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

Great. Well, good morning, everyone. I'm Eric Serotta from Morgan Stanley's Beverages and Household Products team, and I'm very pleased to welcome Molson Coors back to Morgan Stanley's Global Consumer and Retail Conference. Before we begin, please see the MS research website at www.morganstanley.com/researchdisclosures for important disclosures. And if you have any questions, you can reach out to your Morgan Stanley sales rep. Molson Coors has made substantial progress over the past 4 to 5 years in revitalizing its core brands, premiumizing the portfolio, expanding beyond beer and building capabilities throughout the organization. Joining us today, we have CEO, Gavin Hattersley; and CFO, Tracey Joubert. Thank you both for joining us.

Thanks for having us.

Great. So starting big picture, Gavin. A little over a year ago, Molson Coors unveiled the acceleration plan to build on the progress that you made under the original revitalization plan over the prior few years. So big picture, can you discuss what the key areas of focus are for the acceleration plan, kind of your progress over the past year, and then through the areas where you see the largest opportunities going forward?

Yes. Great. Thanks, Eric, and again, thanks for having us. Look, if you go back 5 years when we launched the acceleration plan to last year when we put in place the acceleration plan, there's not a lot of difference between the focus areas that we've got. So the core brands remain the most important part of our business, and they remain a huge focus area for us. Above premium -- aggressively driving that above-premium mix is the second area and then pushing into the Beyond Beer space is the third, and capability building is the fourth. And then, of course, the whole capital allocation, balance sheet management, cash flow management on top of that. But so not a lot of change, honestly, a little -- a few extra points of emphasis. And I think you asked, well, where are we now and how do we feel about it? I feel really good about where we are. We've made tremendous progress on our core brand portfolio, not just in the United States and not just because of the dislocation that we saw last year, but also in Canada and also in our European business, tremendous progress there. We've shifted the mix of our above-premium portfolio from about 23% to about 27%, notwithstanding the big jump in the core brands that we got in U.S. last year. We've done a few things in the Beyond Beer space and our balance sheet is in absolutely tremendous shape, and Tracey can [indiscernible] little about that. But from where we were 5 years ago to where we are now, we feel really, really good about it. So yes, I feel great about the progress on revitalization, I feel great about the stock that we've had on the acceleration plan.

Great. Well, a lot to come back to there. But starting with your largest market, the U.S. and your core brands, so Coors Light and Miller Lite were already on an improving trajectory before your competitors' disruption. And as you pointed out, you've held on to a significant portion of last year's market share gains even as you've cycled that. So can you discuss your priorities for the core premium lights going forward? And kind of what gives you the confidence that you could hold on to last year's share gains going forward and even grow your market share from here?

Yes. So I mean, the data would support that, Eric. Obviously, we had the initial big spike in the second quarter of last year. I think the highest we got to was in that sort of 220-ish basis point jump. And it's settled down into that sort of 190 basis point improvement in share. And it's been fairly stable now for a while, right? And so -- I know there were the skeptics out there that said we would lose all of the share, we're not. And the latest data would suggest that it's around 80%-ish. Some weeks a little worse than that, some weeks actually quite a lot better than that. But let's call it, on average, about 80% of our core brand share. Why do I feel confident about it? Because, I mean, that is the data. The second point is that the shelf space, which really supports that, has stuck and actually has improved a little bit coming out of fall. If we were going to see a reversion on shelf space, we would have probably started to see the signs in the 4 resets. So we didn't. We actually gained a little bit more share. And so our expectation is we're going to hold on to that share as we head into spring. And then if you look at the health of those brands, going back 5 years as to what they stood for and what they stand for now and how the consumer understands them, I think it's day and night different. And Banquet is a fine example of that. Banquet, it's got tremendous momentum, it's growing double digits. Even in some weeks where you have mismatches like the Thanksgiving mismatch that we just experiences, right, I mean, Banquet is still growing double digits, it's gaining distribution, it did pick up distribution from the Bud Light situation, but it's gaining its distribution as more and more folks put both Banquet and Coors Light out there together, that distribution gap is closing. There's still a gap, and we're still working to close it. But Banquet's got all the momentum in the world behind it. So I feel good about the fact that we're going to retain the share space, yes, for sure.

