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

Good morning, and welcome to the Molson Coors Beverage Company Second Quarter Fiscal Year 2026 Earnings Conference Call. Now I'll turn over to Bob Noverini, Vice President of Investor Relations.

Thank you, operator. I'm pleased to introduce myself as Molson Coors new Vice President of Investor Relations. Our earnings release and presentation materials are available on the Investor Relations section of our website. Today's discussion includes forward-looking statements within the meaning of U.S. federal securities laws. Please refer to our earnings release and our most recent SEC filings for important information regarding these statements, including risk factors as well as definitions of and reconciliations to any non-GAAP measures. Actual results may differ materially from our expectations, and we undertake no obligation to update forward-looking statements, except as required by applicable law. Today, we'll focus our prepared remarks on our performance and outlook before opening the line for Q&A. [Operator Instructions] Any technical questions can be addressed with our Investor Relations team following the call. Unless otherwise indicated, all financial results are comparable prior year period and are in U.S. dollars. With the exception of earnings per share, all financial metrics are in constant currency when referencing percentage changes from the prior year period. Also, shared data references are sourced from Circana in the U.S. unless otherwise indicated. Our remarks today will also reference underlying pretax income, which equates to underlying income before income taxes and underlying earnings per share which equates to underlying diluted earnings per share as defined in our earnings release. With that, I will hand it over to Rahul.

