Molson Coors Beverage Company (TAP) — Q4 2021 Earnings Call Transcript

Thank you, operator, and hello, everyone. After the prepared remarks from Gavin and Tracey, we will open the floor to your questions. Today's discussion includes forward-looking statements, and actual results or trends may vary significantly from our expectations. For further details, please refer to the risk factors outlined in our latest SEC filings. We do not have an obligation to update forward-looking statements. GAAP reconciliations for any non-U.S. GAAP measures are available in our news release. Additionally, unless stated otherwise, all financial results discussed will compare to the prior year's figures in U.S. dollars and in constant currency when addressing percentage changes. With that, I'll turn it over to you, Gavin.

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

Thank you, Gavin, and hello, everyone. As Gavin highlighted, 2021 was a year of tremendous progress against our revitalization plan. Despite the challenges that we and so many other companies faced, we achieved our top-line guidance of mid-single-digit growth for the year, delivered strong free cash flow, enabling us to further reduce our leverage ratio and return cash to shareholders. We continue to execute our revitalization plan, building a strong foundation for future growth, and we issued fiscal 2022 guidance that underscores that progress. Before I take you through our quarterly, our full performance and our outlook, I would like to update on a couple of naming convention changes in our business unit reporting. This does not change our reported results for these segments and was done to better reflect the geographies within the segment. As of December 31, 2021, our reporting segments are the Americas, formerly called North America, and EMEA and APAC, formerly called Europe. Now let’s discuss the fourth quarter. We delivered strong top-line and EBITDA performance. While we benefited from cycling significant on-premise restrictions in the prior year, we were still impacted by the rapid emergence of the Omicron variant in mid-November, which resulted in overall on-premise softness compared to the third quarter. In December, the U.S. on-premise net sales revenue was approximately 86% of December 2019 net sales revenue, down from third quarter levels of approximately 88%. Canada was approximately 60% of December 2019 net sales revenue, down from third quarter levels of approximately 80%. And the UK was below 80% after being close to 100% in the third quarter. Consolidated net sales revenue increased 13.7%, driven by EMEA and APAC growth of 56.5% and Americas growth of 7.1%. Consolidated net sales revenue growth was driven by higher financial volume, positive global net pricing and favorable brand and channel mix due to premiumization and fewer on-premise restrictions versus the prior year. In fact, consolidated net sales revenue increased 4.3% compared to 2019. Consolidated financial volume increased 7.4% as we rebuild U.S. domestic inventories and group brand volumes increased by 2.3%, driven by EMEA and APAC, Canada, and Latin America. This was partially offset by lower U.S. economy brand volumes as a result of our economy SKU rationalization program. In the U.S., we grew net sales revenue by 6.3%, with domestic shipments up 3.3%, reflecting our efforts to bolster distributor inventories amidst the supply disruptions in 2021. U.S. brand volumes declined 3.8%, but this was driven entirely by the economy portfolio, which was down double digits, while our premium portfolio grew low single digits, and the above-premium portfolio was up double digits for the quarter. Canada, our net sales revenue increased by 9.9% on strong brand volume growth of 6%, while Latin America net sales revenue increased by 15.9% on brand volume growth of 12.4%. EMEA and APAC net sales revenue grew 56.5%, driven largely by Western Europe, but also growth in Central and Eastern Europe. Strength in our core brands and new innovations like Madrí led to double-digit growth in above-premium and premium volume, partially offset by double-digit declines in economy. Net sales per hectoliter on a brand volume basis increased 3.8%, driven by global net pricing growth and positive brand and channel mix, with premiumization delivered across both business units. Underlying cost per hectoliter increased 5.2%, driven by cost inflation, including higher input and transportation costs and mix impact from premiumization. We benefited from volume leverage due to higher production volumes and continued progress on our cost savings program. Underlying marketing, general, and administrative (MG&A) expenses in the quarter increased by 2.4% as we continue to invest behind our core brands and innovations across both business units, while general and administrative expenses were flat. As planned, we increased marketing investments in the quarter to levels above those in the fourth quarter of both 2020 and 2019, providing strong commercial support behind our brands as we head into 2022. As a result of these factors, underlying EBITDA increased by 21.9%. Recapping the full year, consolidated net sales revenue increased by 4.7%, with Americas up 2% and EMEA and APAC up 19.6%. Top line growth was driven by global net pricing, favorable brand and channel mix from premiumization, and fewer on-premise restrictions, along with EMEA and APAC volume growth. This was partially offset by lower financial volumes in the Americas. Consolidated financial volumes declined by 0.5%, while brand volumes declined by 1.7%. Americas brand volumes declined by 3.2% as a result of the economy SKU deprioritization, which began in the second quarter of 2021 and the rationalization program announced last July. EMEA and APAC brand volumes were up 3%. Net sales per hectoliter on a brand volume basis grew 3.8% due to global net pricing growth and favorable sales mix. In the U.S., net sales per hectoliter on a brand volume basis rose 4.4% for the year, driven by net pricing growth and the success of both premium products, including Vizzy, Topo Chico Hard Seltzer, and Peroni. Underlying cost