Molson Coors Beverage Company

Good day and welcome to the Molson Coors Beverage Company Third Quarter Fiscal Year 2021 Earnings Conference Call. You can find related slides on the Investor Relations page of the Molson Coors website. Our speakers today are Gavin Hatterley, President and Chief Executive Officer, and Tracy Joubert, Chief Financial Officer. With that, I'll hand it over to Greg Carini, Vice President of FP&A and Investor Resolutions.

Thank you, Charlie, and hello, everyone. Following prepared remarks today from Gavin and Tracy, we will take your questions. In an effort to address as many questions as possible, we will ask that you limit yourself to one question. If you have more than one question, we'll answer that first question first, and then we'll ask you to re-enter the queue for any additional follow-ups. If you have technical questions on the quarter, please pick them up with our IR team over the days and weeks that follow. Today's discussion includes forward-looking statements, and actual results or trends could differ materially from our forecast. More information, please refer to the risk factors discussed in our most recent filings with the SEC. We assume no obligation to update forward-looking statements. GAAP reconciliations for any non-U.S. GAAP measures are included in our news release. 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, Greg, and thanks, everybody, for joining us here this morning. I'm going to change things up a bit here from our normal structure, and I'm going to share seven key headlines from our third quarter. Firstly, Quizlight is growing share of the total beer category in the United States. This is our biggest brand in our biggest market, a brand that many doubted could get back onto this trajectory, and it's growing share in the industry for the first time in more than five years. Two, globally Molson Coors net sales revenue from its above premium portfolio has surpassed 25% of our brand volume net sales revenue on a trading 12-month basis for the first time since the revitalization plan was announced. Third, Molson Coors has grown share of the US above premium segment for two straight quarters for the first time in over five years. Four, as we expand beyond beer and with three months still left in the year, Molson Coors has sold nearly 2 million cases of non-alcohol beverages in the United States. Five, Molson Coors' total market share trend in Canada has improved for eight straight months, leading to national share growth in the third quarter. And the European business has bounced back, essentially reaching 2019 revenue levels. Sixth, Challenges in the global supply chain impacted our third quarter volumes. We are already seeing improvements in brewery output in October. We are back to shipping approximately 1 million barrels per week in the U.S. during the fourth quarter, and in aggregate, distributed inventories are starting to improve. And seventh, like for so many others, transportation availability and transportation costs are worse than they have been in years. So I want to start there, and then we'll work backwards. Like we've discussed for the second quarter, and like other CPG companies, inflation was again a challenge in Q3, specifically with respect to transportation. Fuel prices are up, truckers are in short supply around the world, and freight costs are up too. As Tracy highlighted in our second quarter earnings, we have long-term contracts with carriers and a robust hedging program, as well as meaningful cost savings programs to mitigate price fluctuations. But driver shortages at our existing carriers are forcing us to use the spot market and to pay spot market rates, which are significantly higher than they have been in many years. Right now, up to one in every four shipments are at these high spot rates. That level of inflation cannot be completely absorbed or avoided, and you're seeing the results in our COGS for the quarter. Beyond the hedging and cost savings, we are taking steps to reduce the impact, including shipping more beverages on rail. Also, we expect gross margin benefits as we continue to premiumize our portfolio under our revitalization plan and achieve improved efficiencies through our economy-skewed deprioritization and rationalization plans. But even with those steps, inflation will continue to be a pressure point for us and for just about every other company. Now, shipments and trends in the third quarter were not what we wanted them to be. Some of that is related to the challenges of moving finished goods to distributors and also moving suppliers within our brewing network. Some of that is related to our own suppliers having difficulty getting us the materials we needed, since they're facing the same supply chain challenges as everyone else in the world. But the good news is that this trend, as I've said, has already started turning. While August and September were difficult production months, The steps we have taken in the third quarter to expand our base of material supplies and improve our availability for most packaging materials have allowed us to increase shipments so far in the fourth quarter. We are once again shipping approximately 1 million barrels per week in the U.S., and that has helped us increase distributed inventories by approximately 20% over the past few weeks. So that is, of course, a measurement of our total network, and that is a trend we expect to build on. I also want to quickly address volume. Some of you may look at our North American volume trends with concern, but I want to remind you that this is predominantly the result of an intentional and strategic decision we made to deprioritize and eliminate a large number of lower margin, slower moving skews in the U.S. that were mainly in the economy segment. The intention was to simplify and premiumize our portfolio, and that is exactly what is happening. So our volume is down, but our net sales revenue per hectolitre is up. And I can again tell you that we are on track to deliver on our full-year key financial guidance for 2021. Look at what is happening in Canada. We have improved our national share trend for eight straight months, leading to total share growth in the third quarter. This is the best share trend performance we have seen in at least six years. As the on-premise reopens in Canada, our share is growing above 2019 levels, but big driver of our progress. Quizz is growing share of a segment in Canada as well, with Miller Lite also growing approximately 30% in a quarter. Molson Ultra has seen strong year-to-date performance, with volume growing mid-single digits, along with strong