Thank you, Bob. Welcome to Molson Coors, and hello to everyone on the call. Today, we're joining you from Golden, Colorado, the home of Coors. Now since the launch of our Horizon 2030 strategy in Q1, I've been visiting with employees, distributors, and customers across our footprint to discuss our strategy, our early progress and any gaps that require quick action. Before I begin, let me take a moment to thank our dedicated employees here in Golden and across the globe for their commitment behind our Horizon 2030 strategy. Now let's start with the category. While the U.S. beer industry began the year on relative solid footing, the unanticipated energy and inflation shock associated with the conflict in Iran demonstrated how quickly global consumer sentiment and behavior can ship. In the second quarter, prices at the gas pump peaked in May, hitting certain U.S. regions, especially hard. At the same time, geopolitical uncertainty weighed on consumer confidence and spending behavior in EMEA and APAC. These external factors contributed to our volume performance across our markets in the second quarter. In addition, in the EMEA and APAC heightened promotional activity as well as channel mix further pressured bottom line results. Of course, in Q2, the industry came together to champion the World Cup as a premier occasion for socialization and celebrating with beer. That said, high industry anticipation increased competitive pressure everywhere. We also saw pockets of intense promotional activity in the U.K. and across Europe. As such, our share of the early World Cup opportunity, which only included the last 3 weeks of Q2, vary by geography and sector. Now how we respond to these and other external pressures remain firmly within our control. I'm confident that our diversified portfolio of well-loved brands, strong cash generation and disciplined balance sheet provides resilience and flexibility. These advantages enables us to address dynamic external conditions while focusing on the long-term strategic priorities that will grow our business. Based on this, we are reaffirming our fiscal 2026 guidance. So let's discuss our portfolio, starting with our core brands. Horizon 2030 aims to reinforce the relevance of these brands as the first choice for consumer occasions. We're not just sitting back and relying on existing scale and brand awareness to drive volumes enhancing our core brand share performance in today's competitive environment requires continued focus and execution. However, we have more work to do here, and we continue to assess how Coors Light and Miller Lite can amplify the authentic identities to drive greater impact with both core beer and new consumers in the U.S. This work takes time, and we are pursuing new campaigns, partnerships and ways to deploy our media investments with an occasion-based approach. In Canada, Coors Light largely performed in line with the industry and held its spot as Canada's #1 light beer. In the U.K., Carling experienced heightened competition in the quarter and we've acted quickly with several actions designed to strengthen its position in the market. In the EMEA and APAC produce co maintained its leading position in Croatia following its sponsorship of the Croatian Men's National team in the World Cup. Meanwhile, Coors Banquet grew share and brand volume in Q3. We attribute the brand's ongoing success to its clear identity and consistent marketing. This includes our campaign for Americas 250th called Icons of the American West, which helped contribute to growth across all U.S. regions in Q2, and it includes our latest partnership with the Yellowstone spin-off Dutton Ranch, which has also become very popular. Turning to our value brands. Our share trends improved, driven by the successful launch of Keystone Light Apple. We also saw share trends improve for Miller High Life. We've chosen to support growth in our value brands by deploying modest but targeted levels of investment. Keystone Light Apple or Apple is a great example of how we quickly responded to emerging flavor trends. We deployed an AI-generated social media campaign that generated buzz and resonated with the consumer seeking flavor at an enticing price point. Demand far outpaced our limited run production, so we're bringing it back in the fall. We also decided to bring back fan favorite Keystone Ice a high ABV beer in the value segment. In above premium beer, we saw mixed performance across our brands and geographies. In the U.S., we were pleased to see Peroni grow brand volumes by double digits supported by targeted marketing investments earlier in the year. But the broader Blue Moon franchise remains under pressure in Q2. That said, we grew brand volumes for both Blue Moon non-ALC and Peroni 0.0 in the quarter, underscoring our relevance in the small but growing non-ALC beer category. While heightened promotional activity impacted Madri in the second quarter, above premium brand volumes showed segment growth in EMEA and APAC driven by Staropramen, Miller and Blue Moon. In Canada, Miller Lite also continued its momentum as an above premium offering. We continue to gain scale in beyond beer, which is an important part of our journey as a beverage company. NSR growth for Monaco, Topo Chico Hard and Fever-Tree