Molson Coors Beverage Company

Good day and welcome to the Molson Coors Beverage Company second quarter fiscal year 2022 earnings conference call. You can find related slides on the investors. Our speakers today are Gavin Hattersley, President and Chief Executive Officer, and Tracy Joubert, Chief Financial Officer. With that, I hand over to the P&A and investor relations to begin. Greg, please go ahead.

One, following prepared remarks. Marks today from Gavin and Tracy. We will take your questions. In an effort to address as many questions as possible, we ask that you limit yourself to one question. If you have more than one question, we'll answer your first question and then ask you to re-enter the queue for any additional or follow-up questions. On the quarter, please pick them up with our IR. 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 factor. filings with the FCC. We assume no obligation to update forward-looking statements. GAAP reconciliations for any non-U.S. GAAP measures are included in our news release. As indicated, all financial results the company discusses are versus the comparable prior year period in U.S. dollars and in constant currency when discussing percent. With that, over to you, Gavin.

Thanks, Greg.

In the second quarter of 2022, we will continue to execute our revitalization plan, despite a soft industry, global inflationary pressures, and the Quebec labor strike at our Montreal brewery. Globally, we have now recorded five consecutive quarters of net sales revenue growth on a constant currency basis. Molson Coors grew dollar share in the U.S. in the 13-week quarter, both of which have not been achieved in over a decade. What's more, we will ...to achieve dollar share growth in a 13-week timeframe. In Canada, Molson Coors grew volume in share when you factor out Quebec due to the Quebec labor strike. In the UK, Molson Coors grew share and achieved the highest on-premise trailing 12-month average share also in over a decade. And we are currently the largest share gainer... So in aggregate, across our three largest markets, we are outpacing the industry and continuing to grow the top line globally. And these results are no accident. They're not a coincidence. These are the rewards of our continued commitment to and execution of the revitalization plan. So our plan is working, and that fact gives us continued confidence that we are on track to deliver on our guidance for 2020. See it in our core brands. We're a stronger brand. fundamentals and consistent investment since we launched the revitalization plan of paying off. In the second quarter, Coors Light and Miller Light achieved their best quarterly industry share performance in the US in nearly seven years, while Miller Light grew share of industry in a quarter.

As I mentioned last quarter, these results are driven by clear, distinctive positionings of our two biggest brands, and more effective marketing. We are demonstrating the power of our biggest brands and we intend to keep investing behind them.

Coors Banquet, our oldest brand in the U.S., is also one of our fastest growing beer brands with dollar sales up double digits and growing share of the total beer industry, fueled by a new generation of drinkers. In Canada, Molson Canadian is growing share of the total beer industry for the first time in eight years. In the UK, Carling, the largest beer brand in the UK, managed to further solidify its number one position in the total market. And our national champion brands in Central and Eastern Europe are growing share in the majority of their markets. Around the world, our core brands are not just stronger than they've been in many years. Our core brands are outplacing the rest of the beer industry. It's an incredible foundation for our business to build on. We also continue to find success in premiumizing our business, even in challenging economic times. Our above premium brands again hit a record high portion of our global portfolio net sales revenue on a trailing 12-month basis, with positive progress made across the business. The net sales revenue of our U.S. above premium portfolio is now higher than the net sales revenue of our U.S. economy portfolio on a trailing 12-month basis. That trend was driven by the rapid growth of our hard seltzers, the strong launch of Simply Spike lemonade, and Blue Moon and Peroni's continued rise coming out of the pandemic. Last quarter, our share of the U.S. hard seltzer segment grew by 25%, from just over 7% in the first quarter to over 9% in the second quarter. and our hard seltzers are currently growing share of the total beer industry. That growth once again makes Molson Coors the fastest growing hard seltzer portfolio in the U.S. Not only has Vizzy grown seltzer share during this period, but Topo Chico hard seltzer has quickly become the fastest growing hard seltzer in the U.S. and was a top five industry growth brand in the quarter. We said that simply spiked lemonade would redefine the full flavor alcohol beverage segment, and today the results back that up. In just a few weeks, we have sold over 60,000 hectoliters, achieved a three and a half share of the F&B segment in the latest four-week lead from IRI, and it is already one of the top F&Bs in several major grocery retailers. In addition, brand new volumes for Blue Moon were up high single digits, while Peroni was up high teens on a year-to-date basis. and our business globally continues to premiumize as well. In our Latin American business, where most of our brands sell at an above premium price point, we continue to grow volume in the second quarter. This was driven by strong growth in the Colombia, Chile, and Honduras markets. Additionally, in Mexico, Coors Light is back to healthy growth, up double digits versus the prior year, while Milajalas earned a record sales month in June. In the UK, Coors is gaining share of the total beer industry, and Madri's growth is amazing. Madri has seen the most value growth of any brand in its first year in the UK on-premise, making it the most successful launch in the entire 16 years that the on-premise measurement service has been tracking the industry. It's been two years after its launch. The brand has sold over 200,000 hectolitres in the first half of 2022 alone, making it one of the top 20 UK beers, and it only just launched in the off-premise in March. This is a brand you all should get to know, because you're going to be hearing a lot about it in the years to come. And Praha, a relatively newer pilsner from start to prime, has earned strong results in Central and Eastern Europe, and successfully launched this year in Romania. This will be its second largest market to date, and we believe this expansion has the potential to significantly increase Praha's volumes.

Our Canadian business also continues to premiumize, particularly in the second quarter. Our Canadian hard seltzer portfolio continues to grow.

We grew a share of the segment in the second quarter. Coors Seltzer is now the number seven hard seltzer in Canada, and Vizier is number five. Combined, we're over 12 shares of the Canadian hard seltzer segment in the latest month, and that's before Topo Chester hard seltzer launched nationally in Canada. Now, I can imagine that you're all thinking that premiumization is very nice, but how well are we prepared for a recessionary environment?

