Molson Coors Beverage Company

Good day, everyone, and welcome to the Molson & Kors Beverage Company second quarter 2020 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on your touch-tone telephone. To draw your questions, you may press star and two. Participants can find related slides on the investor relations page of the Molson Coors website. Our speakers today are Gavin Hattersley, President and Chief Executive Officer, and Tracy Joubert, Chief Financial Officer. Please also note today's event is being recorded. With that, I'll turn today's call over to Greg Tierney, Vice President of FP&A and Investor Relations. Please go ahead.

Thank you, Jamie. And hello, everyone. Following prepared remarks from Gavin and Tracy, we will take your questions. Please limit yourself to one question. And if you have more than one question, please ask your most pressing question first, and then re-enter the queue to follow up. To the extent you have technical questions on the quarter, we ask that you pick them up with me in the days and weeks that follow. And today's discussion includes forward-looking statements within the meaning of applicable securities laws. Important factors that could cause actual results to differ materially from the expectations and projections contained in such statements are disclosed in the company's filings with the CDC. The company does not undertake to update forward-looking statements, whether as a result of new information, future events, or otherwise. Gap reconciliations for any non-US gap measures are included in our news release or otherwise available on the company's website at www.molsoncoors.com. And also, unless otherwise indicated, all financial results the company discusses are versus the comparable prior year period and in U.S. dollars. With that, over to you, Gavin.

Thanks, Craig. Good morning, and thank you, everybody, for joining us today. We had a strong second quarter, as is evidenced by the results we released this morning, executing well against our two main objectives as the world continues to adjust to the ongoing coronavirus pandemic. But before we talk about our second quarter performance, I would like to address the challenge of systemic racism. Racism is not a new issue, and I'm not naive enough to believe that our business alone can solve a problem that has plagued the United States and many parts of the world for so long. But I do believe we have the opportunity and the responsibility to try and be part of the solution. And that is why we've been unequivocal that we believe Black Lives Matter. And that's why we are backing up our words with action. We developed a new action plan designed to build a more inclusive culture and increase diversity within Molson Queers. Our intent is to conduct a cultural assessment of our practices and policies to guide further future improvement across all of our business units. increase the representation of people of color in our U.S. operation by 25% by the end of 2023, cross the country among salaried employees and also in leadership positions, improve our hiring practices and leadership development programs to bring in highly skilled diverse talent and develop our future leaders, and much more. We've already committed to donate $1.5 million to 23 local and national organizations dedicated to equality, empowerment, justice, and community building, engaging our own employee resource groups in the process of selecting which groups to support. This is only a start. It cannot be a moment in time that passes by soon to be forgotten. We are committed to meaningful long-term change inside and outside our business. Our efforts to leave a positive imprint don't end there. Two weeks ago we released our annual sustainability report in which we announced progress against our 2025 sustainability goals. Highlights from the report include further reductions in emissions, the fact that more than 99% of our packaging is now considered reusable, recyclable, or compostable, and an increase in the number of our zero-waste landfill facilities. Addressing racism and protecting the environment are not societal issues to be addressed by someone else. It's on us to help build a better future. and doing so is good for our business and the communities in which we operate. The data is very clear. Fostering a more diverse and inclusive environment and exhibiting social responsibility increases employee engagement, which leads to more discretionary effort and stronger performance, which leads to better business outcomes. The actions we are taking will help our business compete and win in the future and build on the progress we are making today. as is evidenced by our strong second quarter results. Last quarter we told you that our overarching focus as the whole world deals with the coronavirus pandemic was centered on two objectives, navigating the short-term to protect our employees and to mitigate the short-term business challenges of the coronavirus, and secondly, positioning our business for long-term success. And that's just what we've done. Through sound management and incredible work by our teams, we had a strong second quarter executing well against these two objectives and beating expectations for both top and bottom line performance in Q2. We did it while delivering an improved cash position and preserving the biggest firepower in our marketing budgets so they can be ramped up in the back half of the year when we expect they will be most effective. We have also benefited from the fact that our business is not as exposed to challenging markets as many of our competitors. such as the continued problems facing suppliers with much more sizable operations in places like South Africa and Mexico. At the end of Q2, the benefits of our work to navigate the short-term impacts of the coronavirus are clear. Coors Light achieved its highest segment share ever in the United States. Let me repeat that. Coors Light achieved its highest segment share ever in the U.S. Blue Moon Light Sky became the top-selling new beer of 2020 per Nielsen and it now ranks amongst the top three growth brands in the entire craft segment, also per Nielsen, behind Blue Moon Belgian White. Fizzy has already made a name for itself in the increasingly crowded U.S. hard seltzer market. Despite not launching nationally until April, it is already the number three seltzer in a number of markets and is beating Bud Light Seltzer in repeat purchase rates. Our Trust Canada joint venture shipped its first products, and we are very encouraged by the consumer reception. And in the U.S., our new joint venture, Trust USA, is already piloting opportunities for non-alcohol hemp-derived CBD beverages in Colorado. We have driven progress in Canada through growth in craft in the off-premise, leveraging the North American innovation Belgian Moon Light Sky, as well as growth in local craft brands in Canada, such as Cremor and BDM. Our Canadian innovation portfolio is also off to a strong start with Aquarelle, a line of vodka-based canned drinks, Arizona hard green tea, and Vine, a non-alcoholic hop water. We became an early entrance in the European hard seltzer space by signing an exclusive agreement with British hard seltzer maker Bodega Bay, and we're extending beyond our beer portfolio after signing with Miami Cocktail Company to distribute their growing brands in the United Kingdom and Ireland. And last but certainly not least, we strengthened our financial position. We renegotiated our bank covenants to help ease potential short-term liquidity constraints. And we suspended our dividend payable for the balance of the 2020 fiscal year, a decision that we believe will put us in a stronger cash and leverage position during the pandemic. In light of these steps, we were pleased that Moody's affirmed our credit rating and kept our outlook stable. Don't get me wrong, it wasn't easy, but we were able to deliver this strong quarter despite the challenges facing our world and our industry today. Tourism in Europe has dropped dramatically, and pubs in the UK were closed through the end of Q2 as a result of the pandemic. Some of our Latin American markets were shut down completely or partially for much of the quarter, and while a number of establishments were allowed to reopen, typically in phases, some of these were quickly closed down again in the United States. Consumer demand has shifted in ways no one could have foreseen six months ago. When bars and restaurants were shuttered in the early parts of Q2, demand for kegs in the U.S. went to zero, and conversely, demand for cans went through the roof. Every company that makes anything in a 12-ounce can has been challenged to some degree by the global can shortage. For example, Coke and Pepsi have acknowledged challenges, and Borg Corporation announced new plans to increase production capacity on cans. At Molson Coors, we have been producing and shipping canned beer at significantly higher rates than in recent years, though it hasn't been enough to meet the historically high orders we're seeing. To put a finer point in the level of demand we're seeing, we eclipsed July 4th week shipment days in the United States four times already this year. That's unheard of. You'll remember on our Q1 call, I said constraints on cans and paperboard would be a challenge this summer in North America. All along, we've been working with our distributors in North America to try to manage it. We've been getting as many cans as possible from our suppliers who have been tremendous partners for us, and we've worked to source more cans from countries around the world. At this point, we remain tight on the Coors Light tall can, but are seeing the situation begin to improve with respect to 12-ounce industry standard cans. We are also making progress in securing more paperboard as our suppliers recently added to their production capacity but they are still catching up on some SKUs. Despite all of these obstacles, we continue to navigate the coronavirus effectively today while simultaneously working to position our business to succeed in the long term. There is no better example than our new investment, which is intended to quintuple our U.S. seltzer production capacity. Building on the strength of Visi's launch and the upcoming launch of Coors Seltzer, we announced a multi-million dollar project with our Fort Worth, Texas brewery includes the installation of a new canning line completed earlier this year and a state-of-the-art filtration system expected to be finished later this fall. As I mentioned before, our brands will have additional marketing support in the months ahead. We preserved our marketing firepower for a time when we expected it would have the most impact. Bars and restaurants are starting to come back, admittedly in fits and starts, and we expect to increase investment. We completed our acquisition of Atwater Brewing, a craft brewer that gives us a foothold in the eastern parts of the Midwest and one that produces craft seltzers and beverages that extend beyond the beer aisle. We're excited about our new partner and their offerings. And speaking of partnerships, we recently announced we will be an official partner of the new Las Vegas Raiders football team with the official domestic beer, the official craft beer, and the official hard seltzer. one way that we continue to invest behind our brands even in some challenging times. And for those of you that are excited that baseball season is underway, I'd remind you that with our new and extended partnerships, we entered the 2020 with partnerships with 50% of all MLB teams. We are pleased with how we have managed the short term and are confident in our plans to position the business for the long term. Even in the midst of such uncertainty brought on by the coronavirus pandemic, based on what we have seen and what we have done, we intend to maintain the strength of our iconic brands, grow our above premium business and expand beyond the bureau. And now I'll pass it over to Tracey for the financial highlights.

