Molson Coors Beverage Company

Good day and welcome to the Molson Coors Beverage Company fourth quarter and fiscal year 2021 earnings conference call. You can find the 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. With that, I'll hand it over to Greg Tierney, Vice President of FP&A and Investor Relations.

Thank you, Operator, and hello, everyone. Following prepared remarks today from Gavin and Tracy, we will take your questions. To address as many questions as possible, we ask that you limit yourself to one question. If you have more than one question, we will answer your first question and then ask you to re-enter the queue for any additional or follow-ups. If you have technical questions on the quarter, please pick them up with our IR team in the days and weeks that follow. Today's discussion includes forward-looking statements. Actual results or trends could differ materially from our forecast. For 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. Gap reconciliations for any non-U.S. gap 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 in U.S. dollars and in constant currency when discussing percentage changes from the prior year period.

With that, over to you, Gavin. Thanks, Greg. 2021 was a turbulent year all around the world for our industry and for our business. The pandemic raged and receded multiple times, but unfortunately it surged in the last six weeks of the year. And with it came government restrictions related to bars and restaurants, most notably in Europe and Canada. That impacted our business, creating a whole host of challenges. And yet, through it all, Molson Co. has made tremendous progress in each of the pillars of our revitalization. Our two biggest brands each grew net sales revenue in the U.S., America's and globally. An incredible feat, given the fact that over the past few years, many folks have been of the belief that this whole segment was on a path of spiraling clients across the U.S. and Canada. We finished the calendar year with a larger global above premium portfolio than ever before, with our hard seltzer portfolio growing at the fastest rate of any major beverage company in the United States. Very strong hard seltzer growth in Canada and standout beer innovations in the UK, as well as in Central and Eastern Europe. We are moving to scale beyond the beer aisle on the back of the fastest growing energy drink in the United States per RRI, and we continue to invest in our future growth all around the world. Folks, in 2021, Molson Coors grew the top line for the first time in a decade. Top line growth is one of the core goals of our revitalization plan, and a result our company has not been able to deliver in a long time. Yes, we slightly missed our guidance on EBITDA as a result of the impact of the Omicron variant surge in the last six weeks of the quarter. But at the same time, we've been very disciplined with cash within the business, improving our leverage ratio faster than we expected, And we chose not to cut the marketing investments that will help ensure the long-term health of our brands and our business. Overall, Molson Co. has finished 2021 as a healthier business than we were at the end of 2019. Now, as you recall in our third quarter call, we said that uncertainty as it pertains to potential surges in the coronavirus and or its variance to varying degrees by market could have an impact on our financial performance. Unfortunately, that is exactly what happened. The on-premise in much of EMEA experienced increased restrictions beginning in the middle of the fourth quarter as the Omicron variant surged. In the UK, the Christmas holiday period is one of the most important sales windows of the whole year, and due to government restrictions for pubs and restaurants and more cautious consumer behaviour, we fell to below 80% of 2019 net sales revenue in September. The UK is our third largest global market by net sales revenue, and the on-premise accounted for 65% of our business there in 2021. So as was well established earlier in the pandemic, when that channel is restricted or shut down, it has a meaningful impact on our business, and we felt that in the fourth quarter. But we know from experience over the past two years of the pandemic that this has been temporary. When the on-premise channel has reopened and when consumers are comfortable reentering bars and restaurants, They came right back. And I'm proud to announce that we were ranked number one in the UK Advantage Group survey. That is an independent industry-wide survey on how the big on-premise national customers across the UK view brand owners. And the results speak volumes about our hard-working team. Additionally, some of our US suppliers had renewed challenges providing materials like bottle crowns at the end of the year, which had knock-on effects on our production. But this has certainly eased in the time since. We've taken matters into our own hands by increasing the number of suppliers we work with to limit these kind of issues going forward. One point I want to make clear, though, is that while pandemic-driven issues with freight availability in the global supply chain continue to challenge us in the fourth quarter, we made significant improvements with our distributed inventory in the US. We closed 2021 with about 700,000 more barrels of distributed inventory than we did in 2020. that progress puts us in a far better inventory position heading into 2022 and in fact our out of stocks for core brands and packs are at their lowest level since before the pandemic today our top line is growing fast for the first time in 10 years our core brands are growing net sales revenue for the first time in years our portfolio is premiumizing to levels never before achieved we are moving to scale beyond beer and our business is making tangible progress towards achieving the goals of our revitalization plan. We are set up for a strong 2022. Now I want to dig in a little deeper, starting with our core brands. For the past few years, you've heard us talk about things like segment share and brand health as leading indicators that Coors Light and Miller Light remain strong foundations of our global business. And today I'm very happy to tell you that each brand grew net sales revenue in the U.S. in 2021. Coors Light by 4.4% and Miller Lite by 7.6%. We also saw double-digit growth in our on-premise placements for Miller Lite versus last year. In Canada, Coors Light also reported revenue growth in the fourth quarter, while Miller Lite revenue was up double digits for the full year, with acceleration in the fourth quarter. Our portfolio continues to premiumize. Our above-premium net sales revenue has grown over 15% in 2021. The biggest driver of that premiumization was our growth in U.S. hard seltzers. Despite ending the year with only one nationally distributed hard seltzer brand, our portfolio grew triple digits over the course of 2021, and we generated the largest growth rate in this space among any of the major beverage suppliers per ROI. Today, we have two of the top five hard seltzer brands in the U.S., with Topo Chico Hard Seltzer and Vizzy, and we see more upside ahead. But the... in hard seltzer franchises, Vizzy is the only one that has existed for multiple years and has never lost hard seltzer share in a quarter. In 2022, that success is continuing with Vizzy growing both industry and hard seltzer share. And while it's still early, we are very optimistic about the national launch of Topo Chico hard seltzer. Topo Chico hard seltzer has jumped to the sixth fastest-turning hard seltzer market nationally, and we believe it can become a top three hard seltzer in the U.S. Per IRI, Topo Chico hard seltzer has improved industry share each week since its national launch. Even in markets where the Topo Chico mineral water is less known, we are seeing strong results. Per IRI, Topo Chico hard seltzer alone has already reached a five-share of hard seltzer in seven new markets since launch. And we're bringing new packs to the brand with bottles, margarita hard seltzer, and ranch water that is already driving results. Our 12-pack of Topo Chica ranch water is not only the fastest-turning ranch water in Texas, it's the fastest-turning in the United States. Our hard seltzer progress extends to Canada, where we achieved a nine-share in hard seltzers in less than nine months. That was driven by both Vizzy and Queer Seltzer, with both brands finishing the year in the top 10 hard sales of brands in Canada. Above premium beer continues to be a growth driver for us as well. In the U.S., Blue Moon Belgian White grew net sales revenue by high single digits in 2021 and saw double-digit growth in the fourth quarter. Peroni earned double-digit growth in 2021, and our U.S. regional craft portfolio once again outpaced the category. And we are gaining total share of the craft segment in Canada as well, led by the strong performance of Brassia de Montreal and Food Diablie. We also continue to premiumise our EMEA and APAC business. Madrid, exceptionally now, has continued to accelerate as the world beer category grows in the UK and in Ireland. As of today, it's now delivering the fourth highest rate of sale of all draft world larders per CGA, And in 2021, Prava became the fastest-growing premium 4% lager per CGA. We are also bringing an exciting new innovation to market in the U.S. through an expanded agreement with the Coca-Cola Company. Simply Spiked Lemonade will be a full-flavor alcohol beverage inspired by the number one overall juice brand, a growing billion-dollar brand, and the second-largest brand in Coke's portfolio. Simply can already be found in one out of every two American households. and the brand continues to grow. So we're very excited about this opportunity to shake up the full-flavor alcohol beverage space as more legal-age consumers look for bolder flavor. In 2021, we put teeth behind our talk of becoming a total beverage company. Our Beyond Beer products are performing very well and helping to fuel our emerging growth business, which contributed approximately $800 million to 2021 net sales revenues. taking ahead of our $1 billion annual revenue target by 2023. Zoho has already proven to be a success, with a lot of opportunities still ahead as we continue to expand distribution. In less than 10 months, it has gone from nonexistent to the fastest-growing energy drink in the U.S. per hour, and it is number two in health energy drink sales in the C-Store channel. Latin America closed out 2021 with stellar performance, generating double-digit growth across this part of the business and record sales in many of the markets in which we operate. And we're backing it all up by investing in our capabilities. There are the physical investments, which are, of course, foundational. New hard seltzer production capabilities will be coming online in the U.S. We will soon turn on a new hard seltzer and spirits production line in Toronto. Our new state-of-the-art brewery is online in Montreal, and we're adding new canning and production capabilities in the UK. And then there are the investments we are making behind our brands. We increased marketing behind our core brands and key innovations, and we've become much more effective with those dollars as we accelerated our digital marketing capabilities. Folks, over the past two years, we have laid the foundation for sustainable, long-term, top- and bottom-line growth of Molson Coors. Today our core power brands are growing dollar sales. Today more of our portfolio is in the above premium space than ever before. Today we are moving to scale beyond the bearer. Today we have stronger capabilities to drive future growth. And because of all of that, because of the foundation we have laid over the past two years, against great odds and in a historically challenging environment, we can give guidance that in 2022 Molson Coors expects to deliver highest top and bottom line growth in over a decade. We will continue to invest in our business to drive towards sustainable long-term top and bottom line growth. Now, to give you greater details on that, I'd like to hand it over to our Chief Financial Officer, Tracey Jabbair. Tracey?

