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

Okay. We're going to get started. We have Molson Coors Beverage Company next. Very happy to have the company's CFO, Tracey Joubert, with us today in Boston. And also Traci Mangini, IR. Thank you for joining us on the stage, a little female power up here.

Okay. So still lots of debate on whether soft alcohol consumption trends in the U.S. are cyclical or structural. I know you've leaned towards the former. How do you assess the industry's response to the slowdown in category growth? And what more can or should be done?

Okay. Good. Well, firstly, thank you for having us. It's really good to be here. So look, we do believe that the industry softness is cyclical. We believe that it's being driven by macroeconomic factors, which is driving consumer sentiment and consumer uncertainty. And in particular, we are seeing a bigger impact on lower-income consumers and Hispanics, where we are seeing less buyers and also shift to singles. So we are definitely seeing a dynamic there. In terms of what can the industry do about it? Well, I can tell you what we're doing about it. We believe that we have the right strategy. Over the last number of years, we have been developing a more robust portfolio to focus on not just Beer, but premiumization within Beer and also premiumization being driven by Beyond Beer and also investing in our capabilities. Now with the softer industry, we are also taking actions. So we are looking at nonbusiness-critical discretionary spend where we have pulled back. And we're also looking at efficiencies, driving efficiencies in our breweries, whether it be how we're operating our line, how we're using capacity, et cetera. So we're taking a lot of actions to make sure that we're investing in the right places to grow our brands and grow our business and drive cost savings and efficiencies.

Okay. Great. And even before the industry had suffered from a few years now of 3% decline, you were already working on diversification efforts, Beyond Beer. And I know we'll talk a bit more about it later, but it's interesting to also see beer distributors increasingly going that route as well. Back on this question of the notion of what can the industry do and are they doing enough? Is there a risk that it almost becomes a self-fulfilling process that the industry, that the distribution tier that everyone pulls back too much from supporting beer?

Yes. Look, I think -- I mean, big beer is really important, and it's important to us, and it's important to our distributors. So when I talk about big beer, I'm talking about high velocity, which we see in premium lights. I'm talking about higher margin. And that's important to us, our distributors and our consumers. But we also need to make sure that we're looking at where the consumer is going and catering to the consumers' needs. And therefore, we have -- and we are developing a broader portfolio to meet the consumer preferences and also add to occasions that we don't currently operate in or where we can broaden those occasions. So as we talk about our portfolio, as I said, Beer is still really, really important. But we're also playing in categories where we are seeing growth, might be small, but growing like non-alc beer. So we have 2 wonderful brands, Blue Moon Non-Alc and Peroni 0.0, really great liquid. They taste very much like the mother brand. And so we're really excited about the growth that we're seeing in those brands. But then we also are catering to new occasions with adjacent type segments like Fever-Tree, which plays in both the alcohol occasion space and the non-alc occasion space. And then we're playing in the non-alc occasion space with brands like ZOA. And then also, we've launched a non-alc RTD, Naked Life, which is the largest RTD coming out of Australia. So we are building a portfolio that caters across consumer needs with how the consumer preferences are changing as well.

Okay. Your updated guidance -- just turning to kind of shorter term, your updated guidance assumes continued mid-single-digit declines in the back half of the year, but your long-term expectations are still for low single-digit sales growth. So what type of longer-term beer assumptions underpin that low single-digit algo?

Yes. So when we spoke about and we updated our guidance back in -- on our Q2 call, there were 2 main factors that drove lowering the guidance. One was the continued industry softness that we were seeing. So our assumptions is that for the back half of the year, the industry is going to continue to be down around minus 4%, minus 6%. So that was the one assumption that we took into account with our guidance. The second was our share. So we expect our share to continue to be down around 50 basis points for the back half of the year. Now in terms of the longer-term guidance and having a look at our targets, we haven't publicly given a volume target because it does differ year-by-year. But why it's important to expand our portfolio and to really premiumize is that a lot of our top line, our revenue, NSR is going to come from price and mix. And so it's really important to continue to premiumize both within Beer and Beyond Beer. And then also, one of the assumptions that we've taken from a pricing point of view is we expect in sort of North America, that pricing to be around the 1% to 2% range, which is historical. And then in other countries in Europe, et cetera, it's closer to inflation. So those are the sort of key levers, key drivers of our longer-term growth on our top line.