Thank you Gavin and hello everyone. I will first cover the quarter on a consolidated and regional basis, then move to our outlook. With the continued uncertainty in the current environment, we have determined not to reinstate guidance at this time, but we will be giving additional forward visibility on trends and offering a perspective on how we believe we will be impacted by the coronavirus in the future. We do not expect to continue to give this visibility once conditions have stabilized or we resume guidance. So to recap this quarter, Net sales revenue decreased 14.3% in constant currency, largely due to brand volume declines, principally in on-premise channels, which remained essentially closed during the quarter, along with the resulting negative mixed implications across all major markets. Additionally, our undershipment position in the U.S. continued during Q2, mostly due to the constrained supplies of 12-ounce cans, as well as paperboard that Gavin just mentioned. These impacts were partially offset by higher net pricing in the U.S. and Canada. Net sales per hectolitre on a brand volume basis increased 0.3% in constant currency, reflecting positive net pricing in U.S. and Canada, more than offsetting negative effects globally due to the various market dynamics and consumer shifts caused by the coronavirus. Specifically, the shutdown of the on-premise locations as well as the timing of the gradual reopening of on-premise locations had an adverse impact on geographic mix in Europe. And notably, as many of our higher-end products are skewed towards the on-premise, the closure of these establishments had an unfavorable impact on our brand and channel mix. Worldwide brand volume decreased 11.6%, while financial volume decreased 12.5%, reflecting unfavorable shipment timing in the U.S., and lower contract brewing volumes. Underlying COGS per hectolitre increased 0.4% on a constant currency basis, driven by volume deleverage, partially offset by cost savings, and a favourable resolution of our property tax appeal for our Golden Colorado brewery. Underlying MG&A decreased 30.8% on a constant currency basis, driven by the suspension of on-premise activations and elimination and reduction of spending areas that have been significantly impacted by the coronavirus, for example, sports and live entertainment events. We also adjusted the timing of marketing investments behind brands and tax where we experienced supply constraints. In addition, our G&A spend was lower as we delivered against our cost savings and revitalisation plans. As a result, underlying EBITDA increased 2.2% on a constant currency basis. Underlying free cash flow of $796.4 million for the six months ended June the 30th, 2020, was $235.7 million favorable to prior year, driven by favorable working capital and lower cash paid for taxes, as well as lower cash paid for interest, partially offset by lower underlying EBITDA and higher cash paid for capital expenditures. Working capital and cash tax favorability was driven by the deferral of more than $500 million in tax payments from various government relief programs in some of our geographies in response to the coronavirus pandemic, of which a significant portion is expected to be paid in the second half of the year, with the remaining amount to be paid in 2021. In North America, net sales revenue decreased 7.9% in constant currency. This decline was driven by brand volume declines, unfavorable shipment timing in the U.S., and lower contract brewing volumes. North America brand volumes decreased 7.8% as the on-premise closures during the quarter more than offset the continued strength, particularly in the U.S., in the off-premise. In the U.S., brand volumes decreased 5.2% compared to domestic shipment declines of 6.5% in the quarter. Net sales per hectolitre on a brand volume basis increased 0.9% in constant currency, driven by favourable geographic mix, favourable package mix, and net pricing increases in the U.S. and Canada, partially offset by negative brand and channel mix attributed to a shift of volume from the on-premise to the off-premise. In the US, net sales per hectolitre on a brand volume basis increased 1%, driven by positive mix, with favourable package mix more than offsetting negative brand mix, in addition to the net pricing increases. In Canada, negative mix more than offset the net pricing increases, while in Latin America, net sales per hectolitre on a brand volume basis also declined. Underlying EBITDA increased 13.8% in constant currency as MG&A reductions more than offset the unfavorable impact to gross profit from lower volumes. The MG&A reduction was driven by cost mitigation actions taken, the shifting of certain marketing spend and reduced discretionary spending, limited new hiring and travel restrictions. In addition, we continue to deliver cost savings related to the revitalization plan. Turning to Europe, which is more heavily skewed towards the on-premise, net sales on a reported basis decreased 42.4% in constant currency due to lower volumes and lower net sales per hectolitre, reflecting the impact from the coronavirus. Net sales per hectolitre on a brand volume basis declined 12.7% in constant currency, driven by unfavourable channel and geographic mix, particularly the bigger impact to the high-margin UK business as well as slightly unfavorable net pricing. Financial volumes decreased 24.8% and brand volumes decreased 21.4%, with only partial on-premise openings seen during Q2 in some of our smaller European markets. Europe's underlying EBITDA of $31 million decreased 66.9% on a constant currency basis versus the prior year, driven by gross margin impacts of volume declines and cost inflation, partially offset by lower MG&A expenses as a result of cost mitigation action items following the coronavirus pandemic, as well as lower incentive compensation. In Europe, brand volumes were down 21.4% in Q2, driven by closures of on-premise accounts which were in full force at the beginning of the quarter and began to lift only in certain smaller markets in Central and Western