Okay, we're gonna get started. So we've got Molson Coors Beverage Company, with Gavin Hattersley, President and CEO, and Tracey Joubert, the company CFO. So thank you both for joining us from Boston. We won't have any fire alarms. There was a fire alarm or smoke alarm last year. So road to the hotel. Let's keep it together this year. So I'd love to just kind of jump right in. Exciting times at the company, a lot of very positive developments. So I guess, to start, it would be helpful to just hear your perspective on the health of the US beer category overall.
You know, industry-wide shipments have been more challenging year to date, and since it is kind of even the last month or two, maybe faltered a bit, a bit further versus the historical cadence for kind of like a +1 to -1 type range. So I guess, what would you say are maybe the primary drivers of the slower performance, and how should we think about medium-term shipping growth for the industry?
Thanks, Lauren. Thanks for having us. Good to be here. Yes, certainly, if you look at the overall beer industry, it is operating outside of that sort of historic -1 plus +1 range. Although in the last 13 weeks, as Circana read, it has improved a little bit to about I think it was down 1.7, so a little bit better, but still outside of that range. If you stand back and you look at it, we got off as an industry to a tough start to the year with, you know, the West Coast in particular had some very challenging weather conditions. That's a big beer consumption market. And so that was not helpful at all.
And then as helpful as seltzers was a few years ago to the overall beer category growth, so it's been a drag on the overall beer industry this year. And so certainly I would point to those two factors from an overall consumer point of view. You know, we have seen somewhat of a slowdown in premiumization, but still premiumizing. And that's largely driven by the seltzer phenomena. I would point to those two factors with a slight improvement in the last 13 weeks.
Okay. Okay. And if we focus then on Premium Light, specifically, you know, just any thoughts on kind of sort of softer volume trends there, again, category-wise and, you know, kind of consumer behavior shifts, if any?
Well, putting aside the seismic shifts that we've seen-
We'll get there.
in premium light. I'm sure we'll get there at some point. You know, if you look at the at—we look at it from an overall beer category point of view, and, you know, our premium lights, Coors Light, Miller Lite, are actually growing overall category share, which is really important from our point of view.
Okay. Okay. So on the dramatic changes in market share the past few months. So my understanding is that your 23 outlook reflects the assumption that these current market share levels do hold. So, I guess first, let's confirm that is an appropriate interpretation of the look. But then secondly, you know, why do you think the market share shift will prove sustainable? Kind of, what are you doing to retain this new higher level for your brand?
So if you look at it from that point of view, it's been five months now, right? And whichever way you look at it, if you look at it on the rolling 13 weeks, every single week, the numbers are the same. The trend has stuck, it's sticky, it's not changing. You might see a little bump either way in a 1-week number, and there's always historical reasons for that. But when you look at the rolling 13-week, the trend is stuck and there is no change whatsoever. That's certainly not what we're seeing. And it's certainly not what you're seeing in Circana and IRI. Now, what are we doing to make sure we keep that?
Well, partly the additional marketing spend that we're putting behind our brand. Some of that was planned. We were always gonna do that. We said that at the beginning of the year, that we were always going to increase marketing spend, but we have increased our marketing spend in surgical ways. We're making sure that, from a retailer point of view, they understand, and they do, what's happening in the marketplace. They understand very well, and that the reset process reflects that. I said on the earnings call that we had 20 retailers that had already made shifts in the fall, which is somewhat unprecedented. And I also said that every week that I spoke to our commercial folk, more people got on board with that.
You know, since the earnings call, we've more than doubled that. So we're, you know-
Since the earnings call?
Since the earnings call, we're now closer to 40 retailers that have made that full reset. So it's somewhat unprecedented, but it's reflecting what's happening out in the marketplace. Of course, we'll benefit a little bit from that in this year, but the real benefit of that shelf reset is next year, because that'll make, that'll help us make sure that what you see in the store and what the consumer is able to shop will reflect momentum and will make sure that we retain the volume we've got. The other area of focus for us is in the on-premise.
You know, we talked about 12,000 tap handle increase in the second quarter and brands are built and brand loyalty is also built in the on-premise. So it's a really important move for us as well. So, you know, we're doing a number of things to make sure that we retain this market share that we've got. I know there was this, there's some skepticism, and you were not one of them because I-
Believe it or not.