Great. And you beat me to the punch with a question on Banquet, but 13 consecutive quarters of market share gains. So can you talk a bit about the growth drivers for Banquet from here, whether it's geographic, demographic, distribution, other factors? And then what Molson Coors is doing to really execute on that opportunity?

Yes. So I'm very, very pleased with the trajectory of Banquet, obviously, double-digit growth. It's actually growing faster than [indiscernible] in some data states. It's obviously got its core powerhouse parts of the country where we've always been relatively strong, and we're building on that, but we're actually gaining distribution in many of the areas where we've been somewhat weaker. And in fact, in some instances, not existent. And so as I said, distribution is a big part of it, closing the gap between the Coors Light distribution and the Coors Banquet distribution is a big focus area for ourselves and for our distributor network. And momentum does sometimes get momentum and retailers are getting behind the momentum of Coors Banquet. Coors Banquet also had a super consistent message. It really plays into that western heritage, the fire fighter program, the Yellowstone program that we put in place a couple of years ago. And so we're going to fuel the momentum behind those programs as we head into next year. So all around, feel good about it. It's not a small brand either. It's a big brand now. It's certainly a top 4 brand for us, and it's great to have such strong growth on it.

Great. And then in terms of your above-premium portfolio in the U.S., you've definitely had some successes over the past few years. But some things more of a work in progress, like Blue Moon, Simply Spiked softened a bit this year, cycling some of the big gains. So can you talk a bit about what you're doing to accelerate the growth in U.S. above-premium and sort of how that fits in with the target for global but premium mix to take it from 27% to about 1/3 over the next few years?

Yes, sure. So in the U.S. specifically, we've made some moves over the last few months, which you guys are well aware of in terms of focus, right? And so Blue Moon family of brand, Leinenkugel's family of brand are the main focus areas for us from a point of view. And we made some changes to the Blue Moon family in the earlier part of this year. We changed the packaging. We introduced a new marketing campaign. We aligned the packaging amongst all of its brand families that it looked like a brand family as opposed to 3 or 4 individual brands. We relaunched Blue Moon Light, it was LightSky and so we're much more clearer for the consumer as to what it is. And we launched Blue Moon non-alcoholic which has been really nice and incremental for that. And so whilst we've still got a lot of work to do, Eric, we measure Blue Moon family of brands on the total industry. We don't measure it on a craft, because craft really struggling at the moment. And so we're measuring success with Blue Moon on the total industry. And the last few reads, certainly for a couple of months now, it's been relatively flat, whereas it was down quite a lot a year ago. So we're feeling good about the fact that the moves we've made are starting to have the impact that we need to see. So as I said, lots of work to do, but we're happy about the progress. In terms of our premiumization more broadly, I mean, we've been very successful in Europe. More than half of our revenue in Europe now comes out of the above-premium space. Canada, we've been very successful. And Miller Lite operates in the above-premium space in Canada. It's the fastest-growing brand in Canada for us at the moment. And we've made really nice progress on flavor as well. So feeling good about the overall progress that we've made, particularly outside the U.S. Simply, it's a big brand for us, it's a $100 million brand. So I see that as a success building it from nothing. We've recently launched an LTO cranberry, which has landed very well and it's got additional interest behind the brand. We've got a C-store strategy that we're focusing on a more deliberate basis, more broadly across our business, particularly from a Simply point of view. So we'll have some very specific C-store offerings for Simply [indiscernible], which we'll be launching next year. So definitely will be a continued focus area for us. I mean, it's in 1 out of every 2 households in the non-alc space in the U.S. So we think we've got lots of upside from a distribution point of view, that's where we need to focus our attention. Less so perhaps on awareness because people are aware of the brand.

And then you mentioned that you actually gained some -- a little bit of space in the fall reset. As you look to 2025, what are you expecting in terms of shelf space growth after sort of the big gains that you had last summer and -- kind of last summer into fall and then this spring?

I mean, it was a win for us that we retained the share that we gained fall over fall and spring over fall. That in and of itself was a big win because we gained a lot. And to gain even more on that, we felt really good about it. And so our expectation is as we head into spring of next year is that it will be the same.