Europe towards the end of the quarter. The UK did not reopen until July the 4th. Our relative share position in Europe is significantly higher in the on-premise channel than in the off-premise, so we expect to be disproportionately impacted by the closures in this channel and expect share losses during the closure period. In the off-premise, we were initially not able to meet the full demand following their the abrupt channel shift due to our level of capacity and actions to protect the safety of our people, but this situation has improved significantly during the quarter as we have taken measures to increase capacity while not compromising on the safety of our people. Based on 2019 results, our on-premise business in Europe comprised approximately 50% to 55% of NSR and a higher portion of our gross margin, while in the second quarter, nearly all of our sales in Europe were from off-premise. We are taking significant steps in reducing spending for both capital investments and expense and have taken steps around cash collections to minimize collection risk. Despite these actions, prolonged closures or limited reopenings of the on-premise business will continue to have a meaningful impact on our European and total company growth margin and profitability. Which takes me to our financial outlook. On March the 27th, we withdrew our guidance due to uncertainty driven by the coronavirus pandemic. With the continued spread of the virus and the reversal of certain on-premise reopenings, that uncertainty remains. As a result, we have determined not to reinstate guidance at this time. The pandemic continues to impact our business due to on-premise losses across all our geographies and disproportionately in Europe. and we expect negative trends in volume, NSR, mixed and unfavorable fixed cost absorption in COGS will continue for the foreseeable future. The strength of demand in the off-premise has been unprecedented, but it has not fully offset the on-premise losses, and while the current on-premise trends continue, we don't expect that any increase in total off-premise volumes due to channel shifting will be sufficient to offset the on-premise losses. Also, we expect the industry-wide supply constraints on 12-ounce cans will remain an issue for us in Q3. However, due to our proactive efforts to address this, we expect domestic shipment trends in the US to be higher than brand volume trends as we build inventories for the balance of the year. As it pertains to MG&A, we expect our marketing investment to increase in the second half of the year in North America. to support our core brands, as well as innovations like Blue Moon Light Sky, Vizi, and the August launch of Quiz Salsa. Some of this spend will be dependent on a number of factors, including the anticipated return of live sports. Finally, we also want to call out some unfavorable G&A expense comparisons, as we will be cycling lower incentive compensation, particularly long-term incentive compensation from the prior year, in both the third and fourth quarters, as well as a non-recurring vendor benefit in the U.S. in quarter four of last year. Notwithstanding the current environment, our continued desire is to maintain our investment-grade rating, and we have taken a number of steps to ensure we protect our balance sheets and put ourselves in the best position to best navigate the coronavirus pandemic. As it pertains to our borrowing capability, during the second quarter, we repaid the full $1 billion that was outstanding on our 1.5 billion revolving credit facility or RCF. As a result, we had no borrowings outstanding on our RCF at the end of the second quarter. We had approximately $200 million of commercial paper outstanding as of June the 30th, 2020, resulting in available capacity under our RCF at the 30th of June of $1.3 billion. In addition, in May 2020, we established a $300 million pound commercial paper facility for our UK business. We did not issue commercial paper under this facility in the second quarter and therefore had no balance outstanding at quarter end. Unlike the US commercial paper facility, this UK facility does not impact the capacity of the RCS, so it adds an incremental 300 million pound borrowing capacity for our business. In June 2020, we entered an amendment to our RCF, which favorably revises the leverage ratios under the Financial Maintenance Covenant for the next six fiscal quarters, starting with June 30, 2020. Our near-term liquidity position was further improved by our Board's decision in May to suspend our quarterly dividend for the remainder of the 2020 fiscal year, as well as the benefits of the CAPEX and cost reductions discussed on our first quarter call. During the first quarter, we announced a reduction in 2020 planned capital expenditures by approximately $200 million, and this reduction remains on target without sacrificing our ability to invest in necessary safety and maintenance projects, as well as capital investments that deliver cost savings and high return growth initiatives, such as our significant investments behind hard seltzers in our Fort Worth brewery. Amidst the backdrop of this global pandemic, we are pleased with our Q3 financial performance, our progress in improving liquidity, and efforts to advance our long-term goals for the business. While we are confident in our ability to achieve long-term success, we are mindful of the challenges and continued uncertainty that lie ahead. During this time of great uncertainty, our management and board will continue to take prudent and proactive actions which are in the best interest of the company, our employees, consumers, customers, and our stockholders. Our decisions will be guided by and consistent with the company's overall financial discipline, ensuring adequate liquidity for our continued desire to maintain our investment-grade rating. Our actions remain focused on doing what is best, not only in the near term, but positioning the business for medium and long-term success. With that, thank you for your time and attention, and I'll turn it back to Jamie for Q&A.

Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, please press star and then 1 using your telephone keypad. If you are using a speakerphone, we do ask that you please pick up the handset before pressing the numbers to ensure the best sound quality. To withdraw your questions, you may press star and 2. Once again, in order to ask a question, please press star and 1. Our first question today comes from Kevin Grundy from Jefferies. Please go ahead with your question.

Hey, good morning, everyone. And I hope that you're doing well. Yeah, but I wanted to pick up on the on the company's hard seltzer strategy. Maybe we could talk a little bit about us. And then you mentioned international as well. So on the US side, probably just the State of the Union, I have a number of questions with respect to busy and where you believe that sourcing share and your early impressions there and market share potential for that brand. And then as you roll out Coors Light, what have been sort of the learnings here with the busy launch? How do you intend to keep your distributors focused on both brands to hopefully, you know, ensure that both of them are a success? And then just qualitatively, I wouldn't expect you to talk about how much you intend to spend behind it, of course, but just qualitatively, maybe you can share with folks how big a priority it is for Molson Coors to be successful in this category. And then just a brief follow-up on Europe. Thanks.

Thanks, Kevin. Good morning, and yep, all well here, and I hope the same applies to your side. Look, we've got a very clear strategy as far as hard seltzers are concerned, and we're being pretty smart about how we execute these two new entrants of ours. Obviously, first and foremost, we're focusing on Vizzy, which we launched in April, and then Coors Seltzer. Kevin, it's not Coors Light Seltzer. It's Coors Seltzer in August. I think it's clear that this hard seltzer segments, it's going to be a huge segment. And there's room for multiple brands and multiple solutions. From our perspective, we're making sure that we've got very clear point of differences with our two entrants. So Visi obviously has got a very clear point of difference with its acerola cherry, which is high in antioxidant vitamin C. And based on what we're seeing from consumers and the demand for this product, we're actually very confident that the proposition is resonating well and will continue to resonate well. And to that end, we kicked off a TV and video online campaign this week. So, you know, the early sign is very promising. Coors Seltzer comes in August. People are in this coronavirus pandemic turning to known and and trusted brands, and the Coors brand is the best fit to play in this space based on our testing, particularly with its Rocky Mountain freshness and water heritage. And it's also got a clear point of difference, Kevin. It's the first hard shelter with a social mission. We're partnering with Change the Course. And then on top of that, it is a great tasting product, just like Busy is. As far as sourcing is concerned, look, I mean, it's coming from everywhere, obviously, but the majority of hot seltzer sourcing is coming from outside of beer, which is very positive for the beer category and beer segment. From within the beer category, we are seeing craft and flavored malt beverages as being big sources of that which is coming from the beer category. From a shelf space point of view, it should be coming from obviously underperforming items, which right now would include craft and certain slower-moving FMBs. It shouldn't be coming at the expense of the fast-moving economies and premium lights. As far as our spend is concerned, well, as Tracey said in her opening remarks, we are expecting to increase our marketing spend in the second half of the year versus the second half of last year. And you can assume that a decent chunk of that will be going behind our Visi and Coors Seltzer launches. And then you said you had a follow-up on Europe?

Yeah. You just mentioned that the company is pursuing the hard seltzer category in Europe as well. So White Claw has announced that they're investing in Western Europe, truly seems to be domestically focused. Just perhaps comment on the opportunity relative to the U.S. market and how big of an investment the company plans to make behind the category there?

Well, in Europe, we have recently signed a deal with Miami Cocktails with, you know, Bodega Bay. It's the first, one of the early entrants into the seltzer market there. I'm going to keep a little bit close to my chest some of our other plans around seltzer because we haven't been public about them in Europe. Kevin, but you can assume that we will be showing up there beyond just Bodega Bay.

Very good. Thank you, guys. Good luck.

Thank you.