per hectoliter increased 6.9%, driven by cost inflation, including higher input and transportation costs, mix impact from premiumization, and volume deleverage. However, with the benefit of our robust hedging and cost savings programs, we were able to mitigate some of the inflationary pressure. Underlying MG&A increased by 2.9%, largely due to higher marketing investments compared to 2020. In the second half of 2021, we began to progressively increase marketing spend with the resurgence of more sports and live events. MG&A increases were also driven by lapping profit mitigation actions in 2020 due to the coronavirus pandemic and were partially offset by our cost savings program. In 2021, we delivered approximately $220 million across MG&A and cost of goods sold in our three-year $600 million cost savings program. Over the 2020 through 2021 period, we delivered an aggregate $490 million, positioning us well on track to meet our $600 million target in total gross savings by the end of 2022. As a result of these factors, underlying EBITDA decreased by 3.5%. This was slightly below and approximately flat, and was driven by the on-premise challenges resulting from the Omicron variant. However, underlying net income before income taxes was approximately flat for the year due to lower interest and depreciation, along with 5.6% underlying EPS growth compared to the prior year. Underlying free cash flow was $1.1 billion for the year, a decrease of $183 million from the prior year. This decline can be wholly attributed to the repayment of approximately $100 million of taxes related to various government-sponsored deferral programs related to the pandemic, which benefited prior year free cash flow, creating a negative swing factor of about $250 million on our 2021 free cash flow. Excluding these changes, net working capital movements were favorable compared to the prior year. Capital expenditures paid were $523 million this year, down from $575 million in 2020, and focused on expanding our production capacity and capability programs such as the previously announced Golden Brewery modernization project and our new Montreal Brewery, which opened during the fourth quarter, along with expanding our hard seltzer capacity in Canada and the UK. We have continued to make great progress strengthening the balance sheet and improving our financial flexibility. We reduced our net debt by nearly $1 billion in 2021, and our trailing 12-month net debt to underlying EBITDA ratio is at 3.14 times, better than our guidance of approximately 3.25 times and down from 3.5 times at the end of December 2020; down substantially from 4.8 times in 2016 at the time of the MillerCoors acquisition. We ended the year with strong borrowing capacity, with no borrowings outstanding on our $1.5 billion revolving credit facility. This takes me to our guidance, which calls for both top and bottom-line growth in 2022 for the first time in over a decade. Before we go through the guidance, I wanted to note that year-over-year growth rates are on a constant currency basis. We are adjusting the metric metrics to best align with the goals of our revitalization plan. Also, and consistent with our historical commentary, uncertainty concerning the coronavirus and its variants remains, varying degrees by market. If on-premise restrictions are increased and/or reinstated in some of our larger markets, this could have a significant impact on our financial performance during that period. For 2022, we expect to deliver mid-single-digit net sales revenue growth. We anticipate delivering high single-digit underlying income before income taxes growth and underlying free cash flow of $1 billion plus or minus 10%. This guidance implies that we will ship to consumption in the U.S. for the year. In terms of phasing, recall that we will start lapping the economies to deprioritization and rationalization in the second quarter of 2022. Additionally, we expect to face continued inflationary pressures, including transportation and material costs. While we have levers to offset inflation, including pricing, mix from premiumization, and our cost savings and hedging program will be pivotal. These headwinds are expected to continue pressuring gross margin but have been built into our guidance. We expect to continue investing behind our core brands and key innovations, which entails increasing the level of marketing investment from the prior year. Given the on-premise restrictions in the first half of 2021, we expect greater year-over-year increases in marketing spend in the first half of 2022. We also intend to invest behind our capabilities, with cash capital expenditures anticipated to return to more normal pre-pandemic levels as we expect our capital expenditures range to align with historical levels. Our guidance metrics include underlying depreciation and amortization of approximately $750 million, plus or minus 5%, reported net interest expense of $265 million, plus or minus 5%, and an underlying effective tax rate in the range of 22% to 24%. Turning to capital allocation, our priorities remain to invest in our business to drive top line growth and efficiencies, reduce net debt, and to return cash to shareholders. We are maintaining our target net debt to underlying EBITDA ratio of below 3 times by the end of 2022, and we have a strong desire to maintain and, in time, upgrade our investment-grade rating. On February 22, 2022, the Board declared a dividend of $0.58 per share, an increase of 12%. Also, on February 17, 2022, the Board of Directors approved a share repurchase program, authorizing the company to purchase up to an aggregate of $200 million of the company’s common stock through March 31, 2026, with repurchases primarily intended to offset annual employee equity award grants. In closing, 2021 was a volatile year, but it did not deter us from executing our plan. The progress we have made has laid a strong foundation to achieve our goals of sustainable long-term top and bottom-line growth, and our 2022 guidance demonstrates our confidence that we are on the right path. With that, we look forward to answering your questions.

