Molson Coors Beverage Company

taking your questions. In an effort to address as many questions as possible, we ask that you limit yourself to one question. If you have technical questions on the quarter, please reach out to our IR team. Also, I encourage you to review our earnings release and earnings slides, which are posted to the IR section of our website, and provide detailed financial and operational metrics. 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 except as required by applicable law. Reconciliations for any non-U.S. GAAP measures are included in our earnings relief. Unless otherwise indicated, all financial results we discuss are versus the comparable prior year period and are in U.S. dollars. With the exception of earnings per share, All financial metrics are in constant currency when referencing percentage changes from the prior year period. Also, share data references are sourced from Circana in the U.S. and from Beer Canada in Canada, unless otherwise indicated. Further, in our remarks today, we will reference underlying pre-tax income, which equates to underlying income before income taxes, and underlying earnings per share, which equates to underlying diluted earnings per share, as defined in our earnings release. With that, over to you, Gavin.

Thank you, Tracy. Good morning, everybody, and thank you for joining the call. We are pleased with our results this quarter, which played out largely as we had expected. We acknowledge that there are a few near-term timing dynamics impacting our quarter-to-quarter performance this year. In today's call, we will unpack these, as well as the drivers of the second half of the year, to demonstrate why we are maintaining our guidance for the full year 2024. In the second quarter, we essentially held our top line and grew our bottom line while tackling a very difficult year-over-year comparison. If you recall, the second quarter of 2023 was our strongest second quarter net sales revenue since the 2005 Molson and Coors merger. Consolidated net sales revenue was down 0.1%. Underlying pre-tax income grew 5.2%. and underlying earnings per share grew 7.9%, while we continued to invest behind our brands globally heading into peak season. We also accelerated the pace of share repurchases for the quarter, given compelling valuation as we see it, amid the strong performance of the business and our confidence in our long-term algorithms. Contributing meaningfully to our results was our EMEA and APAC business due to favorable net pricing, premiumization, and brand volume growth. For the first half of the year, we increased net sales revenue by 4.2%, underlying pre-tax income by 20.4%, and underlying earnings per share by 23.8%. While this is a very strong performance year over year, there are a few timing factors that will impact us in the third and fourth quarters, which is why we are maintaining our guidance for the full year. These timing factors will result in an unwind in the back half of the year, and the resulting temporary trends are not reflective in any way of our confidence in our acceleration plan and growth initiatives. The most important timing factor to understand regarding our performance in the first and second halves of the year is US shipment timing. We made the deliberate decision to increase our US inventories in anticipation of and during the strike at our Fort Worth brewery, which ran 14 weeks during February through May. We did this to ensure we had healthy inventories during the peak summer season. As a result, excluding contract volumes, SDWs exceeded STRs by about 750,000 hectolitres in the first quarter and by about 350,000 hectolitres in the second quarter. And we continue to expect this will essentially fully unwind the third and fourth quarters with more weighting to the third quarter. Another factor impacting our results is the continued exit of PEP's contract brewing volume as we approach the termination of the agreement at year end. This reduced second quarter financial volume by 580,000 hectolitres, with declines accelerating from the first quarter. It reduced our first half financial volume by over 900,000 hectolitres, which represents a decline in PEP's contract volume of over 50% from the first half of 2023. To put a finer point on it, PAFs had a negative 3.2 percentage point impact on both our second quarter and first half of America's financial volume on a year-over-year basis. And while PAFs is a near-term headwind to total volume and net sales revenue, the mixed benefits related to its exit, along with favorable global net pricing and premiumization in Numeo and APAC, drove an increase in consolidated net sales revenue per hectolitre of 4.2% for both the quarter and for the first half. Turning to cash flow, we generated $505 million in underlying free cash flow for the first half of the year, while investing meaningfully in our business. And we returned $564 million in cash to shareholders through both our dividends and share repurchase program. Tracy will cover more on our capital allocation and outlook drivers, but to sum it up, Given our strong