Okay. And so beer industry volume in the U.S. and with that 1 to 2 points of positive pricing, we can think about that embedded in your long-term plan is flat to sort of a low single-digit decline in terms of beer industry volume?

Yes. So I mean, the beer industry for the last number of years, previous year has been around the down 3%. But again, NSR is growing. So it's driven by that 1% to 2% pricing, particularly in the U.S. and then the Above Premium category in beer is still growing, which is really exciting. And that's why our focus on some of our Above Premium beer portfolio.

Perfect. Okay. And then on profit, sticking with the outlook for this year. The plan is for constant currency mid-single-digit underlying pretax income growth. How much flexibility is there in that outlook and the implied margin expansion? So in the event that the category and things remain lower for longer, increased consumer pressure in the back half, slowdown in premiumization, just how much flexibility is in that mid-single-digit profit outlook?

Yes. So look, I mean, I spoke about the drivers of the top line, which is also a driver of margin. So premiumization typically comes with higher COGS, but also comes with higher margin. And so that's why the drive to premiumization and then pricing, as I said. So that's part of the margin. And then as we look at COGS, for example, we've done a lot of work around investing in our breweries to drive cost savings, efficiencies, taking out the low-margin contract brewing Pabst has certainly helped take a lot of complexity out of our breweries, and we will fully have cycled that at the end of this year. So it takes a lot of complexity out of our breweries. It also allows us to have capacity to make our own higher-margin brands, particularly during the peak selling season, but also it has allowed us to do things like onshore Peroni, which is driving -- I mean, it's been a best premium brand, much higher margins now that we've onshored it, and it's growing really nicely. And also, it allowed us to sort of -- taking out that sort of contract brewing lower margin has allowed us to close smaller underperforming breweries like we did in Wisconsin last year.

Yes. Okay. Do you think longer term, again, in this like down low single digit, down 3% volume backdrop, is there further opportunity or need to take out capacity as you continue down this road over the next, call it, 5 years?

Yes. Look, I mean, we're really happy with our brewery footprint at the moment because, again, taking out the Pabst contract brewing has allowed us to bring in higher-margin brands and being able to make that in our breweries. But when we look at our brewery footprint, we also -- one of the things that we have to consider is transportation cost is very high. So you have to consider if you close a brewery, how much you're going to add to logistics cost to move your beer from one brewery across the country to another. And that is a high cost. So we take that into consideration. But when we look at capacity, we also -- before we make a decision around closing brewery, there's a whole lot of other things that we can do as well. So it could be taking down a line in a brewery or reducing shifts in a brewery. So we make those decisions first because, again, logistics cost is a big driver of costs. And so taking a brewery down is a big decision.

Okay. That's really helpful. Looking closer in, how would you characterize the U.S. consumer environment through the end of the summer?

I mean, I think what we're seeing as we sort of got to the end of summer is very similar to what we saw in the beginning of the summer. Consumers are still very uncertain. Consumer sentiment is low. We are seeing less buyers, but we're seeing that same sort of dynamic that we've been seeing for a while now is we're seeing channel shifting and SKU shifting. So either consumers looking for value through higher -- bigger packs or going to C-stores, singles, et cetera. So we continue to see that. But no difference from a sort of promotional activity and things like that, that we've seen in the past. But certainly, the consumers are stretched and uncertain in terms of economics.

And you just touched on, you said no real change in the promotional environment. Is that right? And as you think through the back half in this continued pressured environment, what do you think about the risk of that change stepping up?