I read what you wrote, but there was some skepticism. Why are you spending all this extra marketing? But in the same breath of the very same folk that said, "Why are you spending the marketing?" We're also saying that we're not gonna retain the market share. And so we want to retain the market share, and we are gonna do what we need to do to make sure that we have the best chance of doing that.
Great. If I just stick with marketing for a moment, beyond the core premium light brands, where is some of that incremental marketing spend being allocated for the second half?
You're right. It's broader than just, than just Miller Lite and Coors Light. We're putting more money behind Coors Light up in Canada. Coors Light recently became the number two brand in Canada, passing Bud Light. It's not that far away from the biggest brand either. Budweiser... Bud, Bud Red is the biggest brand in Canada. So we're gonna fuel that momentum in Canada. Madrí Excepcional, which is our most successful innovation we've had in Europe. It's certainly one of the most successful innovations that we've had in the company as a whole. We're gonna fuel that momentum. That brand is on fire. And it has only got 40%-ish awareness in the U.K.
We're putting more money behind that brand, and we're putting money behind Ožujsko in Croatia, for example, which recently went past 50% market share. In the U.S., of course, we're putting money behind Miller Lite and Coors Light, but we're also putting increased investment behind a brand like Simply Spiked, which continued its momentum from its launch year of last year. We will invest more behind Blue Moon. We've got the Blue Moon non-alcoholic version, which is launching in the second half, and we'll invest behind that. So, you know, broadly bigger than just Miller Lite and Coors Light. But, you know, given that they're the biggest brands in our portfolio, they will get the lion's share of it.
Yeah. Okay. I'm sorry, I should put on my glasses so I do a better job reading what I've got here. Okay. So also in terms of incremental reinvestment, that's now reflected in the guidance. I mean, how different is it versus what was planned at the start of the year? I know if you're not gonna give me an actual number, but just thinking about, you know, the opportunity to say there are. You know, there's every company, every brand manager, there's a list of the wish list of things they wanna support. You know, how much of where the incremental spend is going versus the day one plan? Is those sorts of things, are there products you're getting even pulled forward from 2024? Because it is, you know, the flexibility with you now is considerable, to say the least.
Why don't you take that?
Yeah, look, I mean, we, if there's good ideas, we're going to invest behind it. And, you know, we've never said no to a good idea. So when our marketing team comes to us with something like an innovation or they want to put a little bit more money, you know, to fuel something that's doing really well, you know, we'll do that. But as Gavin said, I mean, we, we've always planned to spend for this year. $100 million is not sort of totally, it's not all incremental. You know, a large part of that is what was planned. Just in terms of the sort of efficiency of marketing spend, it's not always also about the quantity, but our marketing team has done an amazing job to be more efficient.
You know, running all of the marketing spend through our investment models, making sure we're getting the highest return. So that, that plays into a big part of it as well. So I can't tell you exactly what's incremental, but the $100 million is not all incremental.
Okay. And how do you think about balancing reinvestment versus flowing through to the bottom line? And again, given the view that the share shifts are permanent.
Again, I mean, every, every debt or investment idea that's brought to us, you know, we, we analyze it, and if it's something that we think is, is, you know, gonna drive value, for the company, we'll, we'll invest behind it. But, but, you know, we wanna make sure that we're, we're investing in the business to drive that sustainable long-term, top and bottom line growth. So, so that's how we, we look at it.
Okay. The strength in Miller Lite and Coors Light is obviously a big positive, but how does it impact your premiumization goals?
Yeah, I mean, above premium, premiumization is the second pillar of our overall strategy that we launched a few years ago, and the focus on that hasn't changed, and we've got some really great stories to tell there. I've mentioned one of them, which is Madrí Excepcional, and Simply Spiked would be another one. Most of the innovation which we are doing and have planned to do, some of which we've announced, some of which we haven't, is focused on the above-premium, higher margin space. So it remains a strong focus for us. We had the goal out there to improve that to one third of our NSR portfolio. We've made great strides along that path.
It's obviously fantastic that Miller Lite and Coors Light are doing as well as they're doing, but it's not also changing our focus of premiumizing our portfolio.