Our next question comes from Laurent Grandet from Guggenheim. Please go ahead with your question.

Hey, good morning, Gary and Tracy. So two questions for me. The first one was in the UK. As the size of the UK on previous recovery is significant for your top and bottom line, could you give us how fast, I mean, the reopening is happening? I know it has been reopening since July 4th. And what's the typical right level of inventory in that channel?

Thanks. So as far as the on-premise in Europe is concerned, you can divide it up into Central Europe and Western Europe. Central Europe opened up, started to open up in the second quarter, and we quite quickly got above the sort of 50% level of pubs and restaurants were opening, but obviously they were at reduced capacity. And we've seen that sort of level level out in the sort of 70 to 80% of pubs and restaurants opening. Volume impact is obviously greater than that because of the lower capacity and social distancing processes and procedures that they've got. Obviously, tourism has been very hard hit in Central Europe, particularly in countries like we operate in, Czech Republic, Croatia, and so on. From a UK point of view, on-premises pretty much nonexistent for most of the second quarter. Only a solid opening up on July the 4th weekend, and again, same scenario. We have seen a decent proportion of on-premise outlets reopen, but again, at lower capacities and lower volume levels. As far as inventory is concerned, in both the U.K. and Central Europe, Our on-premise supply for kegs is not an issue at this point in time. Our constraint is more in the off-premise, which has seen a similar surge as we've seen in the North American business. Thanks.

And my second question is really about the U.S. and the economy and light-year segment. So as we're entering into a recession, we maybe could expect, I mean, and actually some of your wholesalers are saying this, that we trade down to a more affordable brand. So is it something that you can confirm and do you have experience from past recession that you could share with us?

We haven't actually seen that this time around yet. Certainly support for our premium lights above premium self has been strong and we haven't seen a lot of trade down into the economy segment. Now, that might still come given some of the actions which national governments are taking in terms of support for unemployed folk, but we haven't seen that to date. In prior recessions, we actually have seen ongoing support for premium and above premium brands at the same time as some folk have traded down. So at this point in time, we're not seeing it.

Okay. Thanks very much. Good work, guys.

Thank you.

Our next question comes from Lauren Lieberman from Barclays. Please go ahead with your question.

Great. Thanks. Good morning. The first thing I was hoping to get some color on was the COGS per hectolitre in the quarter and how to think about that going forward. I know, Tracy, you mentioned that you had a one-time benefit from a favorable sedimentary tax situation. But, you know, by my math, that was, you know, not quite half, but, you know, a good portion of the upside to earnings in the quarter. And so as we think forward and think about, you know, marketing going up to support all the innovation you're doing, I just wanted some perspective on how to think about COGS per hectolitre. Thanks.

Hi, Lauren. So, yeah, so as we've seen, our underlying COGS per hectolitre constant currency increased by 0.4%. So we had volume deleveraged. which would account for around 250 basis points. We also had the thank-you pay, which we had a portion of that in the COGS line. And then offsetting that, the favorable resolution to the property tax appeal was just under 100 basis points. And then, obviously, we had favorability coming from cost savings as well. So hopefully that is helpful for you. And just to note, Lauren, the 100 basis points for the property tax appeal is sitting in an unusual – sorry, that is an unusual and that's why we called it out.

Okay. So in the cost savings annual – you know, very, very strong on the cost line. So could you maybe, you know, just give us a little bit more color on, you know, new productivity initiatives or things that were going on there that may well be part of the, you know, the longer-term restructuring plans? But, again, even if I X out that tax benefit, the costs would have come through, you know, much, much better, I think, than most people had modeled and with the amount of volume deleverage there is. So, you know, how much that cost savings can, you know, prove sticky? Because that would give a lot of support to the P&L and EBITDA growth looking ahead.

Lauren, maybe I'll just give a couple of top lines and then Trace can add color to it. But, you know, we're very pleased with how our revitalization plan is going, notwithstanding the circumstances in which we're operating. You know, I'm enormously proud of how all of our people actually, but mostly the supply chain and procurement operations are functioning during COVID. was clearly a very, very difficult time. Our breweries are operating as efficiently as I can remember them, and I've been here for quite some time now. So, you know, that is certainly helping COGS. And our revitalization plan, as far as cost goes, is on track.

Yes, I mean, we've, you know, we've mentioned cost savings around the $600 million for, you know, over the next three years. And as Gavin said, we're well on track to hit the target.

Okay. That's great. And then if I could just ask a second question. I mean, clearly, like you said, you're making great progress with the transformation plan. We're seeing it in the cost, like we just talked about. But when we think about And I know that you guys have, you know, there's been quite a bit in the media around, you know, I quote, strategic review. There's been debates about Europe. But, you know, I'm just wondering if there's other assets you have that may not be strategic and could give you more flexibility from a balance sheet standpoint. So, you know, for example, I believe you still have one distribution business, which maybe is a bit of like a legacy business. And I'm just curious if you're, you know, kind of thinking about non-core assets within the context of this transformation plan as, you know, something to give you some more flexibility on the balance sheet.

Lauren, let me take that one. You know, I'm just not going to get into engaging in all the rumors and hypotheticals and speculation that goes on outside of our organization. Our decisions that we're making right now to navigate the the coronavirus and the global economic downturn have and will continue to be guided by the two principles I've spoken about first, right? Putting our people first and mitigating the short-term business risks. And then secondly, ensuring that the actions we take today during this pandemic position our business to succeed in the long term. And as it regards our distribution company, we love our distribution company in Denver. It gives great learnings for us to help our our sales folk and our operations folk learn and be put in a better position to know what it's like on the other side of the desk, so to speak, and just we believe makes us significantly better partners to our other distributors around the country.