First, our portfolio and in the industry from what I just shared.

This segment is strengthening in the U.S., and three of our four key economy brands grew segment share in the second quarter.

In fact, our economy portfolio has had its best quarterly performance versus and excluding the discontinued brands from the skew rationalization program, our economy brands grew share of total industry in the quarter. The shape of our portfolio, even as we continue to premiumize it,

ensures that we have strong offerings and strong brands for consumers across the range of price points. That gives us the ability to adapt our plans should the need arise, regardless of the economic climate.

While Tracy will go into more detail, I would be remiss if I did not acknowledge the 11-week Quebec labor strike adversely affected our America's and global top-line results.

The Quebec labor returned to the brewery and distribution center just a few days later. Pleased with the performance as we get the facility back up and running. Out of an abundance of caution, we also conducted a voluntary withdrawal due to a quality issue at one of our US breweries.

Importantly, there were no health or safety risks to correct the problem. And because our is stronger than it has been in years,

We were also able to divert production into this market from other breweries and quickly replenish supply. So the good news in both situations have been addressed and we still met the projection that we laid out for you earlier this year. That is a testament to the health of our business. I think it's reasonable to say that three years ago either one of these issues would have been severely damaging to our business.

Now they're certainly not helpful and of course And we owe this improved health of the business made through our consistent execution of the revitalization plan over the past few years.

Our plan is working. But I'm also realistic about the challenging global macroeconomic environment in which we are operating. It's created uncertainty for our consumers, our business, our competitors, and really all businesses in the consumer goods space. And yet the progress we have made in improving the health of our brands and our business have us well positioned to navigate the current economic climate and to deliver on our full year guidance. Today we have a portfolio that is well positioned to successfully compete within the entire range of consumer demands, whether that be taste or price.

We have a timing benefit in the second half of this year as we gradually diminish how much of the last year's U.S. inventory rebuild we will be lapping.

Additionally, by the fourth quarter, we will no longer be lapping the ship and headwind from the skew rationalization program filmed last year.

In Canada and Europe, some of our biggest and most important business occasions, we have the prospects of a strong fourth quarter thanks to Wayne's further help offset inflation. Under the strength of our brands gives us the continued confidence to reaffirm our guidance of top and bottom line growth for the year.

And now to give you more detail in the financials and outlook, I'll hand it to Tracy.

Thank you Gavin and hello everyone.

of top-line growth on a constant currency basis and achieved income before income tax at the favourable end of our anticipated range while we continue to invest in our business, reduce net debt and return cash to shareholders. We did this while navigating global inflationary pressures, the Quebec labour strike and starting a strong shipment quarter in the prior year. Our performance and our organizational agility demonstrate our successes against our revitalization plan. And it's the efforts and outcomes of that plan that provide us the confidence to reaffirm our guidance, which calls for both top and bottom line growth for the year. I'll take you through our quarterly performance and our outlook. Consolidated net sales revenue increased 2.2%, driven by strong EMEA and ATAC growth,

As restrictions have eased, we have seen sequential improvement in the on-premise performance with variations by market and total net sales revenue returned to 99% of 2019 levels. Consolidated net sales revenue growth was driven