Thank you, Gavin, and hello, everyone. As Gavin highlighted, 2021 was a year of tremendous progress against our revitalization plan. Despite the challenges that we and so many other companies face, we achieved our top-down guidance of mid-single-digit growth for the year, delivered strong free cash flow, enabling us to further reduce our leverage ratio and return cash to shareholders. We continued to execute our revitalization plan, holding a strong foundation for future growth, and we issued fiscal 2022 guidance that underscores that progress. Before I take you through our quarterly, our full year performance, and our outlook, I would like to update you on a couple of naming convention changes in our business unit reporting. This does not change our reported results for these segments and was done so the names better reflect the geographies within the segments. As of December 31, 2021, our reporting segments are the Americas, formerly called North America, and EMEA and APAC, formerly called Europe. Now let's discuss the fourth quarter. We delivered strong top line and EBITDA performance. While we benefited from cycling significant on-premise restrictions in the prior year, we were still impacted by the rapid emergence of the Omicron variant in mid-November, which resulted in overall on-premise toughness compared to the third quarter. In December, the U.S. on-premise net sales revenue was approximately 86% of December 2019 net sales revenue, down from third quarter levels of approximately 88%. Canada was approximately 60% of December 2019 net sales revenue, down from third quarter levels of approximately 80%, and the U.K. was below 80% after being 13.7% driven by EMEA and APAC growth of and America's growth of revenue growth was driven by higher financial volumes, positive global net pricing, and favorable brand and channel mix due to premiumization and fewer on-premise restrictions versus the prior year. In fact, consolidated net sales revenue increased 4.3% compared to 2019. Consolidated financial volume increased 7.4% as we rebuilt U.S. domestic inventories and grew brand volumes 2.3%, driven by EMEA and APAC, Canada and Latin America. This was partially offset by lower U.S. economy brand volumes as a result of our economy skewed deep and rationalization program. In the U.S., we grew net sales revenue 6.3%, with domestic shipments up 3.3%, reflecting our efforts to build distributor inventories for the supply disruptions in 2021. U.S. brand volumes declined 3.8%, but this was driven entirely by the economy's portfolio, which was down double digits, while our premium portfolio grew low single digits, and the above premium portfolio was up double digits for the quarter. Canada, our net sales revenue increased 9.9% on strong brand volume growth of 6%, while Latin America's net sales revenue increased 15.9% on brand volume growth of 12.4%. EMEA and APAC net sales revenue grew 56.5%, driven largely by Western Europe, but also growth in Central and Eastern Europe. Strength in our core brands and new innovations like McGree led to double-digit growth in both premium and premium volumes, partially offset by double-digit declines in economy. Net sales per hectolitre on a brand volume basis increased 3.8%, driven by global net processing growth and positive brand and channel mix, with premiumisation delivered across both business units. Underlying costs per hectolitre increased 5.2%, driven by cost inflation, including higher input and transportation costs, and mixed impact from premiumization. So we benefited from volume leverage due to higher production volumes and continued progress on our cost savings program. Underlying in G&A in the quarter increased 2.4% as we continued to invest behind our core brands and innovations across both business units while G&A was flat. As planned, we increased marketing investments in the quarter to levels above the fourth quarters in both 2020 and 2019, providing strong commercial support behind our brand as of 2022. As a result of these factors, underlying EBITDA increased 21.9%. And recapping the full year, consolidated net sales revenue increased 4.7%, with Americas up 2% and EMEA and APAC up 19.6%. Top-line growth was driven by global net pricing, favorable brand and channel mix from premiumization and fewer on-premise restrictions, and EMEA and APAC volume growth. This was partially offset by lower financial volumes in Americas. Consolidated financial volumes declined 0.5%, while brand volumes declined 1.7%. America's brand volumes declined 3.2% as a result of the economy's skewed deprivatization, which began in the second quarter of 2021, and rationalization programs, which was announced last July. EMEA and APAC brand volumes were up 3%. Net sales per hectare on a brand volume basis grew 3.8% due to global net pricing growth and favorable sales mix. In the U.S., net sales per hectolitre on a brand volume basis was up 4.4% for the year, driven by net pricing growth and the succession of both premium products, including RISD, Topo Chico Hot Salsa, the Blue Moon family, and Peroni. Underlying costs per hectolitre increased 6.9%, driven by cost inflation, including higher input and transportation costs, mixed impacts from premiumization, and volume deleverage. However, with the benefit of our robust hedging and cost savings programs, we were able to mitigate some of the inflationary pressure. Underlying NG&A increased 2.9%, largely due to higher marketing investments versus 2020. In the second half of 2021, we began to progressively increase marketing spend with the resumption of more sports and live events. MG&A increases were also driven by lacking targeted cost mitigation actions in 2020 due to the coronavirus pandemic, and were partially offset by our cost savings program. In 2021, we delivered approximately $220 million across MG&A and cost of goods sold in our three-year $600 million cost savings program. Over the 2020 through 2021 period, we have delivered an aggregate $490 million, placing us well on track to meet our $600 million target in total growth savings by the end of 2022. As a result of these factors, underlying EBITDA decreased 3.5%. This was slightly below the guidance of a property flat and was driven by the on-premise toughness as a result of