Great. Then you mentioned international operations. So you've had some of the strongest momentum in kind of 10 years following the company, 19 months of share gains in Canada, U.K. business is doing very well, clearly benefiting from Madri, but the rest of the portfolio seems to be benefiting as well. So how are you looking to kind of build on and sustain the momentum in the U.K. and Canada in 2025 and beyond?

It's nice to be talking about Canada in a positive way, right, because there were times in the years past where that was a little more difficult. But certainly, over the last couple of years, Canada has really been a shining star for us in our Americas business and actually as a total business. And they've been following the same strategy in Canada as the U.S. has had, right, which is that focus on the core brands. Coors Light, they've have taken a lot of the learnings from Coors Light in the U.S. and put them into Canada, and there's a cost saving there, right, which Tracey likes, but also from a brand health point of view, we've seen the positive momentum. It's now the #1 light beer in Canada, and it's been consistently that way through this year, which it wasn't in the in the past. So feeling really good about that. The whole Canadian market share, from our perspective, Canada from an overall industry perspective, has seen a fairly similar situation as the U.S., right? A little bit challenged. Our market share within that has been very strong, and it was strong last year and it's strong again this year. And that's driven off -- Coors Light being the #1 brand, we're the fastest-growing RTD supplier in the Canadian market. Miller Lite, as I said, plays in the above-premium space. That is the fastest growing brand. They're leveraging the innovation, they're leveraging our commercial capabilities that are built in Chicago. They're leveraging those up in Canada, particularly in Ontario, with the recent legislative changes, which took place, which has allowed us to gain more share than in [indiscernible] our fair share would be. So all around feeling really good about where Canada is. Across the pond, we've had massive success with Madri. I mean, that was string of pearls acquisition, which was tiny, frankly, and it's now a top 10 brand for us globally. We've launched it in Bulgaria. We've launched it in Canada. It's exceeding our budget expectations in both of those markets that plays nicely in the above-premium space. Ožujsko in Croatia and Carling from a core point of view are the numbers ones in the markets. So it's all the same acceleration revitalization strategy with a focus on the core and then premiumizing and then beyond beer as well.

Great. So turning to Tracey now. A little over a year ago, I think it was October 2023, Molson Coors unveiled long-term targets, low single-digit revenue growth, constant currency mid-single-digit underlying pretax growth, high single-digit EPS growth, all from the 2023 base. So can you help us sort of disaggregate or think about the top line drivers here between pricing, mix and volumes and then further down the P&L, where you expect to see the leverage?

Yes, sure. So you're right. So low single-digit growth, if we start with the top line and as we've mentioned, we expect pricing in Americas to be in that 1% to 2% range. That's kind of the historical range in Americas, about 1% to 2% in other countries and other markets, probably closer to inflation. So pricing is a driver of the top line. Mix, as Gavin has spoken about, that's going to be a big driver of our top line as we shift, especially in the U.S., more of our portfolio into that above-premium space. And then from a margin point of view, a couple of things going our way. So we've exited the Pabst business or Pabst out -- will be out by the end of this year, all of the Pabst business, the volume that we make for them, that was very low margin. So you can expect margin improvement from the mix, but also from a lot of the efficiencies now that we can build in our breweries or complexity that Pabst brings will now be out of our breweries. So driving a lot of efficiencies, a lot of cost savings, changeovers, et cetera. So that's certainly going to help our margins. And then we've always got cost savings programs, a lot of the investments that we've made in our breweries in the past is going to help drive the efficiencies and cost savings. So that will help margins. And then from an EPS point of view, we've got the share buyback program. We -- ahead of -- if you just divided it by 5 years, we were ahead of -- we would be -- we bought almost 30% of that share buyback within the first year. And so we'll continue on that program as well to drive the high single-digit EPS.

Great. And then in terms of the top line target, what do you assume or what do you need in terms of category growth in some of your larger markets like the U.S. and the U.K. in order to kind of get to a low single-digit top line growth?

Yes. So again, I mean, with our pricing and our mix, it does allow for some volume ups and downs or whatever to continue with that low single-digit top line growth. In terms of the industry growth and category, we don't want to forecast that. But our plans in terms of the portfolio above-premium we believe in our long-term growth algorithm of low single digits and our plans will drive that.