was partially offset by other brands in the segment like Simply spiked. In Canada, was Coors slushy continued to show momentum in the RTD seller segment, while in EMEA and APAC, [ key drug ] continued to benefit from growing interest in functional beverages. Both Pivitre and Monaco are well on track to each contribute 1% to 2% to NSR, solid proof points of Horizon 2030 focused on both premiumization and portfolio transformation. We have now lapped the first full year of our partnership with Fever-Tree, and we are encouraged to see momentum continue to build. Following a national campaign that celebrated the ease of mixology at home, Fever-Tree delivered its highest quarter of sales in the U.S. since our partnership again. Our first full quarter of ownership of Atomic brands also produced encouraging results. The integration of Monaco cocktails has been going well with its overall top and bottom line contributions tracking slightly ahead of our acquisition expectations. While still early days, this progress underscores the importance of bringing RTV spirits into our portfolio. We see Monaco as a clear example of how we can use M&A as a force multiplier in our transformation journey. This acquisition fills white spaces in our portfolio with a fast-growing beverage segment. It also added an already scaled business, providing both growth and profitability on day 1. Currently, the majority of Monaco sales fall within 5 states, and most of that is in convenience. This is a strong example of our localized portfolio approach in action, and we see plenty of runway to expand into new geographies and channels. As discussed in Q1, the launch of Horizon 2030 also incorporated changes to our operating model, including quick actions and resource allocation at the local level. For example, in preparation for the World Cup, we invested incremental resources into host markets to drive memorable on-premise experiences. Our partnership with venues in key entertainment districts across Dallas, Philadelphia and Kansas City resulted in strong consumer engagement with our core and above premium brands. In addition, after reports that the Scottish football fans [indiscernible] beer shortages in Boston, restock the Scotts campaign swiftly responded by sending a Miller Lite badge to [indiscernible] them in Miami. These examples show how we're leaning into and learning from targeted efforts that drive incremental results outside of national media spend. In total, while we are encouraged by our ability to make progress from a top line perspective, we need to stay responsive to the inflationary cost pressures in commodity price volatility that impacted our bottom line. In the near term, our robust cost savings program and other efficiency initiatives mitigate uncertainty within the global macroeconomic backdrop. We made progress in our previously announced 3-year $450 million cost savings actions by identifying areas where we believe we can drive greater efficiency. For example, we committed to various restructuring actions in EMEA, APAC, including the closure of a small brewery in the U.K. alongside other operational changes designed to modernize, simplify and unlock efficiencies within the region. We've also allocated a portion of our previously announced $650 million in global CapEx to modernize and expand our supply chain capabilities. Upgrades are already underway at our current plant, Rocky Mountain Metal Company. We're investing in new bulk receiving facilities as well as new and upgraded canning lines. Importantly, we believe investments like these that help to strengthen our supply chain will create efficiencies during a time when aluminum sourcing is top of mind. Finally, on capital allocation. We designed our approach to reinvest in our business and reward shareholders as we progress towards Horizon 2030 together. We are a highly cash-generative business and we intend to deploy that cash on prudent growth initiatives, both organic and inorganic. We continue to believe that Molson Coors shares currently trade at a compelling value with an attractive dividend yield, and we have ample capacity left on our share repurchase authorization. We're halfway into our first year of the Horizon 2030 strategy and 1 thing I'd emphasize is that no single event will suddenly change our trajectory. This process is about building portfolio strength, brick by brick. We already have 2 of the strongest beer franchisees in the industry with Miller and Coors. These brands have scale, generate cash and have a deep consumer loyalty. Our job is to keep them relevant and competitive. That means showing up with strong investment during key beer occasions while working diligently and creatively to find new unexpected moments these brands can truly own. At the same time, we're scaling our next layer of expected growth. We're celebrating success in our core with Banquet in above premium with Peroni in value with high live and in beyond beer with Topo Chico, Monaco and Fever-Tree. None of these opportunities individually change our future. We know that. However, in aggregate, we expect these wins to compound over time. To that end, we're making early progress. With that, I'll turn it over to Tracey to discuss our financial performance and outlook.