of the Omicron variant.

However, underlying net income before income taxes was approximately flat for the year as a result of lower interest and depreciation, 5.6% underlying EPS growth compared to the prior year. Underlying free cash flow was $1.1 billion for the year, a decrease of $183 million from the prior year. This decline can be wholly attributed to the repayment of approximately $100 million of taxes related to various government-sponsored deferral programs related to the pandemic, which benefited the prior year free cash flow by $150 million, creating a negative swing factor of about $250 million on our 2021 free cash flow. Excluding these changes, net working capital movements were favorable to the prior year. Capital expenditures paid were $523 million a year, down from $575 million in 2020, and focused on expanding our production capacity and capability programs, such as the previously announced Golden Brewery Modernization Project, our new Montreal Brewery, which opened during the fourth quarter, and expanding our hard-salford capacity in Canada and the UK. We have continued to make great progress strengthening the balance sheet and improving our financial flexibility. We reduced our net debt by nearly $1 billion in 2021 and are trailing 12 months net debt to underlying EBITDA ratio to 3.14 times, better than our guidance of approximately 3.25 times. And down from 3.5 times as of the end of December 2020, and down substantially from 4.8 times in 2016 at the time of the millicruise acquisition. We ended the year with strong borrowing capacity with no borrowings outstanding on our $1.5 billion U.S. revolving credit facility. Now take me to our outlook, which calls for both top and bottom line growth in 2022 for the first time in over a decade. Before we go through the guidance, I wanted to note that year-over-year growth rates are on constant currency basis. We are adjusting the metrics provided to best align with the goals of our revitalisation plan. Also, and consistent with our historical commentary, uncertainty as it pertains to the coronavirus and its variants remains to varying degrees by market. If on-premise restrictions are increased and or reinstated in some of our larger markets, This could have a significant impact on our financial performance during that period. For 2022, we expect to deliver mid-single-digit net sales revenue growth. We expect to deliver high single-digit underlying income before income taxes growth and underlying free cash flow of $1 billion plus or minus 10%. This guidance implies that we will shift to consumption in the U.S. for the year. In terms of phasing, recall that we will start lasting the economy's due deprioritization and rationalization in the second quarter of 2022. In addition, we expect to face continued inflationary pressure, including transportation and material costs. While we have levers to offset inflation, including pricing, mix from premiumization, and our cost savings and hedging programs, These headwinds are expected to continue to push a gross margin, but have been built into our guidance. And we expect to continue to invest behind our core brands and key innovations, which entails increasing the level of marketing investment from the prior year. Given the on-premise restrictions in the first half of 2021, we expect greater year-over-year increases in marketing spend in the first half of 2022. We also intend to invest behind our capabilities with cash capital expenditures anticipated to return to more normal pre-pandemic levels. Other guidance metrics include underlying depreciation and amortization of approximately $750 million plus or minus 5% reported. net interest expense of $265 million, plus or minus 5%, and an underlying effective tax rate in the range of 22% to 24%. Turning to capital allocation, our priorities remain to invest in our business to drive top-down growth and efficiencies, reduce net debt, and to return cash to shareholders. We are maintaining our target net debt to underlying EBITDA ratio of below three times by the end of 2022, and we have a strong desire to maintain and in time upgrade our investment grade rating. And on February the 22nd, 2022, the board declared a dividend of $0.58 per share, an increase of 12%. Also on February the 17th, 2022, the Board of Directors approved a share repurchase program authorizing the company to purchase up to an aggregate of $200 million of our company's Class C common stock through March the 31st, 2026, with repurchases primarily intended to offset annual employee equity award grants. In closing, 2021 was a volatile year, but it did not deter us from executing our plan. The progress we have made has laid a strong foundation to achieve our goals of sustainable long-term top and bottom line growth, and our 2022 guidance demonstrates our confidence we are on the right path. And with that, we look forward to answering your questions. Operator?