Thanks a lot. I really appreciate it.

Sure.

And our next question comes from Andrea Deshera from J.P. Morgan. Please go ahead with your question.

Thank you, and I hope all is well. My question is on the performance in the states or markets that you have been seeing a resurgence in cases, and are you seeing the same level of the off-premise uptick versus what you saw in March and April? And just a clarification on a point that you made about marketing spending the second half. Should we expect marketing to go back to the second half of 19 levels, so in other words, flat year over year, or even higher due to the launches? especially as the Seltzer launch. And should we see part of the savings in the first half flow through? Or in other words, like, because does it make sense to increase promotions now that health consumption is so strong? Thank you.

Thanks, Andrea. So I'll take a second question first. You know, at the beginning of the pandemic, we We obviously took really quick action with our marketing spending in basically three ways. We right-sized our overall spend, we delayed some spending on new products, and we shifted media to consumer-relevant channels with the consumer-relevant messaging. We made sure that we prioritized our spend behind our big trusted core brands like Blue Moon and Miller Lite and Coors Lite. We did choose to delay some of the significant spend behind certain products due to change, you know, the chain resets were delayed and, you know, consumer behavior in stores just changed fundamentally. And we also shifted our media to channels like Twitch and YouTube and Reddit and Hulu, you know, where our consumers were migrating to. In fact, we created a significant number of new programming at very short notice, like the Miller Lite virtual tip jar. And the Coors Lights America could use a beer campaign, both of which connected extremely well with consumers. So our focus has been to maintain top-of-mind awareness for our big brands. As far as the remainder of the year is concerned, as we discussed and Tracy said, we expect our marketing spend in the second half of this year to be higher than the second half of last year. So to answer your question directly, we expect right now that the Six months remaining in this year will be higher than the second six months in 2019. We're going to make sure we've got strong pressure behind big trusted brands like Miller Lite and Coors Lite, and we're going to drive trial and awareness behind our new innovations of Visi and Coors Seltzer and Blue Moon Light Sky. But just as we've shown in Q2, we'll obviously monitor what's happening around us, and if things change, we've shown that we can pivot our marketing as appropriate. As far as your first question is concerned, look, it's quite a tough question to answer. We haven't seen a huge spike like we saw in that one week in March, but certainly the continued off-premise activity in some of the states where we've seen openings and then closings again of on-premise outlets has continued.

And just to clarify, this is super helpful, Gavin. Just to clarify, when you say the second half like the MG&A is in total or just marketing will be up, would you say that your cost savings that you just discussed in the prior question, will kind of fund this increase? Or in other words, should we say margins will be under more pressure or actually not so much pressure in the second half?

There's a couple of ways that I can answer that question. One is we're definitely going to, well, based on what we know now, we're going to increase our marketing spend in the second half. Our revitalization cost savings will continue to flow through. But as Tracy mentioned, there are some one-off items which were beneficial to us in the second half of last year, which won't obviously be in the second half of this year. So, we're not getting a specific guidance on that, but that's broadly how you should look at it.

That's helpful. Thank you.

Our next question comes from Vivian Acer from Talon. Please go ahead with your question.

Hi. Good morning. Thank you. Gavin, I was hoping to follow up on a comment that you made earlier in regards to where you think hard seltzer shelf space should be coming from. Did I hear you correctly that you think Kraft should be a share donor?

Good morning, Vivian. Yes, Kraft should be. Underperforming Kraft brands should be a share donor. My comment really relates to the word underperforming, right? And there are a number of underperforming Kraft brands that exist. out in various channels and that should be a share donor. The same would apply to slower moving, underperforming flavored malt beverages.

Okay. That makes sense. I'm curious, do you think that below premium should be a share donor as well because it seems to be the leading laggard, if you will, on a subcategory basis? Thanks.

Well, not at the expense of faster turning subpremium economy brands. And we've always said all segments matter, and they do. And to an earlier question, whilst we haven't seen an impact of trade down, one can assume that that will happen if the consumer spending unemployment remains fairly challenged into the back half of this year and into next.

That's helpful. Thanks. If I can squeeze one more in. On Visi, any insights in terms of your underlying consumer demographics? Because we're starting to get some of that detail from your peers. Thanks.

Yeah, look, Visi is being well received by all consumer demographics, but particularly by the 21 to 29-year-old.

Very helpful. Thank you so much.

And our next question comes from Steve Powers from Deutsche Bank. Please go ahead with your question.

Yeah, thanks. Hey, guys. So you talked about this to a degree in the prepared remarks, but is there a way you could give us a little more color on the supply constraints that you're facing throughout the value chain as we stand here today? Maybe a bit more perspective on just how thin chain inventories are as we enter August, and then ultimately, your line of sight being able to more fully catch up on that. Clearly, you want to ship above consumption in the back half, but I'm just trying to get a little bit more sense for where we are today and what the magnitude of that might be as we progress through the next couple quarters.

Yeah, thanks, Steve. Good morning. Look, I mean, as I said in my opening remarks and as you referenced, right, we're producing and shipping canned beer at significantly higher rates than we have in recent years. The The demand for 12-ounce cans is just unprecedented, and our competitors in the alcoholic and non-alcoholic space are seeing it as well. For us, this has been more pronounced for the 12-ounce tall slim can, and then also the strong success of Busy and Blue Moon Light Sky. That has also added to the pressure. We've addressed this in a number of ways. One is we have suspended production of slower moving products packaged in the 12-ounce cans so that we can fulfill our faster moving packs. And we've had to adjust orders from wholesalers for some packages to balance supply levels across the country. We are seeing the situation begin to improve with respect to the 12-ounce industry standard can and so, you know, some of the slower moving products will start to turn those back on in the weeks ahead. But we do remain tight on the quiz like 12-ounce tall can. And that will probably continue impacting us through summer. It is, of course, dependent upon on-premise closures or reopenings. You know, we also did have some packaging supply constraints specifically for paperboard, but our supply is making progress as far as that's concerned as well. So, you know, I think Tracy said in her opening remarks, I mean, it is our intention to to ship to consumption for the full year and, yeah, I think that's about it.