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

Thanks, Kevin, and good morning. Let me start, and then Tracey can take you through some of the guidance around cost of goods sold and so on for 2022. But from a pricing point of view, obviously, we’re experiencing inflationary pressures. We expect this to continue well into this year. While we historically take price increases in the spring of every year, this year, we actually announced price increases a little earlier than that. We implemented price increases of between 3% and 5%, which took effect mostly in January and the early part of February. The amount and timing of these price increases do vary by market. We do have more levers than just pricing, of course; we have the mix shift, which is fundamentally part of our revitalization plan to shift toward above-premium and emerging growth. I spoke about that in my opening remarks. Tracey, why don’t you talk about the hedging program, maybe, then I’ll circle back on the brand.

Okay. Yes. We’ve spoken before about our robust hedging program and how we cover all our key commodities. As we look into 2022 and 2023, we’re really comfortable that our hedge position and that hedging program will play a part in mitigating some of the inflation that we are seeing.

Thanks, Tracey. Kevin, look, I mean, our business at the end of 2021 is fundamentally more solid than it was at the beginning of the revitalization plan, particularly with our brands. You referenced Coors Light. We ended the year with both of those brands growing the top line, which we haven’t seen for Coors Light for quite some time. The Made to Chill campaign continues to resonate with both regional and national markets, attracting 21 to 29-year-old consumers. Additionally, Miller Lite has improved sequentially throughout the year despite inventory challenges and tough comparisons. They continue to focus on Miller Lite as a true beer's beer through a variety of brand activities, including recent explorations into the metaverse. So we feel like those two brands are positioned well heading into 2022. Looking beyond that, premium Blue Moon has bounced back strongly, and our emerging growth division is ahead of our plan to get to $1 billion. Canada is showing growth, Coors Light has grown share. It’s as healthy as it’s been for a while. Europe is rebounding now that we’re moving past the Omicron variant and restrictions have been lifted, and we’ve got strong above-premium innovation, which has a strong on-premise bias. Hopefully, that answers your question, Kevin.