We will now begin the Q&A portion of the call. If you would like to ask a question during this time, simply press star followed by one on your telephone keypad. If you would like to withdraw your question, press star followed by two. In consideration of others and to allow more of you to participate in this call, we ask that you limit yourself to one question. If you have additional questions or follow-ups, please rejoin the queue. We will now pause to compile the Q&A roster. Our first question goes to Kevin Grundy with Jefferies. Kevin, your line is open. You can go ahead.

Great. Thanks. Good morning, everyone, and congratulations on the continued progress, particularly in the difficult environment. I want to start with the sales guidance for the year. Tracy, this may be for you. Maybe just spend a moment on how you expect that to break down between volume and net sales per hectoliter within net sales per hectoliter. Maybe just comment broadly on the contribution you're hoping for between price and mix, particularly from a pricing perspective, given the difficult input cost environment. And then, Gavin, maybe just at a high level, coming off of what's been a strong year for your key brands, just offer some thoughts, if you wouldn't mind, on your outlook for Coors Light and Miller Light in the upcoming year, and then I'll pass it on. Thank you for that.

Thanks, Kevin, and good morning. um let me start and then tracy can take you through some of the guns around cost of goods sold and so on for for 2022 but from a pricing point of view obviously we're experiencing you know inflationary pressures we expect them to continue well into into this year um and while we take uh have historically taken price increases in the spring of every of every year this year we actually announced price increases a little earlier than that and we we went with a price increase of of between three and five percent um you know that took place mostly in in january in the early part of of of uh february and obviously the the amount and the timing of of pricing increases does does vary by by market um we do have more levers than just uh pricing of course right we we have we have the mix uh shift which is fundamentally part of our revitalization plan is to shift our mix into the above premium and emerging growth. And emerging growth is almost entirely above premium. So, you know, I spoke about that in my opening remarks. And, Trace, why don't you talk about hedging, the hedging program, maybe, and then I'll circle back on the brand.

Okay. Yeah, I mean... We've spoken before about our robust hedging program and how we cover all our key commodities. As we look into 2022 and 2023, we're really comfortable with our hedge positions, and that hedging program is going to play a part in mitigating some of the inflation that we've seen.

Thanks, Trace. You know, Kevin, look, I mean, our business at the end of 2021 is fundamentally more sound than it was at the beginning of the revitalization plan, particularly with our brands. And you referenced Coors Light. You know, we ended the year with both of those brands growing the top line, which we haven't done for quite some time. Coors Light, you know, the Made to Chill campaign continues to work hard for us, both regionally, nationally. And at a local level, it's resonating and attracting 21 to 29-year-old consumers. And, you know, Miller Lite has, you know, despite some of the inventory challenges and some of the tough comps we had to overcome, have just sequentially improved over the year. And, you know, they continue to focus on a true beer's beer through, you know, all sorts of different brand acts like the like the B&M and more recently the exploration into the metaverse. So, you know, we feel like those two brands are really well placed heading into 2022. And then, you know, looking beyond that, above premium, Blue Moon has bounced back very strongly. Our emerging growth division, as I said, is ahead of our plan to get to a billion dollars. Canada is growing. Coors Light has grown share. It's as healthy as it's been for a while. And Europe is bouncing back now that we're heading through the Omicron variant, and restrictions have been lifted, and we've got strong above-premium innovation, which is a very strong on-premise bias. Yeah, I think hopefully that answers your question, Kevin.

Yeah, that's very thorough. Thank you very much. I have a number of questions I'll take offline with Greg and Tracy, but continued success. Thank you.

Thank you.

Thank you, Kevin. Our next question goes to Rob Ottenstein with Evercore. Rob, your line is open. You can go ahead.

Great. Thank you very much. Gavin, I was wondering if you could talk a little bit about how business is starting off this year. I mean, we all see the public information. January was a very tough start for the whole industry. How much of that do you think is the maybe sticker shock from price increases, Omicron, the weather? Maybe people had a lot of beer in their pantries, given that a lot of holiday parties may have gotten canceled. I'm just trying to get a little bit more of a sense of what the beer industry and your business looks like and maybe what you're seeing in February to give you confidence to underscore your guidance. Thank you.

Thanks, Rob. Look, I'm not going to repeat what I said to Kevin as far as our overall brands are concerned, but if you look to January, yeah, I mean, the data that's publicly available will say that the whole industry, you know, it wasn't the easiest of months. I don't think pricing's got anything to do with it because the pricing increases came... in the month and even into February to impact January trends. I don't think it's got anything to do with it. And frankly, the price increases, as I just said, for us, 3% to 5%, well lower than inflation rates, which are sticking in the consumers' minds. I'd point a finger squarely at the second point you raised there, which is Omicron. Consumers were resistant to to going out into the on-premise December and into January. And as we've got further into January and now into February, we've seen the consumers come back to the on-premise, particularly in our European businesses where restrictions have been largely lifted, but also in the United States and to a lesser degree in Canada. So, you know, I'm going to point the finger squarely at Omicron, Rob.