Okay.

That's helpful. If I could, I mean, maybe this is a bit more theoretical, but, you know, just given where your balance sheets at the current leverage level and your desire to remain investment grade, which is clear, do you see any constraints at all on your ability to, invest more aggressively than planned if optimistically you get the sense of conditions unexpectedly improving. I guess I'm just trying to get at whether or not there's a risk that you may have to be a bit more patient versus some of your more underlevered competitors, which could place market shares under pressure if we encounter such a point of demand inflection.

I'd answer that in a couple of ways. Tracy can answer the EBITDA ratio as it relates to the end of the second quarter on a 12-month trailing basis and where we are. It certainly hasn't constrained us from investing behind what we think are going to be very successful entrants. I point to our Fort Worth expansion of both a canning line and a filtration system. Neither of those were were necessarily planned into this year and we've made and have full board support to invest a meaningful amount of money behind our SELTA portfolio. I think it's also you can draw the same conclusion from the fact that we're increasing our marketing spend in the back half of the year or that's our current plan is to do that based on current circumstances. I think what I'm saying is we are quite willing and able to invest where we believe we need to invest to be successful for the long term. That really plays, Steve, to my point about doing things in the short term but not hobbling us for the long term. Do you just want to comment on our ratio for this?

Yeah. So, Steve, look, we have been making, I believe, really good progress against leveraged ratios. Obviously, quarter by quarter it differs. If I look at our leverage ratio at the end of, or our net debt to EBITDA ratio at the end of June on a trailing 12-month basis, we were around 3.4 times. So, you know, that's an improvement from the end of the year, the end of last year. So, you know, we'll continue to focus on debt and debt paydown and leverage ratios as it is our desire to maintain our investment-grade rating.

Great. Yeah, that's all fair. Thank you very much.

And our next question comes from Brian Spillane from Bank of America. Please go ahead with your question.

Thank you, Operator, and good morning, Gavin and Tracy. Good morning. Hey, so my question is just related to the marketing spend in the back half of the year, and I guess there's kind of two components to it. One is, you know, there's a lot of companies across our food and beverage coverage universe who are also planning to have plans to shift their marketing spend to the second half of the year. So I'm curious if, you know, there's a lot of demand for advertising channels, if that's creating any kind of inflation or, you know, competition for the airtime and maybe does it cost more. And then the second would be given that you're, you know, going to be spending a lot more in the back half of the year, just curious how you're thinking about the effectiveness of that spend given it being concentrated in a short period of time. How do you sort of, you know, think about the return on investment or just how you're planning to spend just given that it's kind of unusual to have such a back-up load plan?

Yeah, thanks, Brian. To answer your first question, no, we haven't seen that. I think as many marketeers are upping their spend in the second half because it makes sense, there are some industries where, you know, it still doesn't make sense. on-premise national chains would be an example. So, you know, the short answer is no. We haven't seen any impact from that perspective. The second part is the effectiveness of the spend. And actually, I saw some results either late last week or earlier this week that showed that the marketing effectiveness on some of our programs in the second quarter was as high as we've seen them in quite some time. And I'm referring to campaigns like the Miller Lite Virtual Tip Jar and the the Coors Light America could use a beer. So, you know, our marketing effectiveness and return on investment is actually getting better, not worse, and I would expect that to be the case in the second half given the programs that we've got coming.

Thanks. If I could just follow up on one more. How much of the spending plans in the back half of the year are dependent on live sports? you know, coming back to a fuller schedule. So like if the NFL ended up with a shorter season or there's no NFL for some reason in the back half, would that at all affect your spending plan?

Yeah, it would. I mean, it would probably affect how much we spend, but it would also affect where we would spend. So, you know, our marketing team have been very nimble in the second quarter adjusting on the fly, so to speak, given that we weren't expecting a pandemic and, and shifting our spend into places where our consumers are. So right now, we're obviously expecting a full NFL season, and we've got Major League Baseball underway, and hockey starting, and the NBA starting. But that should change. Based on what they did in the second quarter, I've got absolute confidence that we would be able to be nimble in the third, and we would adjust our spend dependent on whether it was effective or not. Thanks, Gavin.

And our next question comes from Rob from Evercore. Please go ahead with your question.

Great. Thank you very much. I just want to kind of go back to a couple of big topics, the canned situation and hard seltzer. So on the canned side, have you quantified or ballparked what you think your lost sales were in the quarter due to out of stocks? And maybe remind us what percentage of your business last year was in cans and what percentage it is this year. And I'm assuming that it's that, you know, movement to cans that's driving that positive mix.

Thanks, Robert. Look, I mean, from a lost sales point of view, no, I'm not going to quantify that. I mean, obviously, we have lost some sales. There's two methods of determining out of stocks, right? It's It's out of stocks at our wholesaler and it's out of stock on the shelf. Obviously, the former tends to be higher than the latter because of just the way the whole system works. I'm quite sure that we have lost some retail sales, but consumers have been shifting between package types when their preferred package type is not available. I'd also point that we are shipping more canned beer than we have in many, many years, Robert. As far as the mix is concerned, look, I think I can refer you to historic numbers in our 10K as far as the can. and bottle and keg split is concerned. I'm not going to get into that now. I just feel it's a little competitively sensitive right now. But you can assume that kegs in Europe were pretty low in the second quarter and came off a lot in the North American business and bottles for the same reason would have come off because there's a strong on-premise component to that as well. But it's safe to say that I've top 10 fastest growing skews at the moment are cans.