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

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

Thanks, Rob. Look, I’m not going to repeat what I said to Kevin regarding our overall brands. January was indeed a challenging month for the industry, according to public data. However, I don’t believe pricing had much to do with it, as our price increases went into effect during that month and early February. I’d point squarely at Omicron as the reason. Consumers were hesitant to go out during the on-premise period in December and into January. As we’ve moved further into January and now into February, we’ve seen consumers returning to the on-premise channels, especially in our European businesses where restrictions have largely been lifted, but also in the United States and, to a lesser degree, in Canada. So I’m attributing the challenges mainly to Omicron, Rob.

And so I guess tied to that, would your sense be that you’re not expecting much in the way of demand elasticity on the price increases, maybe be less than historical?

We always understand pricing elasticity in a typical market, but I think we’re operating in somewhat unknown territory right now. Therefore, it’s a bit too early to tell the exact impact of the various price increases that have been implemented and what that will mean from a volume perspective, Rob. As we progress into spring and summer, we will gain clearer insights.

Terrific. Thank you very much.

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

Thanks, Andrea. I think, Tracey, why don’t you take all those?

Okay. So first of all, I think you spoke of margin expansion. To achieve our mid-single-digit top line and high single-digit income before tax, there are a couple of things that need to be taken into account. Yes, we are seeing inflationary pressure, and we expect it to continue on commodities and packaging materials. We also expect the freight market to remain tight. In Q4, we saw significant inflation impact our EMEA and APAC business, and we expect that to persist into 2022. But it’s just one component of our COGS line. Additionally, if we do not see levels of on-premise restrictions in the first half of 2022 similar to those witnessed last year, we expect to see some benefits from volume leverage, particularly in our EMEA and APAC business. I previously mentioned our hedging program, where we typically hedge one to three years in advance depending on commodity liquidity and outlook, and we're comfortable with our current positions as we look ahead. Lastly, our cost savings program, which is part of that $600 million program, has already delivered $490 million. Items like our new state-of-the-art more efficient breweries in Canada will contribute positively to our cost structure. We also have the continued premiumization of our portfolio that our revitalization plan promotes. Moreover, we expect this year to see a full-year contribution from our equity income stemming from our Yuengling collaboration. We have a mixture of items that will affect 2022 positively, but we are also committed to investing in our business and behind our brands like we did in Q4 of 2021.

Thanks, Tracey.

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

Yes. So we don’t specifically give quarter-by-quarter guidance, but perhaps some things to think about: from a marketing perspective, marketing spending will particularly be higher in the first half of the year due to cycling out of some of the on-premise shutdowns in prior periods. For COGS, obviously, we will still deal with inflation, as I’ve mentioned. However, if we don’t experience similar on-premise restrictions in the first half of 2022, we will see benefits from volume leverage, especially in our EMEA and APAC segments. We expect to see both channel and geographic mix benefits as we cycle through the first half restrictions in EMEA and APAC, which typically have a lower overall COGS per hectoliter. I also want to reiterate our robust hedging program, where we cover all commodities, and we’re confident about our posture.

The only other thing I’d add to that, Bill, is that while some of that is positive, we still face challenges related to the economy SKU reduction and rationalization. So we will still carry the negative impact of that, especially in the first quarter and part of the second quarter. As I mentioned earlier, all of our volume loss in the fourth quarter was driven by the economy portfolio; our premium lights grew, as did our above-premium. We are operating at significantly better inventory levels than pre-pandemic, and we don’t anticipate any major out-of-stock issues. We are very pleased with that situation.

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

Yes, they did. Our national rollout of Topo Chico has been very well received by both big and small retailers.