And so I guess tied to that, it would be your sense you're not expecting –

uh much in the way of demand the elasticity on the price increases maybe maybe less than historical well we always we we understand pricing electricity in a normal world right and i think we're operating in in somewhat unknown territory so you know um I think it's a little too soon to tell exactly what the various price increases that have gone into the market, what impact that will have from a volume perspective, Rob. I think, you know, as we head into spring and summer, we shall see.

Terrific. Thank you very much.

Thank you, Rob. Our next question goes to Andrea Teixeira with J.P. Morgan. Andrea, your line is open. You can go ahead.

Thank you. Good morning. So my question is the assumption of the G&A savings because your earnings guidance embeds faster growth, if I understood correctly, on the bottom line. And I understand from Tracy's comments that gross margin will be pressured this year in spite of the timing of the hedges, which I'm assuming are going to be better in the first half of the year and then give back some in the second half. So are you embedding your EBITDA margin with expanding 2022 to reach your profit guidance? And then related to that, I think the investors that I spoke to this morning were asking about what drove the EBITDA miss in the quarter and also the year, and also the reason to refrain from giving guidance on an EBITDA basis for 2022 and use earnings before tax. Just a clarification there. Thank you.

Thanks, Andrea. I think, Trace, why don't you take all those?

First of all, I think you asked about the margin expansion. To add our you know, mid-single-digit top line and high single-digit income before tax line. There's a couple of things that need to be considered. So, first of all, you're right. I mean, we are seeing an inflationary environment. We expect to see inflation continue on commodities and packaging materials. And, you know, we also expect the freight market to remain tight. So that will create a COGS headwind. To mitigate that, we have a very robust hedging program. As you mentioned, we typically hedge The first year, somewhere between one and three years, depending on the commodity and the liquidity of that commodity. But in the first year, our hedges are obviously higher than the outer years, which are typically lower. So we have a robust hedging program. As we look now into 2022 and 2023, we are very comfortable with our hedge positions. In addition to that, we've got the cost savings program. You know, this is part of that $600 million program. We've already, you know, delivered $490 million of that. We've got items like the new state-of-the-art, more efficient breweries in Canada that we spoke about that have come online. So that's certainly going to help from a cost point of view. We've got the continued premiumization of our portfolio, which is really all about what the revitalization plan is driving. We obviously have spoken a little bit about And then this year, we have a full year of contribution of our equity income from our Yangling Joint Venture. So, you know, we've got a couple of those items that will play out in 2022. But having said that, we're going to continue to invest in our business and behind our brands, as you saw in Q4 of 2021. So in terms of EBITDA, the Q4, so we did reaffirm our guidance at the end of October based on the plans that we had in place. And more importantly, what we were seeing in terms of very strong on-premise performance during Q3 and going into Q4, we stated on the call at that time that if restrictions were reinstated in some of our larger markets, it would have a significant impact on our financial performance over the next few months. And we saw that with the Omicron re-emergence in mid-November. And we saw a return to both governments' imposed restrictions as well as changes to consumer behavior. And that impacted our on-premise performance in all our markets, but particularly in the UK, where we've spoken about just what a big part of our business, the on-premise, is. But having said that, we still hit our mid-single-digit top line. and we continued to invest in our brand. So that was important to us. We did not pull back on the investment, which sort of helped us set up 2022 Strong Foundation. So that was really the Q4. And then, you know, the guidance in terms of EBITDA. So what we have done is we have given metrics which... We believe best align with our revitalization plan goals of driving both top and bottom line growth. We've added, in addition to the net income before tax, we've added the depreciation and amortization, which we normally give. We've given net interest, and we've given the effective tax rate, as well as a pre-cash flow and leverage target ratio. So if you add those back, you will get back to the EBITDA range. So we just believe that this is better guidance in terms of our revitalization plan.

Thanks, Joyce.

Thank you.

Thank you, Andrea. Our next question goes to Bill Kirk with MKM Partners. Bill, your line is open. You can go ahead.

Thank you. Good morning, everybody. Tracy, with some 1Q phasing items, I think you have about 2 million hectoliters shifting back into the first quarter related to the Texas freeze and the cybersecurity events. But I guess what about prior year cost comparisons? Are they easier in some ways since the prior year had those disruptions and maybe made servicing the wholesalers more expensive?

Yeah, so... You know, we don't specifically give quarter-by-quarter guidance, but maybe some of the things just to think about is, you know, from a marketing point of view, you know, marketing will be higher in the first half of the year as we cycle some of the, you know, on-premise shutdowns and things like that. We are expecting our full-year marketing in 2022 to be higher than 2021, but really more so in the first half. In terms of other COGs, obviously we're still going to be impacted by inflation, as I've said, but some of the other things to consider is assuming that we don't see levels of on-premise restrictions in the first half of 2022, We'll expect to see some benefit from volume leverage, particularly in our EMEA and APAC business. We'll also expect to see both channel and geographic mixed benefits as we cycle the first half restrictions in EMEA and APAC, which have a lower overall cost per hexalitre. And then again, I just do want to mention our robot hedging program where we cover all commodities and we're really comfortable with where we're sitting. Obviously, we've also got our cost savings program, which we'll deliver as well. So I'd say those are some of the things to consider for at least the first half of this year.

And the only other thing I'd add to that, Bill, is the other side of some of that positive which you mentioned, which is it takes a storm on the cybersecurity tech, is obviously our economy skew reduction and rationalization, right? So we'll still have the headwind of that, particularly in the first quarter and then for a chunk of the second quarter. So that will be a negative from a volume perspective. But if you recall in the fourth quarter, we actually – All of our volume loss in the fourth quarter in the U.S. was driven by economy, as premium lights grew as good above premium as well. And, of course, we came into the year with robust inventory, so we're not expecting any meaningful out of stocks. And I think, as I said in my opening remarks, we are – We're actually operating at levels lower than pre-pandemic at the moment, which obviously we're very pleased about, and I'm sure our distributors are too.