driven by strong global net pricing, favorable sales mix from portfolio premiumization, and positive channel mix. These factors were partially offset by lower financial volumes. Consolidated financial volumes decreased 4.6% as we cycle distributed inventory recovery efforts in the second quarter of 2020 that started in the second quarter of 2021. These factors were partially offset by strong financial volume growth in EMEA and APAC, along with growth in our unit. Net sales per hectolitre on a brand volume basis increased 7.1%, and positive brand and channel mix, with premiumisation delivered across both business units. Increased 11.5%, driven by cost sensation, including higher input and transportation costs, mixed impact from premiumization and factored brands in EMEA and APAC, as well as deleverage. This was partially offset by lower depreciation expense. Underlying NG&A in the quarter increased 7.5%. G&A was up due to higher people-related costs, including increased travel and entertainment, while marketing investment increased as we continued to provide strong commercial support behind our core brands and new innovations. As a result of these taxes, underlying net income before income taxes decreased 22.8%, which was at the favourable end of our outlook range of down 20% to 30%. While we discussed our business performance on a constant currency basis, on a reported basis our second quarter results were negatively impacted by the strength of the US dollar. This impacted our reported net sales revenue by 280 basis points and our underlying income before income tax by 150 basis points in the quarter. Underlying free cash flow was $287 million for the first half of the year, a decrease of $271 million from the same period last year, primarily due to the timing of cash paid for capital expenditures and lower net income, partially offset by lower cash taxes. Capital expenditures paid were $389 million for the first half of the year, an increase of $177 million from the prior year period and focused on expanding our production capacity and capabilities program. Now let's take a look at our results by business unit. In Americas, the on-premise has not returned to pre-pandemic levels, but continues to improve on a sequential quarterly basis. In the second quarter, the Americas on-premise channel accounted for approximately 13% of our net sales revenue, compared to approximately 16% in the same period in 2019. In the US, on-premise net sales revenue improved to 93% of 2019 levels compared to 87% in the first quarter of 2022. And in Canada, on-premise net sales revenue was 77% of 2019 levels, up from 55% in the first quarter of 2022. America's net sales revenue was down 1.7% as net pricing growth in the U.S. and Canada and positive brand mix were offset by lower financial volumes as declines were expected. America's financial volumes decreased 8.1% largely due to cycling higher U.S. shipments due to the prior year period inventory recovery efforts. as well as 2.2% lower brand volumes, including impacts related to the Quebec labor strike. In the U.S., net sales revenue declined 2.1%, with domestic shipments down 8.2%, outpacing brand volume declines of 1.7%. Brand volume declines were driven by economy brands, which were down half a single digit, largely due to the skewed deprioritization and rationalization program. To a lesser degree, our premium brand volumes also declined, reflective of a soft industry. Volume declines were offset by continued strength in the above premium portfolio, which was up nearly double digits for the quarter. In Canada, net sales revenue decreased 2.3% as brand volume declines of 8%, driven by the Montreal brewery strike, were largely offset by positive pricing, premiumization, and channel mix. Latin American net sales revenue decreased slightly as higher brand volume of 1.8% was offset by mixed shifts to our licensed business. Net sales per hectolitre on a brand volume basis increased 6.2% due to net pricing growth and favourable brand mix. US net sales per hectolitre increased 6.7% driven by net pricing growth and positive brand mix led by the above premium brands. Net sales per hectolitre on a brand volume basis grew 8% in Canada due to net pricing increases and positive sales mix, while Latin America decreased 4.2% due to unfavourable sales mix. America's COGS per hectolitre increased 10.2% due to inflation, including higher costs for brewery, packaging and brewing materials and freight, as well as volume deleverage and mixed impacts from premiumisation. and this was partially offset by lower depreciation. Underlying MG&A increased mid-single digits on higher G&A due to increased people-related costs, travel and entertainment expenses, and increased U.S. marketing investments. In the U.S., we increased marketing investments high single digits, putting strong support behind our core brands and innovations, including Topo Chico Hot Salsa and the June national launch of Simply Spike Lemonade, as well as in local sponsorships and events. As a result, America's underlying net income before income taxes decreased 20%. Turning to EMEA and APAC, net sales revenue increased 20.5%, driven by higher financial volume, net pricing growth, and favorable mix. Top line performance also benefited from fewer on-premise restrictions in the UK compared to the second quarter of 2021. Recall that the on-premise in the UK was closed the entire first quarter of 2021 and did not fully reopen without restrictions until July the 19th, 2021. So in the second quarter, our on-premise net sales revenue in the U.K. exceeded 2019 second quarter levels. EMEA and ATAC net sales per hectare on a brand volume basis was up 15.5%, driven by positive sales mix with the on-premise reopening and strengthening our both premium brands as well as net pricing growth. Financial volumes growth of 6.2% was due to higher brand volumes in Western Europe as well as in Central and Eastern Europe, along with higher factor brand volumes. Pulse per hectolitre increased 22% due to rising inflationary pressures and increased factor brand sales. MG&A increased 14.2% as we cycled lower relative G&A spending in the prior year, and increased marketing spend, accelerating investments behind our national champion and premium brands, especially in the U.K., supporting Carling, Madrid, and Star Apparelments, and fueling on-premise strength. As a result of these higher costs, G&A tax underlying net income before income tax declined 22.7%. Turning to capital allocation, our priorities are to invest in our business to drive top-line growth and efficiencies, reduce net debt, and to return cash to shareholders. We ended the quarter with net debt of $6.4 billion, which included the repayments of our $500 million 3.5% USD note upon maturity on May 1, 2022, using a combination of commercial paper borrowings and cash on hand. Notably, and of particular importance during these volatile times, our debt is substantially all at fixed rates with a minimal amount of variable rate debt. We ended the quarter with $250 million of commercial paper outstanding, leaving us with strong borrowing capacity with $1.3 billion available on our $1.5 billion U.S. revolving credit facility. Our trailing 12-month net debt to underlying EBITDA ratio was 3.2 times as of the end of the second quarter, down from 3.35 times at the end of the second quarter in 2021. We remain on track to achieve our target net debt to underlying EBITDA ratio of below three times by the end of 2022 and remain committed to maintaining and in time upgrading our investment grade rating. Also, during the second quarter, in addition to paying a quarterly cash dividend of $0.58 per share to holders of Class A and B common stockholders, we paid approximately $12.1 million for 230,000 shares under our share repurchase program. Now let's discuss our outlook. We are reaffirming our fiscal 2022 guidance, which calls for both top and bottom line growth in 2022, Performance we have not seen in over a decade. Before we go through the guidance, CC reminded that year-over-year growth rates are on a constant currency basis. However, it's important to note that continued strength in the U.S. dollar will result in a headwind to our reported results in the effective period using current exchange rates. For 2022, we continue to expect to deliver mid-single-digit net sales revenue growth, high single-digit underlying income before income taxes growth, and underlying free cash flow of $1 billion plus or minus 10%. We are confident to reaffirm this guidance as our announced 3% to 5% pricing increase in some US markets, as Gavin mentioned, are expected to offset volume headwinds given the softness in the industry and residual impacts of the Montreal brewery strike that was resolved in June. In terms of top-line phasing, in the third quarter, we will still have some volume headwinds from the economy skew rationalisation program, which will not fully last from a shipment perspective until the fourth quarter. Also, while the Quebec labour strike was resolved in mid-June, it will take time to ramp up production and we don't anticipate returning to normal shipment levels from this brewery until the fourth quarter. In the fourth quarter, we have multiple top-line growth drivers. First, we have announced additional pricing in the 3% to 5% range in many markets in the US. That pricing will take effect in the fourth quarter. Second, recall that year-over-year top-line comparisons will begin to ease in the fourth quarter, given the renewed on-premise restrictions in the fourth quarter of 2021, particularly in the UK and Canada. And in November, the World Cup will take place, which is a big beer-drinking occasion in Europe, and notably the UK. Third, as I just mentioned, we will have fully lapped the shipment headwind from economy-spew rationalisation by the fourth quarter. On the cost side, we expect margins to continue to be impacted by inflationary pressures in areas including input materials and transportation costs in the second half of the year. That said, we have multiple levers to help offset inflationary pressures, which include pricing, mix from premiumisation, and our cost savings and hedging programme. When comparing year-over-year COGS per hectolitre growth for the second half of the year to the second quarter, it's important to note a few things. First, the second quarter was meaningfully impacted by volume deleverage, which we would not expect to continue in the second half of the year. And due to the timing and ramp-up of initiatives, the realisation of savings and our cost savings program is weighted to the fourth quarter of this year. In terms of marketing, we continue to expect to invest more in 2022 than we did in 2021. But in the second half of the year, overall marketing spend is expected to be down compared to the prior year period. We anticipate higher year-over-year investment in the third quarter. However, in the fourth quarter, we do not anticipate increases. We are comfortable with our level of marketing investment in the second half of the year, and would remind you that in the second half of 2021, we had ramped up marketing levels to those exceeding that of the respective period in 2019. In terms of our other guidance metrics, we continue to expect net interest expense of $265 million, plus or minus 5%, underlying depreciation and amortization guidance of $750 million, plus or minus 5%, and an underlying effective tax rate in the range of 22% to 24%. In closing, our strategy is working, and we expect that to continue to play out in our long-term financial and operational performance. To be sure, these are dynamic and uncertain times, but we have built our business to manage new challenges. Molson Cruise is a highly cash-generative business with a dramatically improved balance sheet, enhanced flexibility in its operating and cost structures, and a product portfolio that addresses all segments of the market while consistently evolving its concentration to areas of growth. We are proud of the progress we have made against the revitalization plan, and the successes achieved under that plan give us confidence in our 2022 guidance and in our long-term goal of sustainable top and bottom line growth. And with that, we look forward to answering your questions. Operator? Operator?

Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypad. If you'd like to withdraw your question, please press star followed by two. When preparing to ask a question, please ensure you're unmuted locally. As a reminder, that's star followed by one on your telephone keypad now. Our first question comes from Kevin Grundy of Jefferies. Kevin, your line is now open.

Great. Good morning, everyone. I wanted to pick up on your guidance, submit perhaps a question for both of you. So reaffirmed for the year, the back half still implies a pretty sharp ramp in underlying EBT growth. Tracy, thank you for all the details. So I'm not asking you to kind of go through or parse through all of that again. But it would appear that the market seems to harbor uncertainty. some concern on the achievability of that. Maybe just discuss your visibility on the mid-single-digit underlying sales growth for the year, some of the building blocks around that, category growth, brand growth, et cetera, and then also just touch on the visibility from a cost perspective and some of the margin drivers in order to deliver sharply higher EBT growth in the back half of the year. Thank you.

Thanks, Kevin. Look, you're right. I won't rehash everything Tracy said in the opening remarks, but let me just start off by saying we did in the second quarter exactly what we said we were going to do. In fact, we did it at the lower end or the better end of the guidance that we gave the market after the second quarter. the first quarter, sorry, in the second quarter. So where do we stand right now, right? I mean, we had an 11-week strike in the second quarter, which we obviously knew about the strike, and that's why we guided you to where we did. But we grew dollar share in the U.S. on a 13-quarter-week basis, and we're one of only two major beer companies to actually achieve dollar share growth in the 13-week time frame. We've got the fastest-growing hard seltzer industry, portfolio. Kurzlights and Millerlite are really strong, and they had their best quarterly industry share performance in the U.S. Our above premium brands hit record highs. Our U.S. economy beer portfolio has had its best quarterly performance versus the industry in three years. Our revenue is holding up. That's evidenced by the fact that our share is doing really well, despite the fact that we put a price increase in the earlier part of this year. It gives us confidence to put another price increase in, as Tracy said. in the back half of the year. So, you know, notwithstanding everything that's happened, our brand portfolio is strong, whether that's in the United States or whether it's in Canada or whether it's in Europe. And we feel very good about building off of that. And as I said, look, I'm not going to rehash everything Tracey said. I don't think you should either. But, I mean, do you want to make a comment about the cost environment that Kevin referenced? Yes.

Yeah, so, Kevin, maybe just a little bit of context. I'll just talk about, firstly, our COGS per hectolitre in Q2. So, you know, we reported an 11.5% underlying COGS per hectolitre increase. So if I break that down, inflation was 570 basis points of that, and then the mixed premiumisation of our portfolio was 300 basis points. So we always look at that as a good thing, you know, driving the premiumisation. And then deleverage was 210 basis points, you know, driven by, as we said, the inventory bull last year in the U.S. and the Quebec strike. So those are the big drivers of our COGS per hectare in the second quarter. As we look out then to the balance of the year, I mean, we expect inflationary pressures to continue, but we do – expect to mitigate some of that through our hedging and our cost savings program. So in terms of the hedging coverage, you know, as we look out over the balance of 2022, we're very comfortable with our hedge positions. You know, we continue to make good progress against our cost savings program and we expect the realization of some of those savings under our program to be weighted to the fourth quarter of this year. And then, as I also mentioned, I think, you know, it's very important to understand that the deleverage that we saw in Q2, we don't expect to see, you know, similar deleverage impact in the second half of the year to what we saw in Q2. So I would just consider those, you know, big drivers as you look out at the back half of the year as it relates to our costs.

Okay. Very good. Thank you both. Thanks, Kevin.

Thank you. Our next question comes from Eric Sirota of Morgan Stanley. Eric, your line is now open.

Great. Thanks for the question. I know you guys don't give monthly STRs anymore, but Gavin, hoping to get some at least qualitative color from you as to what you're seeing in terms of the beer market, the U.S. beer market as the summer has unfolded. Her July 4th was generally solid for most of the industry, but then I've heard some mixed things as July unfolded. I'm hoping to get your perspective.