Thank you, Rahul. In the second quarter, our results reflected the challenging category and cost environment we anticipated while also demonstrating the flexibility of our business model and the actions we are taking to manage through volatility. On a constant currency basis, consolidated net sales revenue was down 3.6%. Underlying pretax income was down 27.8% and underlying earnings per share decreased 22.9%. On an underlying basis, the quarter was shaped by a combination of external headwinds, timing impacts and controllable actions. While some drivers were impacted by phasing considerations, the broader picture is largely consistent with our expectations. The inventory remains pressured. Our share performance is not yet where we wanted to be, and cost inflation remains significant. At the same time, pricing, mix, cost savings, portfolio actions and disciplined capital allocation continue to support our plan. So let's get into the details. The U.S. beer industry was down minus 4.2% based on our internal estimates. U.S. domestic shipments declined by 7.3%, in line with our expectations of a 6% to 9% reduction in the second quarter. EMEA and APAC brand volume declined 3.4%, primarily driven by ongoing soft market demand and a heightened competitive landscape. The Midwest premium remained elevated, adding approximately $40 million of year-on-year cost increased to second quarter cost of goods sold. Additionally, the elevation of fuel prices and freight market tightening increased cost inflation in the second quarter. SG&A was up 3.2%, largely due to cycling lower employee incentive costs in the prior year and additional investments in technology and capabilities. Taken together, these factors help explain the pressure on the quarter, but they do not change our priorities. We are focused on improving commercial execution where we have the greatest opportunity to influence share, protecting price realization and using our cost savings program to help offset inflationary pressure. Turning to the balance sheet. We believe this remains an area of strength and flexibility for the company. In the quarter, we successfully executed a series of public and private placement offering that allowed us to refinance and retire a portion of our debt. These transactions enabled us to extend maturities and optimize our balance sheet at attractive rates in a rising interest rate environment, resulting in a net debt to underlying EBITDA ratio of 2.53x at the end of the quarter, bringing us close to meeting our stated goal of under 2.5x by year-end. As Rahul mentioned earlier, we remain committed to a balanced capital allocation framework with a relative emphasis on reinvestment, M&A, returning cash to shareholders and debt reduction vary quarter-to-quarter based on available opportunities and strategic priorities. This quarter, we chose to deploy capital in support of financial flexibility and M&A with the Atomic Brands acquisition. Uses of cash that we believe strengthen the portfolio over the long run, while preserving flexibility to continue investing behind our core priorities. We also paid $90 million in dividends and repurchased 1 million shares for $42 million, making further progress on our share repurchase authorization. We have repurchased 15.3% of our Class B shares outstanding since the plan was announced in October 2023. We continue to believe that Molson Coors shares trade at a compelling value, and have $2.35 billion of our share repurchase authorization remaining. With that, let's discuss our outlook. As Rahul mentioned, we are reaffirming our 2026 guidance. We are doing so with a clear understanding of both the risks and the levers available to us in the second half. Before we discuss the details of our near-term outlook, I'll remind you that the impacts of the global macroeconomic environments are multifaceted and difficult to predict. And while we had included in our guidance, our best estimate of some of these factors, external drivers may significantly impact our actual results, either up or down. Starting with the top line. U.S. shipments were in line with our expectations for quarterly volatility year-to-date, with relatively weaker shipments in Q2 following the stronger start to the year. The important point is that the shipment variance is primarily a timing and alignment issue rather than a change in our strategic direction. Our guidance assumes the shipment trends will slightly outpace brand volume trends in the second half of the year. Our full year guidance also includes 9 months of NSR and profit contribution from the integration of the Monaco portfolio. All other top line drivers remain largely unchanged. Our guidance includes the assumption that full year 2026 U.S. industry volume trends will be better than the minus 5% we experienced in 2025. As a reminder, in Q1, our internal estimates indicated that the industry improved to down minus 1.6%. But at that time, we acknowledged that economic and geopolitical uncertainty made predicting future quarters very difficult. The industry slowed in Q2 to down 4.2% based on our internal estimates, but this is still ahead of 2025 full year performance. Barring any further escalation of geopolitical events, our guidance still assumes industry improvement over 2025 levels. That said, we are not satisfied with our share performance. We continue to anticipate making progress as we improve execution in the channel, occasions and consumer segments where we believe we can have the greatest near-term impact. We continue to expect an annual price increase of 1% to 2% in the U.S., in line with Q2 performance as well as the average historical range and expect mix benefits from premiumization in both business units. Moving down the P&L. We expect COGS to continue to be negatively impacted by rising commodity costs through the second half of 2026. On Midwest premium, we continue to expect elevated costs relative to 2025. As a reminder, we had anticipated the largest year-over-year increase in Midwest premium to hit the P&L in Q2 2026. For the balance of the year, we expect Midwest premium to continue to be meaningfully inflationary, but expect that our hedge coverage will mitigate a portion of this ongoing headwind. For the full year, we expect Midwest premium inflation to be in excess of $150 million. We also expect innovative fuel costs relative to 2025, with tighter freight supply causing additional volatility in transportation costs. These are meaningful pressures, and we are not minimizing them. However, our hedging strategy, productivity initiatives and disciplined spending should provide partial offsets as we manage through the year. We now expect a reduction in SG&A expenses in the second half of the year compared to the prior year period. The objective is not simply to spend less, but to carefully manage expenses by redirecting investments towards the opportunities that we expect will improve performance and generate the most effective and highest returns. Our 3-year $450 million cost savings program provides an important lever to reduce reliance on industry recovery as we navigate category and macroeconomic volatility. We are also evaluating additional commercial and operational actions to address the headwinds facing the EMEA and APAC segments. In closing, we are realistic about the category and cost pressures we face, and we are not satisfied with every aspect of our current performance. At the same time, we believe we have meaningful strength, a strong global brand portfolio, a healthy balance sheet, strong cash generation, disciplined capital allocation and a cost savings program that gives us flexibility. We are focused on the leaders within our control, sharper commercial execution, disciplined revenue management, more effective marketing investments, continued productivity and portfolio strengthening, as we manage near-term volatility and stay focused on long-term growth. With that, we will take your questions.