Great. And then with third quarter results, you did lower the 2024 top line guidance from low single digit to roughly 1% decline with some of the soft category trends during the summer, which is not unlike what everyone else saw in the industry. And if you miss the summer season, we're not going to make it up in November. But volumes have improved at least in the scanner data since late September. So what are you guys seeing in terms of category growth in the U.S. as you kind of -- as '24 comes to a close? And how does that kind of inform your expectations for the industry in 2025?

Yes. So I mean Q3 was up and down. We saw July and August down, really economic pressure, et cetera, driving that category. Then we saw September come back a little bit. October looked like it was coming back a little bit and then November started to pull back. Now we haven't finished the November month yet. We haven't got all of that data. But it's been up and down, and we expect the industry to continue to be up and down. I'm not going to forecast what 2025 looks like. But we're very happy with the performance of our brands. I mean, Gavin has spoken about it. Even over the summer, we're very happy with how our brand has performed.

Great. And then, I guess, for both of you, the convenience channel definitely went through a soft patch from all the data that we see and the companies that we speak to over the summer. I guess what are you seeing more recently in the convenience channel? And then in terms of consumer behavior more broadly as you can't take one channel in isolation, but channel pack price segment, as we've kind of moved out of what seemed like a real doom and gloom period, at least from an investor standpoint over the summer into more positive period lately?

Yes. I mean, from a consumer behavior point of view, we were seeing a focus on smaller pack sizes and larger pack sizes. And I think it's safe to say that's accelerated a little bit with the -- yes, it's accelerated a little bit. I wouldn't say it's accelerated exponentially because it hasn't, but a little bit. We're not seeing trade down from a brand point of view. We're certainly seeing consumer behavior driving to that singles and large back space, which in some cases, impacts the C-store positively and in some cases, not. And certainly, it impacts the bigger box store more positively. That's for sure. But not much more I can add to that.

Okay. And then, Tracey, turning to the cost side, we've seen spot prices for some of your key inputs rise over the past few months. Who knows what's going to happen with tariffs here, but you guys have a pretty extensive hedging program. So how are you thinking about inflation for the next year in your commodity basket? And are there other cost buckets beyond commodities that you'd call out as being particularly inflationary or deflationary?

I mean, commodity prices have moderated certainly from the last couple of years, but then we've seen aluminum spike again. And you rightly mentioned our hedging program. So we do have a robust extensive hedging program. We hedge all the commodities over multiple years. We have guardrails in which we operate, but we always have some exposure to the market. So if we see there's an opportunity to hedge further, we'll do that. But it has certainly helped take a lot of volatility out of our COGS per hectoliter metric. In terms of tariffs, I mean, we're obviously watching it very closely, nothing in certain years. I think from our point of view, what's really helpful is most of our U.S. input costs or input materials are all sourced domestically. So we should be hopefully insulated relatively around a lot of the sort of input products that -- or supply that goes into our products. And then just in terms of other things that we've done from a -- especially from a COGS point of view is, as I said, the investments that we've made in our breweries over the last number of years, whether that be driving efficiencies or cost savings, we've built new modern breweries, we've just modernized our Golden Brewery, which is our largest brewery. That's going to drive cost savings and efficiencies. So we've invested a lot in our business and in our breweries to help drive COGS, variety packing, flavor that we brought in-house, and that certainly helped a lot. So we're watching the space very closely. But I think, fortunately, we pretty much insulated from an import tariff point of view in the U.S. because we mostly domestically sourced.

And with that 1.2 million barrels of Pabst coming out, it's going to reduce the complexity, which is also going to be a...

Yes, that's a really good point. Yes, so for 2024, we estimate the Pabst volume to about 1.2 million hectoliters. And you're right, I mean, that a lot of complexity will come out of our business.

That actually leads into my next question. I wanted to come back to the Pabst wind down. So how do you look at kind of the puts and takes for that for next year and kind of the phasing of the benefits from that? On the one hand, you won't have the complexity of it. But on the other hand, you did have 3 quarters, even some in the fourth quarter of volume from Pabst in it. So I guess, is Pabst next year, a headwind from a volume and revenue perspective, but a tailwind from a profit perspective? Or how do you look at those 2 -- the sort of cross currents at the revenue and profit line from Pabst coming out?