Yeah, thanks, Eric. Look, you're right. I mean, we don't give monthly guidance. We stopped doing that a while ago. I think you can see our performance in the share data that comes out from a Nielsen or an IRR basis, which is publicly available data. And I can reiterate what I just said from a share point of view. Our brands are growing share, not only in the United States from a dollar point of view, but also in Canada and also in our third other big market, which is the UK. So we're continuing to build on the strength which we delivered in Q2. We've got some really positive innovations which have only just hit the market. I talked about Simply Spiked. That brand is has really just taken off. You know, we've already exceeded our business case for the year. We're ramping up supply as quickly as we possibly can to meet demand, which has frankly surprised us. um we've accelerated the the um in-housing of simply into the fort worth brewery um for two i mean we weren't planning to do that until next year frankly but the demand is so strong that we brought it in-house and and and we did that in record time i think it took us about six weeks to get it into the into the brewery and And, you know, we're getting cost savings and ramping up supply into the market. So, you know, I would expect our share trends in the flavoured malt beverage space to accelerate as we're going forward. And, you know, without wishing to rehash everything I said about Millivite and Coors Light in our above premium space, we're... We're in a great share position. And, you know, Casey mentioned some of the headwinds which go away for us in the second half. I mean, we essentially lost Christmas in the U.K. and Europe. And it's a really important time period for that business last year. And we're obviously not expecting to lose it again. this year. And, you know, we're coming out of the Canadian Montreal-Quebec strike. All of Canada's volume loss that took place in the second quarter came out of Quebec. If it hadn't been for the strike, we would have, well, we did grow volumes outside of Quebec. And as we ramp up supply into the into the third quarter and specifically the fourth quarter, I would expect to see the improvements there. So, you know, I think we had a strong quarter. We had a strong quarter despite the soft industry, despite the global inflationary pressures and the labor strike, and we delivered what we said we were going to deliver and at the better end of that. Thanks, Eric.

The next question comes from Nadine Sarwat of Alliance Bernstein. Nadine, your line is now open.

Hi, thank you, guys. So first question, you mentioned 3% to 5% pricing in certain markets in Q4. Can I just confirm that this is incremental? So in addition to pricing taken year-to-date, what is the pricing impact at a national level? So not just certain markets, but national. And is this fully baked into your single-digit top-line guidance? And then one very quick follow-up. I appreciate you already gave some comments. on COGS, and you touched on your hedging strategy, which would imply you do have good visibility into next year. So are you expecting your COGS headwinds from input costs in 2023 to be smaller or greater than the headwinds you're expecting to face in full year 22? Thank you.

Thanks, Nadine. I'll let Tracy answer the COGS question. But from a pricing point of view, let me just clarify some of those comments you made. So the 3% to 5% is on a national average basis. So We expect to take pricing in that range on a national basis on average. It'll hit primarily in the fourth quarter, although it will come towards the end of the third. That means that in some markets, we'll take above 5% and in some markets, we'll take below 3%. But on average, we expect it to land in that range. And then secondly, yes, it is incremental to the pricing we already took in the beginning of this year. And yes, it is baked into our expectations for guidance for the full year. Trace, do you want to take up cogs? And did I cover all the pricing? I think I covered all the pricing. You did. You did.

So, hi, Nadine. You know, from a COGS point of view, you know, the one thing I can tell you is I think I've spoken about our hedging program and how we hedge. And so if I look at 2023, I mean, we're comfortable with our hedge position as we stand today. In terms of other drivers of our costs for next year, you know, we haven't yet given guidance on that. But, I mean, there's a couple of things. Obviously, you know, we're looking at commodities all the time. We've seen freight rates coming down. There's some commodities that are going up. So it's a little bit of a mixed bag at the moment. And, you know, costs going forward is still a lot of uncertainty. But it's something that, obviously, we continue to look at. And as we get into next year, you know, we'll talk a little bit more about our outlook for 2023. Thanks, Trish.

Thanks, Nadine. Got it. Thank you.

Thank you. Our next question comes from Brian Spillane of Bank of America. Brian, your line is now open.

All right. Thanks, Operator. Good morning, Gavin. Good morning, Tracy. So just thinking about the back half of the year, I guess if I'm just replaying what we've heard on the call today, you've got some incremental pricing which will flow through the fourth quarter. There was a residual impact from the Canadian strike, which now you have to absorb. And then the only other piece that's really changed is, I think, Gavin, you talked about just, you know, I don't know, some expectation for the market to moderate. So I have that right, you know, and I'm not sure how big the Canadian residual is, but it really just seems like, if anything, the pricing still gives you net a little bit more cushion, if you will. And, you know, with regards to, you know, which way the market might move if it gets, you know, more – slows more or not. So I just want to make sure that I'm contextualizing that right because I think, again, as I think Kevin Grundy pointed out, I think there's still a lot of – Concern about the back half, and it seems like 2Q, you landed right in the middle of the fairway. It always implied that a lot of the leverage in the back was always going to be in the back half of the year. It just seems like you actually have a little bit more cushion with the pricing now than you did before, even in the context of some of the maybe incremental headwinds.

Well, Brian, to advance that golf analogy, I think we landed in the middle of the fairway and maybe about 10 yards further than we expected. Yeah, yeah, yeah. We didn't really – well, we didn't obviously have into our guidance the – the voluntary product withdrawal. And, you know, frankly, the Montreal strike went on just a couple of weeks longer than we were expecting it to. And despite all that, as you say, we land in the middle of February. Well, what's changed, right? I mean, we knew we were going to take a price increase in the fall. We're probably going to get a little more than we were expecting. So, you know, it was our expectation we were going to get it. But we're probably taking a little bit more, as I said. I think the overall industry is maybe just a little softer than we had expected. And, you know, when you add all of these things up, that gives us the confidence to deliver what we've said we're going to deliver, Brian. I don't know if that's helpful.

Yeah, no, that is helpful. That is helpful. And, Gavin, if I could just follow up, the softness, is that more on-premise versus off-premise? Yeah. Can you give us a little context of just where you're starting to see a little bit of that softening, just as we're watching it from the outside, maybe what we should be monitoring? Thank you.