[Operator Instructions] Our first question comes from Bonnie Herzog from Goldman Sachs. Unfortunately, we can't gain connection with Bonnie. Our next question comes from Filippo Falorni from Citi.

I was hoping you could give a little bit more color on the category growth expectations, including the beneficiary from the World Cup in June and July, and then any additional comment on the market share performance that you're expecting going forward in the balance of the year?

Filippo, thank you for the question. So maybe I'll address a couple of things. I think it was a little bit of what's happened and what's going to happen. So if you think about Q2, Tracey talked about the category based on internal estimates, so it was in the minus 4.2% range, Filippo. The World Cup, obviously, was a great occasion from a beer perspective, rather than as a great opportunity for us to showcase our brands bring people together. But it probably did not have that big an impact across the entire category. If you think about on and off premise, what we did see from the World Cup is strong results in host cities and particularly on the on-premise. So if you think about on versus off 14-ish percent versus off, we didn't see a massive impact of the World Cup across the entire country. So in those host cities in the on-premise, it was a great opportunity to showcase our brands, bring consumers into the category, and really have a great occasion to get our brands performing. So I would say that would be the World Cup assessment. I think your question then around the category. If you think about 2026 versus 2025, we still believe the category is going to be healthier than 2025. It is going to be -- continue to be a volatile year, you saw the changes in Q1 versus Q2 driven by macro issues, fuel prices, et cetera. So for us, it is a little bit of -- we'll keep close to where the category does in Q3 and Q4. But importantly is what are we going to do about it? And I think that's why your question around market share comes in. I go back to our portfolio. I mean we've got a pretty broad set of brands across different price points. And so that gives me confidence that going into the next quarter, we can continue to make progress. And if you look at Q2 versus Q1, we modestly gained share. If you look at our different parts of our portfolio, we made some good progress in our value segment. We made some good progress in core in the Coor trademark, above premium beer and then also the beyond beer stuff. So we're making progress from a share perspective. We want to continue to make that progress going into Q3 from a different part of our portfolio. But the category volatility will react to how the category behaves. But probably, it'd still be better than what 2025 was.

Our next question comes from Peter Grom from UBS.

I actually wanted to ask a follow-up to Filippo's question just on the category. And you noted the weaker performance in Q2, and this may be hard to do, but -- is there a way to kind of parse out the impact from higher gas prices, maybe some unfavorable weather versus maybe some shifts that may be more structural? And I just asked that in the context of I think people were hoping that the category would be stronger in 2Q, but obviously, you saw a meaningful deceleration. And then I guess, underpinning the back half, I mean, I understand that for the full year, you expect it to be better than the [indiscernible] should we be expecting a continuation of kind of maybe what we saw in Q2 from a category standpoint?

Yes. I think , your question around the category parsing out higher gas prices and impacts is -- I would say, it's a tricky thing, right? Because maybe I'll explain it in a different way. So if you think about coming into this year, consumer confidence, a little bit of clarity in terms of consumer sentiment and how people were making decisions. I think you saw the category being healthier than Q1. As we get into Q2, I do think you saw different behavior from consumers, when things like gas prices, et cetera, are impacted. We saw that in back data. We saw that in channel data. So there was definitely a pullback I then go back to occasions, right? I mean the World Cup again, was a great opportunity for bringing people together from a beer perspective. But maybe a little deeper into performance of the category. If you look at some of the channel-specific data, convenience and dollar continued to do well in Q2 versus food and grocery singles and small packs did well versus some of the other packs. So folks were making choices in a way differently in terms of their expandable income. Now on the other hand, I would call out the consumer that is continues to grow from a premiumization perspective, right? So above premium portfolio with Peroni and Fever-Tree continues to see growth. So that consumer is resilient, is healthy. The on-premise performed better than the off-premise overall for the category. And that's also a good sign in terms of consumer health in that regard. So hopefully, that gives you a sense of some of the levers and the drivers in the category for Q2. Your second part of the question is, I think that macro impact oil prices, sentiment is probably going to be an important aspect as we think through H2, Q3 and Q4. But then I go back to our portfolio, right? Our portfolio is pretty broad. It is encompassing different price points, and it gives -- that gives me confidence and it gives us our ability to lean in differently, right, whether it's the value segment with pricing, whether it's our core segment with Miller Lite with price pack architecture, and then it's obviously leaning in with above premium beer and beyond beer. So the category will stay volatile, will stay, I would say, better than '25 but we got the different tools, different brands, different parts of our portfolio to lean in differently and continue to execute, right? And again, I think the previous question about we got to keep showing share improvement that we've done now Q2 versus Q1, and we're going to keep leaning into that for the balance of the year.