Yes. Hey, thank you very much. A couple of follow-ups on things, I guess, mostly for Tracey, we’ve covered before. On the hedging program, I guess, are you able to be any more specific around where you think your COGS per hectoliter. I guess, what your outlook is for the coming year before any productivity offsets? I just – I think the spot market would indicate potentially double-digit type inflation. It sounds like you’re going to be well below that. I’m just trying to get a sense for the order of magnitude and how much inflation may be deferred into 2023? That’s question number one. And then two, I know I’m supposed to only have one, but if you can – on the second one, on EBITDA, just remove away from explicit EBITDA guidance, I think all the pieces you gave us, do allow us to back into EBITDA, but I think it results in a wider range and you might typically land on. So is that intentional, so would be thinking kind of the midpoint of all those things, low single-digit type EBITDA increase? Or do you – are you intentionally leaving a little bit wider? So thank you for both those.

Yes. So Steve, look, we didn’t provide guidance on COGS per hectoliter, but that is embedded in our bottom line guidance. The high single-digit net income or income before tax guidance that is factored in there. Some of the things that may provide clarity about our COGS outlook include the ongoing impact of inflation on commodities and packaging materials. We expect the freight market will stay tight. We experienced significant inflation in our EMEA and APAC businesses and expect that to continue into 2022. But that is just one element of our COGS charge. Additionally, assuming we don’t see similar restrictions in the first half of 2022 as in the prior year, we expect to see benefits, particularly in EMEA and APAC due to volume leverage. I alluded to our hedging program earlier. We typically hedge between one and three years based on the commodity's liquidity and outlook, and we’re comfortable with our hedge positions for the next couple of years. Also, there will be some benefits from depreciation as we cycle out of a five-year period associated with asset valuation exercises from the MillerCoors acquisition. Beyond that, we offer various actions across our supply chain and other levers that we can utilize for top and bottom-line delivery, but our COGS outlook is captured within our comprehensive guidance.

For you, Tracey.

Hi, guys. Thanks for taking my question. I want to push a little bit more on gross margins. Tracey, you mentioned and provided some helpful color on all of the moving parts. In your prepared remarks, you did say that gross margins were going to continue to be pressured. But pushing in a little bit more on that, can you give more precise expectations as to gross margins for this year? What I’m trying to understand is, do you expect to be able to take enough price plus that positive mix to offset the COGS pressures? Or should we be expecting gross margin compression on a year-on-year basis? Thanks.

Nadine, maybe I can start on that one first. You’ve identified the components, but if you look at our P&L, we’re making a strong push through our revitalization plan to change the shape of our portfolio. We’ve been successful in that last year. Our brands are healthier, and the mix is strong. Coors Light and Miller Lite have seen very good growth. Therefore, we have a few levers working for us. We have pricing, along with the positive mix shift as our portfolio reshapes towards above premium. We have also cycled past the economy portfolio reductions. Additionally, our emerging growth has been a positive driver from a margin perspective. We want to continue investing and growing our marketing, and we chose not to cut back in December once we realized Omicron would challenge us. We want our brands to stay competitive, hence our decision to increase marketing in 2022 across all markets.

Thank you.

Hey everyone, thanks for the question. So Gavin, I'm trying to understand a little bit about how you're thinking about channel mix in 2022. You mentioned that EBITDA would likely have been in line without the volatility brought on by Omicron at the end of the quarter. However, sales came in line, which I take it implies there was a margin impact, specifically from channel mix within the on-premise sector. If I run the math on the difference between your yearly guidance and what came through, I'm estimating a difference of around $70 million or a few hundred basis points on margin. Is this how we should consider potential benefits from channel mix as a bullish indicator entering 2022?