Well, if you look at our three big markets, Brian, in the UK, from an on-premise point of view, you know, it's settled down very close to 2019 levels. I think in the first part of the quarter, it was a tad below, and in June, it was a tad above. So, you know, call it 98% of 2019 pre-pandemic levels in the UK. In Canada, it's a little bit more tricky for us, right, because Quebec's an important on-premise market. And, you know, we were constrained in supply in Quebec. But even outside of the Quebec market, Canada has lagged the rest of the world in terms of consumers' propensity to get back into the on-premise. And in the U.S., Brian, which is obviously our biggest market, it has settled down in the sort of 85% to, you know, the top end sometimes 90% level. And I think that's probably where it's going to settle until, you know, folk get back into the big cities like New York and Chicago and, you know, start visiting bars and restaurants on a more regular basis. I think, you know, commuting and office work habits have changed fairly meaningfully through the pandemic, and obviously that's hitting the bigger markets. I would say it's probably more in the off-premise side than in the on-premise side that that comment applies to.

Okay, great. Thanks, Gavin. Appreciate the comments.

Thanks, Brian.

Thank you. Our next question comes from Chris Carey of Wells Fargo. Chris, your line is now open.

Hi. Thank you for the question. So I just had – One quick confirmation and then just a follow-up on Brian's question around pricing. So just on the confirming one thing around the economy skew exit, have you always expected those to go into the back half a year? My understanding was those would mostly be done by Q2, but perhaps it's just taking a little bit longer to get those out of the system. So that's just, you know, kind of a follow-up. And then, you know, maybe just – I'm trying to maybe frame just a level of confidence on the pricing in Q4. you know, specifically if you're pricing against the category, which you expect to be a little bit softer in the back half from a volume perspective, right, because the volumes are weaker, and that was kind of what drove the deleveraging on the COGS per hectolitre line. And so, you know, it sounds like you're being pretty targeted about the pricing, some areas over five, some areas below five. So it certainly sounds like you're pricing in areas where you have confidence that the brands can withstand the higher rate, but – I'd love to maybe just get a little bit more context on just the level of comfort that the pricing won't accelerate elasticity. So thanks for the follow-up on the skew axis and that commentary around pricing.

Thanks, Chris. Okay, so on the skew rationalization and the discontinuation of some of our economy brands, there's two sides to this, right? From an SDW perspective, that has a quicker impact than an STR or brand volume perspective. Because obviously from an STR perspective, both our distributors and our retailers had inventory on hand of the brands that we discontinued, and so they continued to sell those until they sort of ran out, right? and and and that would take place frankly more towards the back end of the third quarter and into the into the fourth from a shipment point of view obviously when we had the cyber security attack we stopped shipping a bunch of economy brands and we started picking those back up again um you know some of them towards the end of q2 but predominantly in the in the end of you know q3 so you know, from a shipment point of view, the benefit is sooner than from an SDR point of view. So I hope I've explained that okay. From a pricing point of view, look, I mean, we feel confident about putting pricing into the marketplace behind our brands. You know, if you look at BSCPR versus The national average CPI, even after putting these price increases into the market, will still be less than that. And we're substantially less than some of the other products which consumers are buying, whether it's eggs or bread or milk or gas, whatever. I mean, we're substantially lower than those levels and lower than overall national average CPI. Our brands have also held up really well in the last year. sort of four or five months since we put the overall price increase in place. I mean, I don't think it's a coincidence, as I said, that we're growing share. We're one of only two major beer companies in the United States to deliver dollar share growth in the 13-week time period. So we feel very good about the strength of our brands and the ability of them to absorb more pricing in the fall. Thanks, Chris.

Okay. Thanks, Gavin.

Our next question comes from Camille of Credit Suisse. Camille, your line is now open. Please go ahead.

Hi. Thanks for the question. A question on the volume deleveraged 210 basis points, I guess. Are you able to break out how much of that was one time related to the brewery issues and such versus just a slower overall industry volume growth rate?

I guess you're asking to break down the industry, the shipment decline, Komal, and I would say that the overall North American shipment decline was driven primarily by two things. One was the strike in Canada, which was the entirety of the Canadian volume loss, and the second one was obviously the You know, I think I said this on the call last time around. We pulled out every stop we possibly could in the second quarter of last year to try and recover from a devastating cyber security attack. So we were, you know, shipping beer all over the country. Folks were working long hours, overtime, everything, to try and make sure that we got as much beer out to the And it was inefficient, and it cost us a bunch of money last year to do that. Obviously, this year we're in a much more normal environment, given our inventory levels, and we're not making sort of – Our service levels are where we need them to be. So we're not having to ship beer all over the country at a high cost in the second and the third quarters to meet that demand. And because of that, obviously, our shipments are a lot less. So that would be the biggest impact from a delivery point of view. And the second biggest would be, obviously, our Canadian volumes. Our overall plan for the year is to ship to consumption at Comal. You know, that's generally our plan. We have shipped less than retail so far. And, you know, we'll get the deleverage benefit going forward. I don't really think deleverage will be a driver for us in Q2. In other words, a negative driver. Sorry, not in Q2. In the second half, yeah. It won't be a negative driver for us in H2.

Got it. Okay, that's what I was going to clarify. Just to make sure on the spread between shipments and takeaway, obviously you've got this wild comp, but if you're happy with inventory levels, does that mean in the back half shipments should roughly align with STRs?

And our plan for the full year is to shift to consumption. We've got work to do in Canada to catch up with what happened with the strike, right? I mean, obviously, having an 11-week strike at a really big plant like that is not a positive for us. And it'll take us the whole of Q3 and into Q4 to recover from that. So certainly from a Canadian point of view, we will be shipping up. My expectation would be shipping higher than we were selling. In the U.S., I think we shipped below STRs in the first half, and so you can expect that we will align that over the full year. Thanks, Cardinal.

Thank you.

Thank you. Our next question comes from Andrea Teixeira of J.P. Morgan. Andrea, your line is now open.