Our next question comes from Robert Ottenstein from Evercore.

Great. And I missed the first part of the call, so excuse me if you already addressed this. .

Apologies, Robert, we lost connection. We'll now move on to our next question from Chris Carey from Wells Fargo.

Hopefully, you don't lose connection with me. .

We hear you loud and clear.

Okay. All right. Wonderful. I wanted to ask about the evolution of the inflation expectations. I think I heard, Tracey, you say $150 million the slide say, $130 million for a Midwest premium impact. But maybe just conceptually, inflation? Is the expectation now that it's running higher for the full year than the prior expectation? How did that impact your outlook for COGS per hectoliter and then similarly or conversely, you're expecting, I think, maybe a slight decline in MG&A on the full year, confirming if that's correct? And where does that savings come from relative to prior expectation? And maybe importantly, I'm just starting to think about the path into 2027. Can you just perhaps give us any construct for how to think about your ability to be hedging some of the cost increases that you have seen going into next year. I think you had mentioned that you'll take maybe a pricing in line with similar levels in the fall. And so how do you really think about starting to get ahead of some of the cost curve as you go into 2027 and love any thoughts on that. So thanks for the balance of COGS inflation versus MG&A and how the path unfolds.

Chris, thank you. A number of different parts. So I think I captured all your pieces. So let me address that. And Tracey, please add enough after this. So if you look at this year, '26, obviously, when we laid out our '26 guidance and we shared our plans. We knew we were stepping into this year with a high inflated cost base in terms of Midwest premium, LME, just the inflationary impact this year. So -- the way I would call out H1 is, I think the teams have done a good job of managing that within the framework that we had laid out, right? So between all the volatility of aluminum pricing and Midwest premium. The teams have done a good job of managing our COGS per hectoliter. The 1 thing that we did see a little bit more elevated levels now is fuel costs and logistics costs, right, where logistics companies, transportation issues are up proving to be a little bit more challenging. But I would put all of that under the bucket, Chris, our focus on cost management, focus on our savings program. and managing through that. So for the balance of the year, if you think about our COGS per hectoliter, we're probably in line with what we've said, and I'll let Tracey give you some specifics on that. But it's a combination of, yes, elevated levels, still a lot of volatility, but working through the levers we have. To address your question around MG&A, there's a number of factors that go into our MG&A for the balance of the year, right? So it is I invest in tools and technology capabilities. Obviously, the cost savings programs that we announced and initiated both last year in the Americas and earlier this year in the EMEA and APAC, right? So that all starts playing out in the balance of the year and then making sure we have the right brand support in making sure we're investing behind our brands for the balance of the year. So for MG&A, just there's a number of things we put in place and obviously to be disciplined around our cost base. You probably saw that in the context of our EMEA business results. So that's how I would characterize the whole MG&A line. I know we don't talk a lot about '27, but it's an important as we execute on '26. We're obviously thinking through what does that inflationary landscape look like for '27 and going back from making sure we have the right brand investment and support for our portfolio is competitive landscape, but we're going to lean in from a portfolio investment for '27. So more to come on '27 but hopefully, it gives you a sense on '26 MG&A. And Tracey, any more things to add on COGS?

Yes, just in terms of the Midwest premium impact, Chris. So if you remember, our initial guidance assumes that the impact of Midwest premium would be at least $125 million. Our latest estimate now is above $130 million, so 130. And so we do -- I mean with these premium has not come down. Commodity costs are going up. So we do assume that Midwest premium and base aluminum will be elevated versus last year. And again, the Midwest premium impact for Q2 for us was $40 million. So we do have hedges on for Midwest premium that is going to help mitigate some of these increases. . But as we've said before, it's very difficult, it's very expensive. It's not a liquid market. It's not a transparent market. So we also are using our cost savings program, which we've mentioned to help mitigate some of this inflation. But we do have good line of sight to the balance of the year. But again, continue to see elevated commodity costs, particularly the Midwest premium.

Our next question comes from Kaumil Gajrawala from Jefferies.