Thank you, Gavin. And as a follow-up there, I think you mentioned Topo Chico was the hard seltzer, was the number two turning hard seltzer. Retailers are finishing up their spring shelf resets right now. Did they respond the way you wanted to with Topo Chico here with their resets, given those velocity stats?

Yes, they did. We've got our national rollout of Topo Chico has been very well received by both big and small retailers.

Okay, thank you.

Thank you. Thank you, Bill. Our next question goes to Steve Powers with Deutsche Bank. Steve, your line is open. You can go ahead.

Yes, hey, thank you very much. A couple of follow-ups on things, I guess mostly for Tracy, that we've covered before. On the hedging program, I guess, are you able to be any more specific around where you think your COGS per hectolitre, I guess what your outlook is for the coming year, but before any productivity offsets? I think the spot market would indicate potentially double-digit type inflation. It sounds like you're going to Well, below that, I'm just trying to get a sense for order of magnitude and how much inflation may be deferred into 23. That's question number one. And then two, I know I'm supposed to only have one, but if you can hear me. On the second one, on EBITDA, just to remove away from explicit EBITDA guidance, I think all the piece parts that you gave us do allow us to back into EBITDA, but I don't think it results in a wider range than you might typically expect.

you know, land on. So is that intentional? Should we be thinking kind of the midpoint of all those things, low single-digit type EBITDA increase?

Or are you intentionally leaving a little bit wider? So thank you for both of those.

That's both for you, Trish.

Yeah, so let me try that. So, Steve, look, we didn't give COGS basically the guidance, but it is built into our bottom line guidance. So, you know, the high single-digit net income or income before tax guidance. So it is built in there. Some of the things maybe that can just help put a bit of colour around our COGS outlook is, you know, As I said previously, we'll continue to be impacted by inflation on our commodities and our packaging materials in particular, and we do expect the freight market to remain tight. In Q4, we actually saw some noticeable impact from inflation on our EMEA and APAC business, and we expect to see that continue into 2022. But inflation is just one component of our COGS charge, and maybe a couple of additional items just to, particularly in EMEA, an APAC business around volume leverage. I also mentioned earlier that we expect to see channel and geographic mixed benefits, again, in the APAC, which has a lower overall COGS per hectare cost. I have mentioned our hedging program. We don't get into specific details around that other than saying that we typically hedge anywhere between one and three years, depending on commodities, depending on liquidity, depending on our outlook of the commodities. And again, at this point, we are comfortable with our hedge positions as we look forward over the next couple of years. Maybe just one more item to consider around COGS is we also are expecting some depreciation benefits as we are cycling out of a five-year period of the asset fair value exercise, which relates to the millicruise acquisition. So, you know, you'll see some benefits coming out of that. You know, other than that, we've got a number of actions across our supply chain. and other levers that we can pull to deliver our top and bottom line. But the COGS outlook is built into our bottom garden. And then just in terms of EBITDA, I mean, really the intention is to more closely align the metrics, guidance metrics with our revitalization plan goals. So, you know, that's all about driving both top and bottom line growth. there's no intention other than that. We just want to more closely align with, you know, how we run the business. So, again, we have added the other metrics that hopefully will get you to an EBITDA range, I mean, without giving you, you know, specifics.

Thanks, Joyce. Thanks, Steve. Thank you. Thank you. Thank you, Steve. Go ahead.

Hi, guys. Thanks for taking my question. I want to push a little bit more on gross margins. Traciana, you mentioned and provided some helpful color on all of the moving parts. And in your prepared remarks, you did say that gross margins were going to continue to be pressured. But pushing in a little bit more on that, can you give more precise expectations as to gross margins for this year? What I'm trying to understand is, do you expect to be able to get that positive mix to offset the cost?

Should we be expecting gross margin compression on a year-on-year basis? Thanks.

Maybe I'll which you've given all the components of it, right? But, I mean, if you look at our P&L, obviously we're in our revitalization plan to change the shape of our portfolio, and I think we've been pretty successful at that last year.

I mean, as I said, our brands are healthy. Mixed is, you know, Coors Light, Miller Light, our core brands have grown very nicely. So you've got... You've got a couple of things going on in the top line. You've got the pricing, which I referenced. I gave you the U.S. pricing, but obviously there's pricing in Europe and Canada coming through as well. We've got strong positive mix that will come through as our portfolio reshapes into above premium.

We cycle past the economy portfolio.

in the first and second quarter will drive positivity from an overall margin point of view. We do have the emerging growth, which is all operating in the above premium, and we're going to continue to invest in our business. We're going to continue to put money into marketing. We made that – Tracy made the point. We were very choiceful in December – once we realized that Omicron was going to impact us. We very choicefully chose not to pull the marketing lever because we were marketing and we wanted to set ourselves up for a strong 2022. And so that was choiceful.

And we are going to increase marketing. And all of our – I'm not going to repeat everything Tracy said about the cost of goods sold line.

and all the levers that go in there. But, you know, we've got some positive momentum in the top line. Thanks, Nadine.

Thank you.

Thank you, Nadine. Our next question goes to Chris Carey with Wells Fargo. Chris, your line is open.

You can go ahead. Hey, everyone. Thanks for the question. So, Gavin, I'm trying to, you know, just understand a little bit on the, you know, it is a question of just how you're thinking about, you know, channel mix in 2022. And you did say that, you know, that the EBITDA would have been, you know, kind of like in line if Omicron had not, you know, created the volatility at the end of the quarter, right? But, you know, sales came in line, which I suppose implies, you know, margin impact and specifically channel mix with the on-premise. And if I just run that math on the difference between the full-year guide and what kind of came through, maybe it's like a $70 million difference or a few hundred basis points on margin. Is that how we should be thinking about, you know, just the potential benefit of channel mix going into next year? as a potential offset in your business. You know, Tracy did mention that in the cost per hectoliter. It is a tailwind to the business just because of, you know, different packaging mix, and you're going to get some volume leverage. So, I mean, clearly we're all trying to figure out how the cost per hectoliter versus MG&A dynamic works. you know, plays out, and if you could just maybe offer some perspective on, you know, what you think the channel mix is that you've done in the quarter, and I guess, you know, really how we should be thinking about, you know, potential tailwinds of the business on a, you know, profit and margin impact going into next year.