Okay. And you'd mentioned Blue Moon. I just would love to get an update on the latest, you know, latest Blue Moon campaign. I know it was a focus area for 2023, and then some other things kind of stole the spotlight. Yeah, the Blue Moon still looks a little bit challenged in some of the tracked channel data, so I'd love to just hear a bit about the development there.
Yes, it is. I mean, Blue Moon has had. Just like craft as a whole, it's a segment that has suffered from some delays, and Blue Moon is obviously part of that segment. Notwithstanding that, it's still the largest craft brand in the country. It's twice as big as its nearest craft competitor. Some of the challenges which I talked about earlier from an industry point of view impacted Blue Moon a little disproportionately because it's got quite a big market share on the West Coast, that's its highest volume state. And so challenges in California hurt Blue Moon disproportionately. Having said all that, we recognize we've got more to do on Blue Moon.
You know, we have our distributor convention next week. We'll be unveiling some new plans for them from an overall brand point of view. We have already announced the Blue Moon non-alc version, which I think our brewmasters have done an amazing job of matching the taste of Blue Moon non-alc with the alcohol version. So, we're not blind to the fact that we've got work to do with Blue Moon. Some of that you'll see coming up in the next three months or so.
But the bigger impact for us from a overall campaign and brand point of view will be for next year, and we'll be unveiling those plans next week.
Okay. On the non-alc launch, I'm curious just your thoughts on launching a non-alcoholic brand underneath an existing halo versus kind of standalone, discrete, non-alcoholic brand. And just sort of the interplay of those two things. You know, do you think it's important to have something that's simply non-alc versus just the knock-on to brand extension, I guess?
Yeah, we've tested this one every which way, as you can imagine, right? As to what we think will work best for our portfolio. And Blue Moon non-alc rose to the top. I mean, it's a very well-known brand. It's got great quality credentials, and it's got a huge consumer following. And coming up with a non-alcohol version of that that meets the expectation that you would have from Blue Moon, from a craft and a taste point of view, rose to the top of a pile of a number of different ideas. So we're pretty excited about it.
Okay. Consumers of a certain age are very appreciative when companies launch non-alcoholic.
I know, it's true.
We'll save that for all. Let me switch a bit and just ask how you're feeling about kind of current capacity and brewery network, and the ability to keep up with demand? I mean, anything I hear from my industry contacts has been gold stars all around the ability to keep up, but we'd just love some commentary on that.
Yeah, I mean, our brewery supply chain has done an amazing job through summer. You know, part of that was because we did build up inventories coming out of Q4 of last year, and we made sure that we kept them as high as we could in Q1. So we asked our network to take their inventories up, not because we expected this, right? Of course not. But we were actually expecting something negative to happen, because it has every year for the last three years. And so when this positive thing landed, we were in a great place, with healthy inventories. Because you can't just turn on a dime to make more beer.
So that gave us the breathing room for a couple of weeks to ramp our breweries up, and they've done an amazing job this summer. You know, I talked about it in the second quarter call, and we're through Labor Day now, and our breweries kept up that great work. I mean, they've done. They actually over-delivered what we were hoping for from a shipment point of view. That they performed really well. It's gonna give us an opportunity in the fourth quarter to perhaps do something we haven't been able to do in a while.
Our workforce has really risen to the challenge over holidays, July the Fourth, Memorial Day, and it might give us an opportunity, you know, over Thanksgiving and Christmas to give our employees a bit of time off. Frankly, the amazing performance that they've achieved through summer. So, you know, capacity is great. Now, of course, there are gonna be some out-of-stocks in somewhere with some brand or some pack or some SKU. But as you rightly point out, you've not heard it. It hasn't been in the trade. There hasn't been a lot of chatter about it. And that's been our experience.
But we've had some distributors which have had, you know, seismic shifts in volume trends, you know, growth of 50% and, you know, their warehouses aren't big enough and it's certainly you would see some level of out-of-stock there, but the performance has been amazing. You know, the, we've got Pabst coming out. A big chunk of Pabst comes out in the fourth quarter. That'll give us the...
It has less of an impact for us from a capacity point of view in the shoulder quarters, but it'll certainly help us next year, once we get into summer and that volume is out of us, able to meet the demands that we've experienced with our joint venture partner, Yuengling, in the expansion markets. So we're feeling really good about our capacity.
Great. Just one question here. Are there any operational risks to running the network tighter for longer than usual? You know, like, is there pushing maintenance and things like that?