Hey, good morning. This is Drew Levine on for Andrea. Thank you for taking the question. I just really had two clarifications, if I may. On the incremental pricing slated for the fourth quarter, it sounded like the company is not really building in any sort of incremental volume decline or elasticity. from the pricing increase relative to kind of what was built into the guidance before. And then the second one is just on the MG&A. I think in the first quarter you said it was slated to be up double-digit on marketing in the second quarter, and it came in somewhat below that. Just curious if there was anything you saw to pull back on or if it was just kind of didn't see enough opportunity to deploy more spending. Thank you.

Thanks, Drew. Look, I mean, from a marketing perspective, obviously, we don't manage our marketing spend on a quarter-by-quarter basis. We manage it over the year, and we manage it for the long term. And we frankly don't always spend marketing in the same quarter as we did in the previous year, depending on what happens. Specifically to your question, though, obviously the Quebec strike went on a little longer than we expected. It made no sense for us to be marketing up in Canada when we were not able to supply. And so we did spend less in marketing, particularly in Canada, than we were originally intending because of the fact that we had the strike. And, you know, at some points we didn't have any beer to sell. So that was, I think, probably a good decision on our part. Outside of Quebec, we increased our marketing spend across the board, and we had some out-of-cycle marketing spend. Simply Launch, as I said, has just been off the charts good, and we don't normally launch innovations in the time period that we've launched. Simply, we normally do them earlier than that, so there's a bit of marketing spend that's coming through in Q2 there. Pricing point of view, obviously we do watch what our brand's performance is when we put pricing into the market. We watch very carefully how it performs and what the elasticity is. I think we said on Q1 call that You know, elasticity wasn't as high as one would have expected, given the pricing that we put into the marketplace in January and February of this year. And, you know, we'll do the same thing again with this price increase. We'll watch the elasticities, and we'll watch how our brands perform in the market very carefully. But, you know, without rehashing what I said, our brand performance from a share point of view is strong, and we're pleased with it. Thanks, Drew.

Thank you. Our next question comes from Vivian Azar from Cohen. Vivian, your line is now open.

Hi. Thank you. Kevin, I wanted to get your perspective on the interaction that you're seeing in some of the important subcategories that you participate in the U.S. We've heard from one of your key competitors in the hard seltzer category that they believe that there's some heightened interaction between hard seltzers and premium lights. I'd love to get your perspective on that. Thank you.

Thanks, Vivian. Look, I mean, the strength of Miller Lite and Coors Lite long predated the softness of some of our competitors' seltzers. So, you know, you can take from that what you wish. But I think Miller Lite and Coors Lite brand performance has been very strong for quite some time now, and that's because they've got great differentiated marketing programs and are really nice and healthy. I mean, we had the best quarterly industry share performance in the U.S. in nearly seven years. And potentially, one could look at the outstanding performance of Topo Chico Hard Seltzer as something which might be driving the softness of some of our competitors. I mean, our market share has grown 25%, as I said, and that's largely driven by Topo Chico, which is actually doing really well in markets where the Topo Chico name is not necessarily that well-known. We're getting strong growth in market shares in those markets. So... I guess that's what I would say, Vivian.

Okay, thank you.

Thank you. Our next question comes from Lauren Lieberman of Barclays. Lauren, your line is now open. Please go ahead.

Thanks so much. We've covered so much on the call, so I'll let it go and look forward to catching up with you guys in person soon.

Thanks, Lauren.

Thanks, Lauren.

That was an easy question, Oren. Thank you.

Our next question comes from Steve Powers of Deutsche Bank. Steve, your line is now open.

Okay, thanks. I'll ask one just to keep it going. Hey, so I wanted to pick up on the marketing comments, Gavin. You explained the two key dynamics, I think, pretty clearly, and Tracy called at the start your overall comfort with second half marketing plans. I guess what I'm Just left with is, on a full-year basis, have marketing intentions or plans undergone any changes versus where we were coming out of the first quarter, whether either in overall magnitude or focus, given what you've seen in the marketplace, some of the pockets of softness you called out? I mean, that's really the main question. I guess the second part of that would be... things trend a little bit better than maybe your base case in the back half, given places where you've got momentum like Simply or Chepachico or what have you, is the bias that you would invest some of that upside against some of those momentum, or is the marketing plan pretty well fixed at this point?

You know, I think, Steve, if there really are any positives that come out of a pandemic, one of them is that it's driven us to be way more flexible and agile than we were maybe three years ago. And our marketing team is a particular personification of that. They really are agile in terms of how they spend their money and where they spend their money, pushing behind things that are working, shifting dollars to things that are really doing great, and maybe dialing back on things where they're not doing that well. So I would say to you that we are very flexible. We're very agile. And we're very happy to lean into things that are working. I think Simply would be an example of that. You know, it's performing so much better than we expected. And I would expect that we'll put a bit more fuel behind that fire as we go forward. So we're very flexible, Steve. We obviously do have a plan that we come into the year with. And, you know, the team adjusts as and when it makes more sense for us. The work that they have done together with finance and the other teams from an ROI point of view continues to get better and better, and the teams know what works and what doesn't work, and pretty flexible in changing that on the fly.

Thanks, Steve. Okay, so I guess – okay, thank you.

Thank you, Rob. Our next question comes from Rob Ostenstein of Evercore. Rob, your line is now open. Please go ahead.

Great. Thank you very much. Two questions, maybe a boring one from Lauren. First, can you give us a lot of moving pieces here, trying to understand the U.S. business, given the rationalization of the economy skews, and then the addition of all the different seltzers. I was just wondering if you could give us a sense of what, you know, kind of the core traditional beer business did on an apples-to-apples basis in terms of volumes. Is that something you can ballpark for us?