I mean as we go into the summer, we always do see increased competitive activity. We see increased promotional activity. But again, it's not really different to what we see. Now there has been some retail accounts, et cetera, that have done different things. But generally, a lot of that, in our belief, is retailer driven. So the brewers -- and again, I can't talk for our competition. But generally, we don't participate in what the retailers do because they do it a lot to drive footfall -- foot traffic through grocery stores, et cetera. But again, if we do see any increased activity, whether it be promotional or consumer dynamics, we look at it for the long term of our business. I mean we're not going to do anything short term that's going to harm our brands. We're going to look at it market by market as we always do with our pricing, market by market, SKU by SKU, brand by brand, and that's worked for us.

Okay. Great. And in the U.K., just we've been talking so much about the U.S. I think that was a market where you had seen some elevated competitive pressure. Just latest on the consumer and promotional environment, just focusing in on the U.K.?

Yes. So maybe, Traci, you want to talk a little bit about the U.K. consumer and...

Sure, sure. So in the U.K., I mean, consumer sentiment remains challenged. It actually is in negative territory by the indexes that they follow. But the -- like real wages are up and inflation is coming down. So the macros are looking better, but again, the sentiment is still challenged. So we continue to push forward with our plans. Obviously, we have a strong portfolio of brands there. But it is a highly competitive environment. We see that at sort of the mainstream level with Carling, where some of our peers have reduced ABV on their products. We have chosen -- we have not done that. We certainly looked at it, but we have not done that at this point. But what that means is that at times, in the off-premise, our brands -- our Carling, for example, could be 20% higher in price point. So there has been some -- obviously, some challenge there, but we've taken a value over volume approach. Very positively, though, we continue to premiumize very nicely. For example, in Q2, Madri U.K. business was up mid-single digits. Staropramen, another Above Premium brand we have in the U.K. was up double digits. So premiumization continues to be positive for us as we manage the competitive environment.

Okay. Great. And let's shift back to the U.S. You shared this targeted plan for the convenience channel. I think we first talked about it at CAGNY, if I remember correctly, where your share had slipped a bit since 2019. Could you talk a little bit -- just give some background on this "influence point strategy" and give us an update on how that's going and some of the associated innovation?

Sure. Yes. Look, we've done a lot of work around our C-store strategy. And look, the C-store is the biggest sort of beer channel. So it's really important, and we do under-index in the C-store. So we spend a lot of time looking at consumers, we interviewed thousands of consumers and really trying to trace the path to purchase in the C-store. And the insights that we've got from that is every C-store visit is different. And it may be -- as you look at the path to purchase, it may be an influence at home or in the car on the way to work or at the pump or in the store at the [ cooler ]. So there's all these influence points as you call it, these points that matter that we are focused on. And so I'll give you an example. The biggest visits to C-stores is generally impulse visits. And so someone might be just popping into a C-store to grab a snack. And so we want to nudge them to say, with that snack, grab a beer. And so we're doing things partnering with various companies. So for example, Miller Lite partnering with Pringles in the C-store or Miller High Life partnering with Planters peanuts or Topo Chico with Takis. So providing that sort of promotional, just a nudge around beer. And then also, it's not just one sort of promotional sort of in the store, but we can influence them at the pump through commercials at the pump, just to remind them to pick up their beer or in the store at the cooler, et cetera. So there's a lot of work that we have done around the C-store consumer. And that's also driven some of our C-store innovation. So this year, we launched 3 higher ABV brands, 8% brands, Blue Moon Extra, I always have to look at Traci to help me with this; Simply Spiked Bold and Topo Margarita MAX. I think I got that all right. All at 8% ABV. Simply Spark Bold was the #4 singles launch in C-store with Blue Moon Extra #6. So we're really excited about the traction and what we are seeing with those brands, early days. But some of our C-store strategy and insights drove us to make decisions like that, which again, we're quite excited about.

Okay. Great. Let's talk about Coors Banquet. I mean another area you've had great success. So 16 quarters of share growth, 5% of U.S. volumes now according to [ Beer Marker ] data. What do you see as the brand's ultimate potential, especially given distribution is still so limited relative to Coors Light. I think on the last call, you said it was about half the outlet coverage. So curious about the path and potential for Banquet?