performance for the first half of the year, we remain on track to deliver a 2024 guidance. This guidance calls for top and bottom line growth for the third straight year, something that has not been done in over a decade. Now, let me take you through our strategic priorities, starting with our core power brands. In the U.S., Coors Light, Miller Light and Coors Banquet's second quarter combined volume share is down a half share point of industry versus a year ago when we saw our peak share gains. However, these brands remain up two full share points compared to the second quarter of 2022. This means that we retained approximately 80% of our peak share gains on our core power brands. Coors Banquet in particular is performing extremely well. We have deliberately built on this 150-year-old brand over the last several years, building on its loyal consumer base and attracting new Gen Z and millennial legal drinking age consumers. And the results have been impressive. Coors Banquet grew brand volume nearly 13% in the first half of the year and gained dollar share at the fastest rate among the top 15 brands in the beer category. And we see great potential ahead as we continue to close distribution gaps and increase brand awareness. In Canada, Coors Light continues to be the number two brand in the country and the Molson family of brands gained volume share in both the three months and year to date ended May. In fact, in Ontario, Coors Light and Molson Canadian continued to be the number one and number two brand respectively in both the three months and year to date ended May. In EMEA and APEC, strong results in Central and Eastern Europe have been supported by OJUSCO in Croatia, which has gained nearly two value share points of the core segment year-to-date in June, as well as the extremely successful launch of a new core power brand, CARIMON, in Romania, reaching about 150,000 hectolitres since March. And Carling's brand equity continued to benefit from its partnership with the FA Cup. Turning to our premiumization priority for both beer and beyond beer, our above premium portfolio was over 26% of total net brand revenue for the 12 months ended June 30th. Our premiumization progress is at different stages across our markets, and we have had success in EMEA and APAC, Canada, and Latin America. In EMEA and APAC, our above premium share of net brand revenue continues to be over 50%, up nearly 10 percentage points from the full year 2019. This improvement is primarily due to the very successful launch of M3, which continued to grow revenue double digits in the second quarter. And it is the number three lager in the on-premise in the UK in terms of value. In the Americas, our above premium share of net brand revenue was over 21% for the 12 months into June 30th. which is up nearly two percentage points from the full year 2019. This was supported by Canada, where our above premium share of net brand revenue has also grown, driven by the success of Miller Lite, Coors Seltzer, and Vizzy. Also contributing to the mix is Latin America, where more than three-quarters of our net brand revenue is above premium. In the U.S., our net brand revenue share from above premium has improved compared to 2019. but our above premium trends have been more challenged recently, and we have work to do here. Now, this is largely due to the strong performance of our core power brands in 2023, but we believe we can build from here, and we have focused plans around our key above premium brands and innovations to do just that. This starts with a Blue Moon family performance, and we feel good about our new campaign and packaging, our repositioning of Blue Moon Light, as well as our line extensions into non-alcohol. It's early, but we believe we are moving in the right direction. We are committed to continue to innovate and scale in Beyond Beer, which for us is all about above premium. Flavor is a key focus area because it's big and it's growing. Given the flavor consumer evolves and shifts quickly, flavor innovation is key to keeping pace with their demands. We believe we have impactful brands with potential in the space. For example, we have built Simply Spiked into a $100 million brand in just two years, illustrating the power of the Molson Coors platform as a launchpad for innovation and growing brands. And while we have seen some suffering on our original packs as we launched into new flavors, with the Simply brand in one out of every two households in the US, we believe the Simply Spiked brand family has more runway. And we have exciting plans for Peroni. By onshoring production in the US, we believe we can better ensure consistency of supply and ultimately drive scale and margin for this high-potential brand. Before I pass it to Tracy, I'll conclude by saying that we are confident we have the right strategy to achieve our long-term growth objectives, and we are very pleased with our progress against our strategy. We are a much different company today than we were four years ago, and we are most certainly stronger than we were just 16 months ago. With that, I will pass it to Tracy.