Yes. Yes. So roughly, the 1.2 million hectoliters that we mentioned that's coming out is going to be a headwind to our top line. But it will be positive from a margin point of view. That business is very low margin. And so we are quite happy to not be in that business anymore. So low margin. But also, as I mentioned, driving a lot of efficiencies in our breweries, lot of complexity being taken out of our breweries. So it helps. We announced in October, early November that we had closed 2 of our regional craft breweries. And because of the capacity that Pabst opens up in our breweries, we're able to put that volume into our larger brewer in Milwaukee specifically. So from a margin point of view, certainly will benefit us not having the Pabst volume.

Got it. And then moving down the P&L, last year, you increased the marketing by about $100 million in the second half to really cement your share gains after the Bud Light disruption. This year, you said spending would be down year-on-year in the second half due to that comparison, but still be above '22 levels for the full year. So looking forward, are you currently running at the right annual level of marketing investment and overall brand support and do you see any kind of material changes in investment going forward?

Yes. I mean I think a lot of the work that we've done, again, over the last couple of years around return on marketing investments has helped us keep the absolute dollars down, but our marketing returns up. So for example, we've got in-house agencies. We brought some of the agency book in-house. We got our graphic studio in-house. Now in the U.S., actually about 80% of our spend is digital. So that's obviously more flexible. We can make decisions much quicker. We're able to pivot messaging much quicker when it is digital. So we've shifted a lot of the marketing spend from sort of below the line to above the line to consumer-facing versus production and that type of stuff because of the work that we've done bringing it in-house. So overall, I mean, we think that we invest the right amount of money behind our brands. Obviously, if there's great ideas, we want to fuel some fast-moving cars, we're able to do that, and we will do that. But we don't see a need for a significant step-up in our marketing dollars.

Okay. And then turning to capital allocation priorities from here. You mentioned the share buyback sort of ahead of schedule if you divide by 5, you still ended the quarter with leverage, I think, at 2.1x, well within -- well below the 2.5x target. With now kind of 30% through the 5-year, $2 billion authorization, how are you thinking about buybacks going forward?

Yes. So we've got the buyback program. With all of our capital allocation decisions, we want to make sure that we are returning the right amount to our shareholders. And so within sort of 3 buckets that we always look at, one was around the leverage ratio paying down our debt. And as you say, we're at 2.1x, which is ahead of where we -- our target leverage ratio was mean to be. But we also want to invest in our business for long-term sustainable growth. And so that might be with innovation, it might be with our string of pearls approach from an M&A point of view. So that's also a really important bucket for us. And then returning cash to shareholders, whether it be through sustainable growing dividends or whether it be to continue to buy back our shares, we'll continue to do that, but making sure that we're providing the highest return for our shareholders.

Yes. And in terms of the string of pearls approach to M&A, is the thought to still stick with that? Would you consider something larger? And can you talk a bit about the rationale behind some of your recent investments like the majority stake in ZOA, Blue Run spirits last year?

Yes. So the answer to the first part of your question is, yes, absolutely. We're going to stick to the string of pearls approach. I think it's worked very well for us. We've got numerous examples of that, whether it's the small investment we made in [indiscernible], which brought us ZOA, which brought us the Coca-Cola relationship, whether it's the tiny investment we made in Madri buying up the rest of Cobra recently, all of these things have worked well for us. Now that's not to say that everything has worked well, but by and large, feel really good about string of pearls. Now 5 years ago, string of pearls -- a pearl might have been $10 million. And with where we are from a leverage point of view, a string might be $100 million or $120 million with our capabilities and the resources that we've got to make these things work. So yes, you can expect us to stick to that strategy. In terms of the rationale from a ZOA point of view, we started off with a very, very small stake in ZOA. Obviously, energy drinks was an unknown commodity for us. We felt good about what we could do there in the relationship. And we took the stake up a little bit last year or this year, I can't remember, earlier this year. And then we went majority in the fourth quarter. And what that's going to do for us is we've been sort of in an advisory kind of role more in the past, and now we're going to be controlling marketing. We're going to have our marketing team, which, of course, I would say this, and you can accuse me of being parochial, but I think we've got one of the best marketing teams around in CPG. And now they're going to have their fingerprints directly on ZOA, whereas in the past, we haven't. We're also -- we're going to invest resources behind the non-alc space, and the learnings that we've had over the last 3 years give us confidence that we can now build out this non-alc team to a size, which we think is appropriate. So we'll be putting a lot more headcount behind our non-alc space, which will also help us with things like our relationship that we've just announced on Naked Life, for example. So that's the rationale behind it. We think we've got a great liquid. We think we've got great capability. And now we need to build on that and having a majority stake in it made all the sense in the world for us. In terms of spirits, well, I mean, it's our first foray into spirits. We started off with developing our own with Five Trail and with Barmen. Five Trail in particular, has done well from a liquid point of view. It's won numerous awards. I can't even remember all of them. There have been so many over the last 3 years since we launched it. Blue Run, different pricing category than Five Trail and Barmen. And we're on the learning curve there. We're probably a little bit further behind in the learning curve than we are on energy drinks. But we feel good about the learnings that we've got so far.