No. I mean, look, that is really important to us to make sure that we maintain our breweries. And you know, some of the capital spend that we've put in to make our breweries more efficient, to run better, you know, we expect that this year and will continue to spend. But no, there's nothing that I would point to that would be out of the ordinary.
... We always do our maintenance in the stronger quarters anyway, right? So we always do it in Q4 and Q1. It's planned, and we'll do it again this year.
Okay, great. And then, just, I know you typically plan to ship to consumption each year. Is that sort of what you're expecting to do this year, or is it a ship ahead to also, you know, rebuild?
Yeah, look, I mean, our aspiration is to shift to consumption every year. You know, this year, what we've been really focused on is meeting demand. And so as Gavin mentioned, you know, our chain has done a magnificent job keeping up with the demand as it's sort of overshifting to what we had planned. So you know, it does give us a bit of an opportunity, as Gavin mentioned, to maybe give our employees, you know, time to enjoy the holidays this year. And then the other thing, just to mention, as Gavin said, you know, Pepsi comes out. A big part of Pepsi comes out in this quarter. So, you know, at the moment, what we focus on is just meeting demand.
Sure. Okay, great. And then I know, you know, compared to, like, the second quarter, that usually runs pretty close to go out anyway. But our math has been that you'd see a bigger benefit from positive operating leverage in those, in those shoulder months or, or quarters. Is that fair? You know, 'cause I think there were been some investment community struggles, right, on, on how to model all of this.
Yeah.
We thought it was more of the operating leverage is more apparent later.
Yeah. So look, I mean, obviously, it's more volume. We push strawberry, you know, the more leverage there is, so we can spread those fixed costs over more volume. Now, it does the composition of that volume. You know, it does make a difference. We said that on an enterprise basis, our fixed cost is around 20% of total cost, but depending on the composition of that volume. So you know, our different geographies have a different percentage cost. So if we've got higher volume in the APAC relative to the prior year, that may impact that. But yes, you're thinking of it correctly. I mean, you know, the more we use, the better the leverage that we get.
The change in that year-over-year, because-
Of course.
Typically pretty close to-
Yes. The volume change year-over-year makes an impact.
Okay, great. And then just more broadly, you know, the rate of inflation is expected to moderate in the second half. So can you just walk us through the key drivers, you know, for that easing in the back half of the year?
Yes. So, we've got a good line of sight right now to our cost. So, I mean, we, we've got a, you know, a good idea of what commodities are doing. We've obviously got our, our hedge program, you know, that is a good line of sight, too. We, we know what our contractual sponsors are. So we, we do have a lot of contracts, you know, that, that limits our costs and then also our cost savings programs. So, so yeah, we, we can see the, the inflation moderating. Now, again, it does differ depending on the geography. So EMEA, APAC has, has had a much bigger inflation impact than North America, for example.
We expect to continue to see EMEA, APAC still having this inflation, but certainly, you know, North America, we're starting to see that inflation come down.
Let's move on to pricing. So I guess first, you know, still expecting to take a fall increase. What are you seeing in terms of the promotional environment in the category? And then just almost as an overlay to it, I mean, one of the things that I've been thinking a lot about is: how much has changed in the category in terms of category leadership, right? And ABI's role historically on pricing in the industry, and how that may or may not change the cadence of, and that too, frankly, of pricing that comes through.
Yeah, we will be taking a price increase in the fall. It will be, as we always do, right, brand by brand, market by market, SKU by SKU. So we won't take a price increase in every market. We won't take it on every brand, and we won't take on every SKU, right? We'll be surgical about it. I do expect that the comments that I've made in the past about, you know, reverting back to the historical sort of average of 1-2 is the most likely outcome for next year. In terms of you know, the overall category, we've long punched above our weight from an overall category captaincy and point of view, and you know, we... It's a competitive advantage for us.
Certainly that's helping us now as we work with retailers on on-shelf resets, as we show them the facts and the velocities and what needs to change. You know, for those changes that have already taken place, you know, frankly, we're the big winner. There are three clear winners of this shelf reset space that we're seeing at the moment: ourselves, Pepsi, and Yuengling, not only in the markets in which we operate with them, but in their home markets. Those are the three clear winners we're seeing. That's something we're emphasizing.