Right. Chris, yeah, a lot going on in that question. Let me see if I can help. Look, I mean, I think I have to say that in the fourth quarter, we were expecting our revenues to be higher than what we actually ended up with. So although we met the guidance of mid-single digits, our expectation at the end of October was that it was going to be higher. And obviously it wasn't because of the Omicron impact. But there's a range there, right? I think mid-single digit guidance is 3.6 to 7.4 roughly, right? So we were expecting that number to be higher. From a channel mix point of view, obviously particularly in Europe, it's very positive for us when the on-premise is open. We're extremely efficient at that and the margins are good. In the U.S., the margins are also good in the on-premise for us, mostly because we skew higher on the above premium portfolio than we do on economy, for example. I mean, brands like Blue Moon, Peroni, Pulsner, Akel in the U.S. are all higher margin, higher revenue brands. So when the on-premise is open, we benefit from that. You know, Miller Lite and Coors Lite also disproportionately over indexed versus some of the lower margin brands in the on-premise. And you have the same impact in Canada and you have the same impact in Europe. So when the on-premise runs into some challenges, obviously that's mixed negative for us everywhere, but particularly in Europe. As we head into this... sort of 2022, obviously we've got some tailwinds behind us. I mean, the first quarter, we had the well-publicized challenges of the Texas storms and the cyber security attack. And, you know, in Europe, as I recall, in the first quarter last year, we were pretty much shut down in the on-premise for, I think, the whole first quarter, which obviously we don't have yet. Well, we did a little bit in January, but certainly I think as of either this Monday or last Monday, they've pretty much opened up the UK completely, which will obviously be positive for us. So we've got some positive tailwinds behind us from that perspective, and they happen to be positive tailwinds from a channel point of view because we make more margin there. And then, of course, you've got the negative – headwind of cycling the economy portfolio change, which we've got, I don't know, four or five months left of starting on the 1st of January. But from a margin point of view, that's actually very positive for us. So hopefully that's helpful, Chris.

Yes.

Thanks, Gavin. Thank you, Chris. Our next question goes to Lauren Grande. Okay. From Guggenheim, Lauren, your line is open. You can go ahead.

Thank you, and thanks for squeezing me in. Two questions, actually, on the top line as a significant part of your assumption. So I would like to understand what are you expecting in terms of how sales category grows for this year and the sales you are planning to achieve thanks to Topo Chico and VZI? and what to expect for Simply. I know it's not a heartfelt answer, but a different one. And finally, if you can help me try to figure out how much ZOA contributes to the growth of your emerging growth division. Thank you.

Thanks, Lauren. On Simply, look, I mean, obviously, we haven't even launched it into the market yet, so all I can tell you is how the retailers, distributors, and consumers are reacting to it. And, you know, they reacted extraordinarily positively to Topo Chico, which is doing amazingly well for us. The reaction to Simply has been even stronger than that. You know, the number of households that have Simply in them uh one in two households in america it's a very well-known brand so if if if we just go by reaction um that we've had from retailers distributors and from uh consumers we we're going to get more than our first year of of shelf space in a in the sort of above you know more flavorful um area which which is probably where we've lagged a little bit um this year. We're tapping into a new segment of flavor for us. And so, you know, we haven't done anything yet, but the reaction has been particularly strong. If you look at emerging growth, you know, it's got three big components to it. The solid base business, right? We've got our distribution business, our craft business in Tenth and Blake, and then our Latin American business. Latin America contributed, as I said in our opening remarks, really strongly. But, you know, non-ALC, which comprises ZOA and La Cologne, to all intents and purposes, we're coming off a zero base of revenue coming into 2021. So, you know, a good chunk of the growth that we've experienced in emerging growth has come from non-ALC, which is, which is ZOA and Luck Alarm, Lawrence. I'm not going to break out by brand what that is, but you can assume that, you know, big contributors to that growth were Latin America and our non-ALC businesses. I think those were the two biggest drivers of us being ahead of plan.

Thanks, Lawrence.

And we're getting out to this, or if you can... Tell us basically what your assumption in terms of category goes and what you're praying for.

Well, look, I mean, from a hard Celsius point of view, Lauren, I mean, obviously it was growing very strongly. It came off a lot. But, you know, it still grew low teens in 2021. We've got the two. Fastest growing of any major beverage company that differentiated. We've got a lot of momentum behind them and we think we can do really big things with those two brands. heading into 2022. I mean, we've got two of the top five Seltzer brands. So we think we're all positioned to take share and grow. It's a big segment, Lauren. I'm not going to put a number as to what we assess that it's going to grow. But, you know, frankly, we can gain a lot of share in this space, whether the Seltzer category grows or doesn't grow because of the two brands and offerings that we have. Thanks, Lauren.

I appreciate it. Thanks.

Thank you, Lauren. Our next question goes to Lauren Lieberman with Barclays. Lauren, your line is open. You can go ahead.

Great. Thanks so much for the morning. I wanted to just hone in maybe a little bit on unexpected volume performance for 22. just knowing i guess the a the comments on right so on on elasticity and really just sort of not knowing um but if i back into kind of the comments you've made on on pricing um nick still being you know positive i would assume giving you about premium growth sounds like you're planning for volume to be flattish i'm guessing um and specifically it's true that sprs and thinking about the category backdrop The degree to which if that slattish volume thought process is right, that implies continued market share gain across the portfolio, or if that's more of a kind of in-line performance as you're thinking about how things may well play out next year. Thanks.