Well, look, from an overall perspective, I think Miller Lite and Coors Lite, which is two-thirds of our U.S. business, Robert, both of those brands grew the top line in the quarter. They grew share in the quarter, and they're well positioned and doing well. In terms of individual brand volumes, Robert, we don't have plans to disclose that at this point.

No, I understand that, but just in aggregate is just in terms of a volume number in aggregate the core beer volumes, you know, so we can, you know, adjust for the impact of the economy brands and, you know, all the seltzers.

Yeah, but, Robert, I'm not going to give you individual brand volume, their brand volume performance. We don't do that. Oh, okay.

Well, you're gaining share, as you had mentioned, and that was one of the main drivers and goals of the vitalization. So kind of stepping back at this point and looking at that plan, are you pretty much done? Is it just kind of continuation of the measures that you've put in place? or are there particular, you know, finishing elements of the revitalization plan that still need to be done? And, you know, over the last number of years, you've taken out a lot of costs. Is that part of the program pretty much done now? So just trying to kind of get a sense of where we are with the revitalization plan, given that, you know, you've turned around, as you said, Coors Light and the loan gaining share. Thank you.

Thanks, Robert. Tracy's pointed out that I can tell you that our brand volume declines in the U.S. were driven by the economy brands. So you can assume from that that everything else in total grew. So just that piece of context. As far as the revitalization plan is concerned, Robert, from a cost point of view, I mean, we're pretty much done. There is a little bit more cost to come out from the revitalization plan, but it's not meaningful. From a cost point of view, though, we are always looking at taking more efficient ways of doing things in our business. We invest capital in a variety of ways to achieve that. You know, the simply in-housing, for example, is a fine example of that, right, where we can take our costs down without actually much capital investment in the process. So revitalization costs pretty much done, ongoing. We've always been looking for ways to be more efficient, and that won't change. From a revitalization plan point of view, obviously our goal ultimately with the revitalization plan was to drive top-line and bottom-line growth at the same time and on a consistent basis. And that obviously, you know, remains our goal. And this year we've got guidance out there that says that we will do it, and it's obviously not intended to be a one-off goal for us. It's supposed to be an ongoing goal for us. In terms of, you know, making sure that our core brands are healthy and strong, I don't think that one can ever say that's done. We need to stay strong and vigilant behind that. But I think we've made amazing progress there. And we've still got lots of work that we want to do in the above premium and the beyond beer space, Robert. We are doing well. Above premium is exceeding our economy share of our products. of our portfolio, but our ambitions to drive our both premium volumes and revenue up doesn't stop there. So we'll continue to invest behind that space, to invest behind the innovations, and to drive our emerging growth division with some of the, you know, great new brands and relationships that we've got in that space, Zoho obviously being one of the lead ones.

Terrific. Congratulations on the progress.

Thanks, Robert.

Thank you. Our final question of today comes from Peter Grom of UBS. Peter, your line is now open.

Hey, good morning or good afternoon, I guess. Hope you're doing well. So, Tracy, I know last quarter was a bit of an anomaly in terms of providing a quarterly outlook. But I guess a lot of the commentary from the call today seems to suggest a much stronger fourth quarter versus third quarter. You mentioned pricing, you know, fully lapping the economy, headwinds, you know, kind of the brewery disruption in the rear view. So is there any way to kind of frame how we should be thinking about the weighting of growth in the third quarter versus the fourth quarter?

Yeah, Peter, hi. Let me just say, look, we've reiterated our guidance for the full year, but let me try and add some colour for you for the third and fourth quarter. So firstly, from a phasing point of view, I would tell you that in Q3, just remember that we're still going to be fighting to some degree the economy skew rationalisation. And again, as Gavin mentioned, the correct labour strike, even though it ended in June, you know, it will take time to ramp that brewery back up with normal shipments not resuming until Q4. So that's in Q3. When we look at Q4, there's several positive drivers, as I've mentioned, that's going to help offset the headwinds in Q3. um you know we spoke about incremental pricing uh we've spoken about the top line comparisons really beginning to ease in the fourth quarter with the on-premise restrictions in the fourth quarter of last year and i mentioned the world cup which is taking place in november um so you know that that's a big beer drinking event um and then just you know from a from a investment point of view um you know I think Gavin mentioned that we expect to invest more in 2022 than we did in 2021. But in the second half of the year, we expect marketing investment to be down. But in Q3, higher relative year-over-year investments in the third quarter, and then in the fourth quarter, we don't anticipate increases. And then just the final thing to mention is the deleverage impact in the second half of the year. I mean, we don't expect to see that deleverage impact that we saw in Q2 of this year. So, yeah, that's about as much color I think that I can give here.

Thanks, Peter. Okay, no, and then just, that's helpful. Okay, yeah, no, maybe if it's just a follow-up on the 4Q. I mean, just what is embedded in terms of the on-premise or COVID-related restrictions? Are you assuming a return to normal or pre-pandemic-like environment, or is that comment simply just an expectation for stronger performance versus a year ago?

I think what we're trying to say there is that we're not expecting to have the situation in the fourth quarter of last year as we had in the fourth. So this year as we had in the fourth quarter last year. So if you think back to what was happening in Q4 of 2021, Omicron was fairly rampant. and we pretty much lost the Christmas season in the UK, which is a big season for us. So we're not assuming the same thing to happen. We're not also assuming unrealistic expectations in terms of, you know, if the U.S. is at 85%, we're assuming something pretty similar to that. But, you know, we are assuming better performance out of Canada and UK when you compare it with last year, yes.

Thanks so much.

Thank you, Peter.

Over to you, Greg.

All right, very good. Thank you, everyone, for joining us today. I know we did run a little bit over, and there may be additional questions we weren't able to answer today. But if you do have further questions, just please follow up with me and the investor relations team, and we will look forward to talking with many of you as the rest of the year progresses. Thanks, everybody, and have a great day.

Thank you all for joining today's call. You may now disconnect your lines.