share gains. These are all very good signs for our business in Canada. Not to be outdone, our European business has bounced back strongly. In the UK, our on-trade net sales revenue has now reached 2019 levels, and margin has surpassed 2019 levels as the business continues to premiumize, which I'll touch on in more detail in a moment. As we look to the fourth quarter, we plan to keep this momentum up by stepping up our European marketing investments. Two years after shifting from a beer company to a beverage company, we have reached a significant milestone. For the first nine months of the year, we have sold nearly 2 million cases of non-alcohol beverages as we continue to drive towards our $1 billion revenue ambition for our emerging growth business by 2023. We have launched into categories where we think we can create scale offerings like water, energy, and coffee. First, of course, is our partnership with Zoho, which has been making some serious noise since its launch just over six months ago. It's the number one new energy franchise in 2021, and it's already a top 20 energy drink brand. Zola already has 31,000 buying outlets and over 115,000 points of distribution, with more coming online every day. There's a lot of upside for this brand. We have the distribution partnership for La Cologne's incredible lineup of ready-to-drink coffees, one of the fastest growing spaces in the beverage industry. And thanks to our early success with distribution in large national retailers, we've also unlocked national distribution of La Cologne in grocery and mass channel stores for early 2022. Growing beyond the beer aisle is no longer an aspiration. We're doing it, and we're driving scale. Molson Coors has grown share of the U.S. above premium segment for two straight quarters for the first time in over five years, That mark is largely driven by the continued success of our U.S. hard seltzer portfolio, and this is another space I want to take a little more time to discuss. There's been a lot of noise over the past few months about hard seltzers in the U.S., a lot. Not all of it has been accurate, and much of it has been unproductive. Now, are hard seltzers going to keep growing at 300% per year? Well, of course not, and we've been clear since last fall that we didn't expect them to do so. But in spite of the rosy forecast some had a year ago and the bleak forecast being thrown about today, there are some clear truths. Hard sales are here to stay. They are over 10% of their category sales and growing. But the segment has matured and the easy growth is over. Moving forward, it is going to take distinctive, differentiated brands in order to succeed. And that's why we feel so confident about our portfolio. While so many of the mainstays are declining, Molson Coors has the fastest-growing hard seltzer portfolio in the United States. Visi brand volumes grew 50% in the third quarter versus the prior year and passed yet another competitor to become the number four hard seltzer in the United States. Despite only being launched in 16 different markets in the U.S., Topo Chico hard seltzer occupies the number three slot as a new item in the general malt beverages category. The brand also garnered a 2.4% share of the U.S. market, according to IRI, and this success has led to the national expansion of the brand. But that is not the extent of our premiumization. Our joint venture with Yingling launched in Texas this quarter, and we are very pleased with the very early results. By the end of August, it was already available for purchase in 40,000 locations across the state. As the on-premise continues to strengthen, so have two of our biggest above-premium brands. Peroni is up double digits, gaining share in the category and outpacing all other European imports. Blue Moon Belgian White is up high single digits, and this quarter we announced plans to build upon the success of Blue Moon Light Sky, which our data shows is 96% incremental to the flagship Belgian White. Blue Moon LightSky continues to see double-digit growth year-to-date after finishing 2020 as the number one new beer in the United States. In 2022, we'll add more muscle to the Blue Moon family as we launch LightSky Tropical Wheat. As I said in our second quarter earnings call, premiumization is here to stay at Molson Queers. All that growth in the U.S. is contributing to a significant premiumization of our entire global portfolio. So much so that as of the third quarter, the percentage of Molson Coors portfolio that is above premium has surpassed 25% of our brand volume net sales revenue on a trailing 12-month basis for the first time since the revitalization plan was announced. And that progress is being seen throughout the company. The early returns on our Canadian hard seltzer portfolio have exceeded expectations with both Visi and Coors seltzer generating strong market share. We will extend that streak when we introduce Topo Chico hard seltzer in Canada in 2022, which we announced this month. Six Pints, our Canadian craft business, is growing double digits despite on-premise restrictions. Combined with the growth of Middlelight and Molson Ultra, this has continued to drive the premiumization of our business in Canada. In Western Europe, our new Mediterranean lager, Madri, has already doubled its distribution goal for the year, now at approximately 5,500 on-premise outlets, with more coming in the fourth quarter. In Central Eastern Europe, new smooth Pulsner lager, Praha, has been performing above expectations across the markets, with presence in more than 15,000 outlets, supported with strong media campaigns reaching over 13 million consumers. And in Latin America, Coors Light is growing in Puerto Rico for the first time in 15 years where it sells at an above premium price point. And speaking of Coors Light, that brings me to the final point I want to make this morning. In the face of many doubters, Coors Light is growing share of industry in the United States for the first time in more than five years. The brand's strong performance in the third quarter was aided by the continued success of our Made to Chill campaign and through increased marketing investment. Folks, we're making progress on the things that are within our control and driving measurable results that continue us on the path to delivering on our goal of sustainable, long-term, top- and bottom-line growth. We are two years into our revitalization plan, and I remain confident that we are on track to deliver our full year key financial guidance for 2021 while continuing to invest behind our brands. And I'm very optimistic about the future for Molson Coors. Tracey?