space is still -- it's big, it's still good and it's a place we want to play in. In terms of our partnership with Coke, we like it, right? I mean we've got some great brands from them. We're launching a new brand with them in the fourth quarter, Peace Hard Tea. We will launch that in the Southeast. And so this is a relationship that we think is working really well despite -- had a great introduction here. It's growing very nicely even on top of some of those really big comps in this year and we're going to double down on that as we go forward. So I think there's lots of runway in terms of our relationship with Coke.

And I guess just when I think about business model, I guess, what I'm also thinking about is because of the churn, thinking about return on investment, right? And that's like picking the winners or how do you -- you've got plenty of flex in the P&L right now, obviously. But if you think about how much to invest or seed some of these plans or garnering shelf space, I think, how are the retailers, I guess, I'll point to the distributors dealing without working through that, the increased complexity there, picking the winners, what scales, what disappears, kind of is a very different approach than what would be core company historically, with Miller Lite was a big core stable brand. So what is that adaptation that you needed to make in how you operate versus [indiscernible]?

Our distributors are really good at operating with quite a lot of complexity. They -- most of them deal with a ton of brands and a ton of SKUs and they are really, really good at it. It's one of the advantages of our particular network, is they're used to dealing with that scale and complexity and breadth and depth of brands. So that hasn't been a challenge. And our distributors, of course, love momentum, so do our retailers. And so when they see momentum like they're seeing with Simply Spiked, they get behind it in a meaningful way. From an investment point of view, the moves that we've made, not only in this space but for example, our relationship with Yuengling which has been absolutely fantastic for us. And that's gained significant market share and it's a new market -- new markets we're entering into this year, Kansas and Missouri and Oklahoma. We haven't had to put a lot of investment behind that. A little bit of capability in our brewery network to handle a new brand but it's not anything like you would expect, returns on that particular investment, for example, are very strong. And then from a flavor point of view, we always make sure that whatever we're doing, we try and make sure that it's flexible enough. For example, we've got a new variety pack investment, which came live a couple of months ago, which certainly has and will continue to reduce the overall cost structure of our flavors. But those lines have the capability to operate broadly. It's not just Simply or [indiscernible]. It's got broad capability. And the same can be said for the slim can lines that we put into a number of our breweries, they can operate beyond just the flavor space. So I think we've got better and better at that honestly.

Okay. Maybe we've got time for one more question. So I just want to close out and talk about capital allocation. So you've reached your target leverage ratio, business is throwing up more cash given the step-up in sales and profits this year. So I guess, if at all, how have your priorities changed? And how should we think about M&A as you're going forward?

So our capital allocation priorities haven't changed. It's all those 3 buckets. We're going to continue to invest in the business to drive top line and bottom line growth sustainably. So that could be investments in brands. It could be investments in our breweries to drive cost savings or efficiencies or it could be M&A. And Gavin has spoken about, we're not going to be doing huge transformational deals. We are looking at the string of pearls approach, bolt-on, filling the white space or some kind of strategic area. So that's #1. #2 is, to pay down debts. We do want to improve our investment grade rating and that's really important to us. So we'll continue to look at that. And then thirdly, is returning cash to shareholders. So the priorities haven't changed. What's great about our performance this year and actually, to be honest, our performance over the last number of years, was our active cash flow generation as we now have more optionality. So we can better balance that capital allocation across those 3 buckets. And we continue to have conversations with the Board, and we've got our Strategy Day coming up and we'll give a little bit more about our strategy and how we're approaching our capital allocation.

Okay. We'll stay tuned. Good. Thank you very much for joining us. We're going to be seeing you again in a few weeks. Thank you.

Thank you for having us.

Roger that.