Great. Let's switch back to Europe. So you've brought up Madrí a couple of times, or Madrí, I guess I should say.
Mm-hmm.
Put my emphasis in the right place. What is it about that brand that's just been such an overwhelming success in the E.U?
You know, I would. That's a great question. I'd point to two things, right? It met a consumer need. There was a demand from the consumer for, you know, refreshing Mediterranean-style lagers. And you know, we launched that brand, and we used our strength in the U.K. to do that. I mean, our strength in the U.K. is the on-premise. It hurt us obviously during COVID, but we've come out of that, out of COVID even stronger from an on-premise point of view, capability point of view than we were getting in. So we leveraged the strength we had, which was the on-premise, and we met a consumer demand that they wanted.
You know, the success of that brand has been astronomical. I mean, it's beyond our wildest expectations, and we think we've got significant upside for the brand, given the low awareness that still exists. But you know, when something is super successful in the on-premise, that's where you build, I think, build brands, that's where you build consumer loyalty. The demand for it then came in the off-premise, which is moving to the off-premise quicker than we were perhaps anticipating. So you know, right now our focus is on the U.K. and meeting the needs and growing the brand in the U.K. But it is certainly a brand that we will look to expand beyond the U.K., either in Europe or elsewhere. It's just been a phenomenal success.
Okay, great. You know, we do keep hearing about the tough consumer backdrop in Central Europe, where, you know, you have real exposure. So, what are you doing to kind of keep up consumer engagement in those, that region in particular, given the challenging macro?
Yeah, we've long talked about that one as being-
Yeah
The most challenged market, area that we operate in. Disposable income's tough, inflation's high. There's consumer sentiment, given what's going on around them, has been tough. So there's no doubt that that's a more difficult market for us. Inflation was high. We put large price increases into the market. We probably won't, well, we won't be putting in those levels of price increases in the market in the coming year. And we're investing behind those brands which are working and working well. So I mentioned, Ožujsko in Croatia. Staropramen is doing really well with its new campaign. Obviously, Madrí Excepcional is a investment focus for us.
And then we've recently upped our spend behind both Carling and Coors Light in the U.K. market. But in Central and Eastern Europe, more surgical, I would say. Those brands which are working and working well, we're putting a little bit of extra oomph behind it.
Okay, great. Let me shift gears to look at beyond beer. You made an interesting spirits acquisition in August with Blue Run. You know, and along with that announcement, you shared the plans to establish the Coors Whiskey Co., so that will have all the other brands in it. So what's the strategy there? This is something new, so it's a good opportunity to talk a bit about it and also think about the opportunity and necessity to scale a business, you know, for it to be something that can move the needle.
Now, if you remember back when we launched the revitalization plan, we just, we said we wanted to move beyond beer. While core was always gonna be our focus, and above premium beer was gonna be the second focus, going beyond beer was, was our third big, big priority. And, you know, we've, we've sort of honed in where we want to focus. So certainly in the non-alc space with an energy drink focus, particularly and potentially something else, and then in the spirits world. So we launched the Coors Whiskey Co., Five Trail, last year or the year before.
Yeah.
We launched Barmen, and we spent a lot of time looking as to, you know, what brand fit with our overall strategy from a premium point of view or margin point of view and just an overall brand point of view, and we landed on Blue Run. It's a wonderful brand. We're very excited about it. We're excited about the partners that have come with it. We think there's tremendous upside for that brand. And then, of course, we get economies of scale with what we already had, which was Coors Whiskey Company. So it's right in line with our strategy, and it's right in line with our string of pearls M&A approach, which we've talked a lot about as well.
We think we're good at the string-of-pearls approach. I think it's added value for shareholders, and something we're gonna continue to focus on going forward, and this is an example of that.
Let's talk a little about the market for RTDs. So there's so many brands out there, right? And the consumer has been super experimental. I mean, you could even argue, I know seltzers is not an RTD, but you've kind of seen that dynamic as well, the experimentation, the big surge, now we're going the other way. This great partnership with Coke. How do you see it all shaking out? You know, like what's the right business model to participate in this space, given there's so much churn, right, and there's so much activity?