Great. And then in terms of your beyond beer strategy, what are the -- sort of what are the key building blocks or what are the key kind of pillars of that from a brand perspective of what you have in the portfolio today? Do you need more brands to bring in? I think it was a few years ago when you talked about the above-premium strategy that -- a significant portion of that, and I forgot the number was 1/3 of the above-premium growth or half of the above-premium growth, it was going to come from beyond beer. So how are you looking at that beyond beer strategy?

I think we said half was going to come from taking ourselves from that sort of 23 to roughly 1/3 of our NSR. And then from 27 to the 33 now, about half of that we would expect to come from beyond beer. Beyond Beer has got sort of 2 arms to it, right? It's the sort of alcohol space flavor mostly focused on flavor like Simply and so on, Happy Thursday. And then there's the non-alc space, which is ZOA. It's the Naked Life cocktail non-alc version. And then similar things that we're doing in both our Canadian business and in our European business. I think we've also been fairly open about the fact that we think we need something more than just ZOA, and whether that's something we develop in-house or whether we do a string of pearls approach on that is obviously the strategy that we're following. But we -- certainly, I think you can expect us to either develop or string of pearls something beyond just ZOA.

Great. And then sort of coming back, we'll finish kind of where we started, come full circle here and talk about some of the progress that you made. The company is really, I would to say, unrecognizable from what it was 5 years ago, but it just has come such a long way. As you look at capabilities from here that you still need to invest in or build, I guess, what do you see as the biggest opportunities or needs to invest? You made big progress on supply chain. I guess what are the other opportunities or areas out there that you're focused on from an organizational capability standpoint?

Want me to take this one?

Yes.

So I mean, from my perspective, I think it's what I said earlier on around the non-alc space. I think that's a capability that we need to build. It's very different to the alcohol space. We've certainly learned a lot, and now we're going to build more of that capability. So I think we've got a nice foundation. Now we need to double down on that capability. I think we've made tremendous progress in the analytics world. Our center of excellence in our Americas business is unrecognizable from what it was 5 years ago. I think our pricing capability has been building. We've always been strong in chain. So I wouldn't necessarily say that that's been a step change. We're just building on top of that. Force me to pick one thing, I'd say, our non-alc-capability space is where we're going to spend time.

Yes. I think you mentioned everything. I mean, I think we're really excited about the progress we've made on our insights and analytics, and I think we've got a little bit more to do around that space.

Great. And then pricing, you've said in the past, you expected to get back to more historical pricing trends in the U.S. in the 1% to 2% range. Can you just recap pricing that you've taken in the fall? Are you moving back more to a spring schedule in terms of pricing? And then just any consumer and retailer response that you've seen so far, realizing it's early?

Well, I mean, we saw limited price increases in the fall last year in limited markets. And I would say, it's safe to say that we've taken price in the same limited number of markets in the fall of this year. Our historical level of pricing, if you take out that one blip year when inflation was so strong and we were getting high single-digit pricing, I would say, that pricing has been fairly stable in that 1% to 2% range for a while, stripping out that one year. This year, we'll probably be towards the top end of that, taking into account what's already happened and the 4 price increases that we've put into place. So obviously hard to predict the future from a pricing point of view. But historically, it's been around that 1% to 2% level.

Great. Well, that brings us right up against time here. I want to keep you guys on schedule for your meetings today. I want to thank Gavin and Tracey, and we hope to see you here next year.

Thanks very much, Eric.

Thanks, Eric.

Thank you.