Well, Lauren, look, I'm not going to give volume guidance. But what I can say to you is in the fourth quarter, obviously, the entirety of our loss was driven by the rationalization of our economy portfolio. Above premium grew, and our premium lights grew in some of our premium light brands. But our drive into above premium is reaping benefit.

Honestly, we came within a whisker of being positively from a volume point of view, for the whole year for Miller Lite and Coors Lite.

In fact, I would hazard a guess that if we didn't have the Omicron virus in the last six weeks, that we might well have got there if we hadn't had the... We are expecting a head... It's a very deliberate decision. We think it's the right decision. It allows focus for us, allows us to focus in on for economy, a kind of complexity from... our supply chain, which has really helped us to rebuild our inventory levels to levels that we haven't seen for a while and really improved the service to our distributors on the brands that really matter, which is Miller Lite, Coors Light, and our above premium portfolio. So, you know, absent another variant in 2022, we think we're well placed from an overall portfolio point of view. Okay. Thanks so much.

Thank you, Lauren. Our next question goes to Brian Spillane with Bank of America. Brian, your line is open. You can go ahead.

All right, thanks, Eric. Good morning, Gavin. Good morning, Tracy. Just one question, and Tracy, you touched on this a little bit, I think, in the prepared remarks. Can you give us an update on where we stand now in terms of the progress on the investments that you've made in the brewing, you know, in your brewing facilities? You know, I think you referenced Montreal. There's an upgrade going on in Golden. There's the seltzer capacity. Just kind of where we stand now. on those projects and maybe the contribution that we're getting from cost savings related to that? And then if you could, just give us a perspective on what it implies for capital spending for 2022, and then maybe just are we in the right range in this mid-500s as an ongoing CapEx?

I think that was for you, Tracey.

Yeah, okay. So let me start and then Gavin, you just jump in here. So, I mean, we... If we just start with our Canadian brewery, so our new Montreal brewery, you know, state-of-the-art brewery that we're building just outside of Montreal, that actually came online at the end of last year. We still have some IT projects around bringing, you know, the Canadian business onto our US ERP system. So, you know, that's going to continue... at least into this year, maybe a little bit more into the early part of next year. And then we've got the transformation and the modernisation of our golden brewery. That's a multi-year project. So, you know, that's still ongoing. The investment in our hard sulfur capability. So, you know, we're putting in capabilities in Canada and the UK. So that'll be this year and next year. That's a big project. And then also our packaging upgrade project. that relate to sustainability of our packaging, et cetera, that's ongoing. So I'd say those are the three big projects. Now, we haven't given specific CAPEX guidance, but what we do expect is our CAPEX to return to more historical levels. So if you have a look at around 2019 type of spend, you can expect that for this year.

Okay, that's really helpful.

And just, Tracy, if you could, just, I guess, if you could just give a sense of just how much incremental savings or productivity efficiency from here.

Yeah, I mean, I'll just refer you to our cost savings program. It's about $450. $150 million of cost savings primarily related to the COGS fund, so that would include the Montreal Brewery, some of those types of efficiencies that we put in place. And then the $150 million of the revitalization program was primarily around the G&A areas. So we've been $490 million of that $600 million. So the balance will be delivered this year. And again, the majority of that would be related to the COGS line. But I'm not sure that I can say much more than that other than it is included in that cost savings number.

The only other thing I'd add to that, Brian, is obviously we have been pretty clear, open about the fact that as we bring SELFs into our own facilities, so the for us, right? And we started bringing Visi in last year into Fort Worth, and we'll bring Topo Chico in 2022, and we'll bring those in-house, and we'll do the same from a margin point of view.

And then, obviously, the brewery there was a couple hundred years old, and we've placed it with a state-of-the-art brewery, and it has meaningful cost benefits for us. All right. Thanks, Brian. That's really helpful. Yeah. Thank you, Brian. Our next question goes to Dara Mocinian with Morgan Stanley.

Dara, your line is open. You can go ahead.

This is actually Eric Sirota in for DAP. Good morning. Our main question is one to circle back on with shelf space. Seemingly, potentially a lot of shelf space up for grabs if the expected trimming in marginal hard seltzer skews happens. Just You're thinking about that in terms of opportunities for Molson Coors, what you're looking at in terms of shelf space position. Who do you think, you know, other than Topo Chico's picking up that and You know, in the broader context of, you know, spirits having one of its best years last year in memory and RTDs being, you know, particularly hot, you know, what kind of risk do you see for some of the core brands in terms of shelf space and retailers that are able to hold to carry spirits and RTDs?

Thanks, Eric. Yes, you're right. I mean, spring is where most of the reset point of view takes place. And that's when, you know, most of the large innovations are actually launched.

And, you know, our team, where we believe that all decisions start with a current add-up.

and getting the call right for retos in those segments is really important to that as well. So, you know, our team is focusing on driving productivity on our core brands, you know, Coors Light, Coors Banquet, Miller Light, Blooming Belgian White, and Lining Kugels, particularly Summer Shandy. And at the same time, they're selling, you know, what I think is one of the most focused and exciting years with Topo Chico Hodge

And Tapachika Margarita and Simply Spiked and Blue Moon Light Sky, it's really focused and exciting.

And, you know, with that strong performance in our core, which we're experiencing, as well as the innovation we bring, we are expecting to see expanded shelf space for our business in the spring, and that's what we're striving towards. Thanks, Eric.

Great, thank you.

That concludes our question and answer session. I will turn the conference back over to the management team for any closing remarks.

Thank you, Greg. All right, so thank you very much, everyone, for joining us today. Thanks, Gavin and Tracy.

And appreciate to all of those who were able to ask questions. Tracy Mangini and I are very happy to follow up on any days. So with that, thanks, everybody, and have a great day.

That concludes today's call. Thank you for your participation. You can now disconnect your line.