Yeah. So we, for quite a while now, have been looking at this more from an overall flavor point of view. So not just seltzers, but also flavored malt beverages, because of this churn that has taken place. And so if you look at the total space flavor, I think from an overall growth point of view, it's still growing. Seltzers is down a lot, and some brands within seltzers are down quite a lot. But then flavor with brands like Simply Spiked are growing very nicely. You know, some of our competitors, like High Noon, growing, growing very nicely. So you know, the overall space is still, it's big, and it's still good, and it's a place we want to play in. In terms of our partnership with Coca-Cola, we like it, right?
I mean, we've got some great brands from them. We're launching a new brand with them in the fourth quarter, Peace Hard Tea. We're gonna launch that in the Southeast. And so this, this is a relationship that we think is working really well. You know, Simply Spiked had a great introduction year. It's growing very nicely, even on top of some of those really big comps in this year, and we're gonna double down on that as we go forward. So I think there's lots of runway in terms of our relationship with Coca-Cola.
I guess just when I think about business model, I guess what also I'm thinking about is because of the churn, thinking about return on investment, right? And that's like picking the winners or how do you—you've got plenty of flex in the P&L right now, obviously. But you think about how much to invest or seed some of these brands or, you know, garnering shelf space. I mean, how are the retailers, I guess, more pointedly, the distributors, dealing with that, working through that, the increased complexity of picking the winners, the what scales, what disappears? It's a very different approach than what would be core company historically with Miller Lite was like big, core, stable brands. So what adaptations, you know, have you needed to make in how you operate here?
You know, our distributors are really good at operating with actually quite a lot of complexity. But most of them deal with a ton of brands and a ton of SKUs, and they're really, really good at it. It's one of the advantages, one of the advantages of our particular network, is they're used to dealing with that scale and complexity and breadth and depth of brands. So that hasn't been a challenge. Our distributors, of course, love momentum, so do our retailers. And so, you know, when they see momentum, like they're seeing with Simply Spiked, they get behind it in a meaningful way.
From an investment point of view, the moves that we've made, not only in this space, but you know, for example, our relationship with Yuengling, which has been absolutely fantastic for us. You know, it's gained significant market share in its new markets, the new markets we went into this year, Kansas and Missouri and Oklahoma. We haven't had to put a lot of investment behind that. We a little bit of capability in our brewery network to handle a new brand, but it's not anything like you would expect. Returns on that particular investment, for example, are very strong. And then, from a flavor point of view, we always make sure that whatever we're doing, we try and make sure that it's flexible enough.
So, you know, for example, we've got a new variety pack investment, which came live a couple of months ago, which certainly has and will continue to reduce the overall cost structure of our flavors. But those lines have the capability to operate broadly. It's not just a, you know, a Simply or a Topo. It's a- it's got broad capability, and the same can be said for the slim can lines that we put into a number of our breweries. They can operate beyond just the flavor space. So I think we've got better and better at that, honestly.
We've got time for one more question, so I just wanted to close out and talk about capital allocation. So you've reached your target leverage ratio.
Mm-hmm.
Business is throwing off more cash, given the step up in sales, and profits this year. I guess, if at all, how have your priorities changed, and, you know, how should we think about M&A, going forward?
So, our capital allocation priorities haven't changed. It's still those three buckets. You know, we're gonna continue to invest in the business to drive top line, and bottom line growth sustainably. So that could be investment in brands, it could be investment in our breweries to drive cost savings or efficiencies, or it could be, M&A. And, you know, Gavin spoken about, we're not gonna be doing huge transformational deals. We are looking at the string of pearls approach, you know, bolt on, filling a white space or some kind of strategic area. So that's number one. Number two is to pay down debt. You know, we do want to improve our investment grade rating, and that's really important to us. So we'll continue to look at that.
And then, you know, thirdly is returning cash to shareholders. So the priorities haven't changed. What's great about our performance this year, and actually, to be honest, our performance over the last number of years with our free cash flow generation, is we now have more optionality, so we can better balance that capital allocation, you know, across those three buckets. And, you know, we continue to have conversations with the board, and we've got our strategy day coming up, and we'll give a little bit more about our strategy and how we're approaching our capital allocation.
Okay. We'll stay tuned. Good. Thank you very much for joining us.
Thank you.
Look forward to seeing you again in a few weeks.
Good. Thank you.
Thanks for having us.
Sure.
Thank you.