Thank you, Gavin. We reported another strong quarter of financial performance and continue to expect we will achieve our goal of growing the top and bottom line for the third year in a row. As Gavin mentioned, with our strong free cash flow generation, we continue to invest strategically in our business and also return cash to shareholders. Since October 2019, when we launched the initial phase of a new strategy, we have invested substantially in our capabilities, from supply chain to marketing to technology and tools that advance our insights and analytics. These investments have driven substantial cost savings, which help to offset inflationary pressures and support long-term, sustainable, profitable growth. In recent years, this has included adding flavor production and coast packing capabilities, expanding and diversifying our supply base, building a slim-can capacity in our can plant, and replacing several breweries with state-of-the-art facilities in Canada. In the first half of this year, a big focus has been our multi-year, multi-hundred-million-dollar modernization of our Golden Colorado Brewery, which is nearing completion. This project at our largest US brewery, which broke ground in the fall of 2020, is completely overhauling the brewery's infrastructure and is expected to result in more efficient fermenting, aging, and filtration facilities, as well as a state-of-the-art upgrade to the cellars. When it is fully operational in a few weeks' time, we will have a more efficient brewery that produces less waste. We also commenced a new multi-year project in the UK to increase our brewing and packaging capacity, which is necessary in part due to the continued growth of Madrid. And it is these investments, along with our extensive hedging program, that have helped us to offset inflation, particularly during the significant inflationary period we have experienced in recent years. And while inflation has moderated, as expected, it remains the headwind this year. In the second quarter, our COGS per hectolitre increased 2.9%, which was driven by the America's business, which was up 4.1%. This was largely due to ongoing inflationary pressure, as well as volume deleverage, in part due to the reduced tax contract brewing volume in the America's business. Turning to marketing capabilities, we overhauled our marketing strategy several years ago. making us more nimble and efficient as we have continued to invest behind our brand. By improving our ability to analyze and evaluate the effectiveness of marketing investments, we are able to assess our campaigns in almost real time. And we built our own in-house agency, enabling us to meaningfully shift our percentage of spend to more working versus non-working marketing dollars. It's our deep marketing capabilities that have enabled us to meaningfully improve our return on marketing investment since 2019 and supports why our long-term growth algorithm does not concentrate step changes in marketing spend. As for returning cash to shareholders, in the first half of this year, we paid $188 million in cash dividends. And in February, we raised the dividend for the third consecutive year. a cumulative 29.4% increase. As such, we are generating a dividend yield of 3.2% as of August 1st. Also, we are active in executing against our up to five-year $2 billion share repurchase program that we announced last October. We continue to view our stock as a compelling investment opportunity amid the strong performance of the business and our confidence in our long-term growth algorithms. and utilizing a sustained and opportunistic approach, we repurchased 4.6 million shares for a total cost of $260.7 million in the quarter. Since inception of the plan, we have already repurchased 8.8 million shares, or 4.4% of our Class B shares outstanding since September 30th, 2023, for a total cost of $521.1 million. That means we have completed approximately 26% of the plan in just the first three quarters. And the reason we have been able to deploy our capital in these ways is because our balance sheet is strong and healthy. Healthier than it has been since before the 2016 milliquids acquisition. We ended the quarter with a leverage ratio of 2.13 times, which remained in line with our long-term target range of less than two and a half times. In May, we issued an eight-year €800 million note at the fixed rate of 3.8% and used the proceeds to pay down our €800 million note upon its maturity in July. And now I'd like to conclude with our financial outlook. We are reaffirming our 2024 guidance. As a reminder, the key metrics call for low single-digit net sales revenue growth on a constant currency basis, mid-single-digit underlying pre-tax income growth on a constant currency basis, mid-single-digit underlying earnings per share growth, and underlying free cash flow of $1.2 billion plus or minus 10%. While this guidance implies slower trends for the second half of the year, it's important to remember that this is driven by shipment timing this year, and it does not alter our confidence in our long-term growth expectations. As Gavin discussed, In the US, excluding contract volume, we deliberately shipped ahead of demand by about 1.1 million hectolitres in the first half of the year. This compares to the first half of 2023 when our STWs were behind our STRs by about 400,000 hectolitres. And since we currently plan to shift to consumption for the year, we expect this to reverse in the second half, mostly in the third quarter. At the same time, our contract with PEPs continues to wind down. Recall that we expected the impact for the year from the PEPs contract termination to be approximately 2 million hectolitres, or about 3% of America's financial volume. There is about 1 million hectolitres remaining that will come out of that system in the second half of the year, with over half of that expected to exit in the third quarter. These U.S. shipment plans are expected to result in volume deleverage in the second half of the year. And recall that we had a volume leverage benefit on a consolidated basis of about 60 basis points in a comparable period in 2023. For some perspective, on a consolidated basis, we estimate that our fixed cost in 2024 will comprise approximately 20% of our total cost. However, the anticipated benefits of roll-forward pricing taken in the first quarter, premiumization of our portfolio, moderating inflation, and cost savings should partially offset the impact of volume deleverage. And we expect MG&A for the second half to be down compared to the prior year period as we tackle the second half of 2023 when we had high marketing investment to support the momentum in our brand, as well as higher incentive compensation. As we look to the longer term, we remain confident in our growth algorithm as we have multiple levers to achieve it. From our robust revenue management platform, to our premiumization and innovation plans, to our continued investment to drive efficiencies and cost savings, these levers help us to navigate various market circumstances. In closing, we had another strong financial quarter and remain committed to our short and long-term financial and strategic goals. And with that, we'd like to open it up to your questions, operator.