Just in terms of dealing with the can situation, how much price increase do you think you're going to have to see in the second half of the year or in the next year given the extreme shortage on cans?

Robert, you know we don't talk about pricing as it relates to the out years. I would say to you though that our partners have been tremendous partners with us from a supply point of view and whilst there obviously is an uptick in input cost to source cans from South America or from Africa or from the Middle East, the aluminum price has also been a bit of an offset to that. Our partners have been superb from this perspective.

Great, great. And then just one follow-up on Coors Seltzer. You know, tough time of the year to bring in a new product. Can you talk about where retailers are in terms of their shelf sets? I'm getting a lot of mixed messages here. On that front, some suppliers saying it's just not even going to happen this year. Others say they expect something in the fall. So I'd love to hear from you on that. And then based on that, around that, what is your sense of the kind of shelf space commitments that you're hearing from your top retail partners?

It's not the easiest time to launch a new innovation, Robert, you're right. But, you know, Blue Moon Light Sky and Visi are off to very strong starts notwithstanding that. The reaction that we've received from our retailers, particularly the chain customers for Coors Seltzer is very strong. I'm very pleased with the chain placements that we've received. And if the initial orders from our distributor are any indication of success, then we're going to get off to a very strong start.

Terrific. Thank you very much.

And our next question comes from Bonnie Herzog from Goldman Sachs. Please go ahead with your question.

All right. Thank you. Good morning, everyone. I did actually want to circle back on your marketing spend, you know, just ask a few questions, but maybe ask a little differently. You know, first, you pulled back a lot in the quarter, so I guess I wanted to understand from you if you see a potential risk, you know, of a disproportionate negative impact on your top line in Q3 or maybe even Q4, since typically there is a lag effect on spending. I guess, you know, you guys seeing any signs of this so far? You know, maybe some color on your trends in July would be helpful to hear.

Thanks, Bonnie. Look, remember the MS, the MG&A cut is both North America and Europe. And so we have pulled back. The team in Europe have done a tremendous job prioritizing spend and pulling back spend based on the fact that we do over-index to the on-premise in Europe and obviously it was nonexistent in the UK for three months of the year. As far as hurting our brands, no. In fact, I have the opposite data, as I think I said in response to an earlier question, that the marketing effectiveness behind our core brands in North America has actually been very positive. And when you look at Coors Light's segment share, I think it had its highest segment share ever in the second quarter. And Miller Light delivered a 23rd consecutive segment share growth. So we're not seeing that. In fact, we're seeing somewhat of the opposite.

Gavin, can you share how your trends have been in July just to give us a sense of how the business has been trending as maybe we're seeing some openings in the last few weeks granted things are shutting down again. So just curious to hear how your business has been performing.

Yeah, you know, Bonnie, we went off giving, you know, short-term sales trends many years ago. We gave it last quarter because we thought it was helpful given that we were right in the middle of the pandemic. But, you know, we don't believe that a short-term trend is terribly helpful to the market, so we don't plan to give that.

Okay, and just one final quick question, if I may, kind of circling back on sort of the canned shortage, you know, situation. I'm just you know, curious because, you know, you have a joint venture with Ball Corp. So it'd be helpful if you maybe could give us a little more color on that relationship and, you know, if in fact, you know, it might be giving you a bit of an advantage during this difficult period for the entire industry because obviously it's an industry-wide issue. So I'm just wondering, you know, how that may or may not help you just giving you, again, your relationship with Ball Corp. Thanks.

Yeah, Ball's been a tremendous partner of us during this pandemic, Bonnie. It's, you know, just like we're constrained, they're constrained, and, you know, they've helped us look for cans around the globe. So I can't say enough positive about our partners during this time. As far as our joint venture is concerned, that primarily produces the Kurslak Tall and obviously the Keystone Tall and We're running that plant as hard and as fast as it can and it would be giving us an advantage at this point in time, but it is still very constrained given the huge demand that we've had for Coors Light large packs primarily. That plant is running effectively and efficiently.

All right, thank you.

And our next question comes from Bill Kirk from MKM Partners. Please go ahead with your question.

Hi. Thanks, everyone. I know you won't give the July trends, and that's fine, but maybe just help me with my math inter-quarter for the reported period. If U.S. brand volumes started in April at minus 14 and ended at minus 5, does that imply May and June were roughly minus 1 year over year? Is that kind of the the exit rate that you ended the quarter in for brand volumes in the U.S.?

Look, I think we can say that our global brand volumes did sequentially improve. And obviously, given that the first few weeks in July we said was down 14 and we ended up at 5, you can do the math as you've clearly done, but we're not going to give month-to-month retail sales.

Okay, thank you. Sorry, April. Sorry, the down 14 was April.

Yeah. And ladies and gentlemen, with that, we'll conclude today's question and answer session. I'd like to turn the conference call back over to management for any closing remarks.

Sure. Thank you, everybody. Again, thanks for joining us today. Just wanted to remind everyone and point folks that our 10-K has been filed and has all of the details on our segment reporting. as well as both US GAAP and non-GAAP measures. And then, again, please, you know, looking forward to reaching out to all of you. Please do not hesitate to reach out to me. This is Greg Tierney again if you have any questions. Look forward to speaking to you soon. Thanks much.

Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending. You may now disconnect your lines.