Right. Chris, yes, so much to unpack in your question. Look, I think it’s safe to say that in the fourth quarter, we were anticipating revenues to be higher than what we recorded. While we did meet our guidance of mid-single digit, our expectation at the end of October was for a higher number. From a channel mix perspective, particularly in Europe, it is extremely positive when the on-premise is open. We're more efficient there, and the margins are favorable. In the U.S., the margins also benefit us since our above-premium portfolio is stronger relative to our economy segment, which inherently has lower margins. Brands such as Blue Moon, Peroni, and Pilsner Urquell have higher revenue margins, and when the on-premise channels are operational, we benefit from that. So, under typical conditions, on-premise challenges translate to a mix negative for us everywhere, particularly in Europe. Looking to 2022, we do have some tailwinds. As we enter the year, we will have to consider what happened in January, given events like the Texas storms and the cybersecurity impacts. In Europe, I believe we’re moving past over most restrictions now having impacted the on-premise for much of last year; so yes, I think we’ll reap potential benefits from that perspective.

Yes, thanks, Gavin.

Thanks for squeezing me in. Two questions, actually, on the top line. I would like to understand what you are expecting in terms of sales category growth for this year and what you are planning to achieve thanks to Topo Chico and Vizzy. How should we expect to factor Simply in? I know it’s not a hard seltzer category, but it is distinct. Finally, if you can help me figure out how much that will contribute to your growth in the energy growth division? Thank you.

Thanks, Laurent. Regarding Simply, we haven't yet launched it in the market. We're basing our evaluation on the retailer and distributor reactions so far, which have been extraordinary. The response has been even stronger than what we received for Topo Chico, as it has an excellent reception in one out of every two American households. We expect great shelf space in terms of distribution. Our emerging growth division has three big components: a solid base business, including distribution in markets like Latin America, which generated remarkable results and a substantial contribution from our non-alcoholic businesses, ZOA and La Colombe, with considerable growth stemming from that. While I can't break down specifics by brand, it’s safe to say our emerging growth has seen great contributions from both non-alcoholic areas and Latin America, which are expected to continue positively. With regards to the hard seltzer category, after a strong growth period, remember it did lower overall value but still managed low teens growth last year. We've positioned ourselves strongly within this sector, with both Vizzy and Topo Chico leading the charge.

And regarding that, could you give us your assumptions in terms of category growth? What is your outlook for that?

Well, it's a strong category, and we believe there's also opportunity for share within the seltzer market. While I can't commit to a specific number for growth, I assure you that the potential for us in this segment remains high, and we’re well-positioned to capitalize on that with our established brands.

Great. Thanks so much. Good morning. I wonder if you could hone in a little on expected volume performance for 2022. Just knowing, I guess a) your comments on elasticity and really just sort of not knowing, but if I back into the comments you’ve made on pricing, the mix still being positive, I would assume that you're planning for volume to be flattish, I’m guessing. And specifically, through that STRs and thinking about the category backdrop to the degree that if that flattish volume thought process is right, that implies continued market share gains across the portfolio? Or if that’s more of a kind of in-line performance as you’re thinking about how things may well play out next year? Thanks.

Well, Lauren, I’m not going to provide volume guidance. What I can say is that in the fourth quarter, the entirety of our volume loss was driven by the rationalization of our economy portfolio. Both premium and above-premium grew, improving overall trends. We were close to having positive volume results for Miller Lite and Coors Light last year. Had it not been for Omicron’s impact and the curtailment of on-premise access, our approach to our economy portfolio was deliberate and necessary, and it helps clarify our supply chain—improving inventory levels that we need for key products, especially for Miller Lite and Coors Light, as well as our above-premium brands. This gives us better control overall while allowing us to expect a favorable performance as we move through 2022.

Okay. Thanks so much.

Thank you.

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

Yes. If we start with our Canadian breweries—our new Montreal brewery is a state-of-the-art facility that came online at the end of last year. We still have some IT projects ongoing to integrate the Canadian business onto our U.S. ERP system. The transformation and modernization of our Golden Brewery is a multiyear project, so that’s still underway. We are also investing in hard seltzer capabilities in Canada and the UK, which will take place this year and next. Our packaging upgrade projects are geared toward sustainability and are ongoing as well. Overall, our CapEx is expected to align with historical levels, similar to the spending seen around 2019. As we progress with the efficiency improvements across the board, we anticipate capturing further benefits.

Okay. That’s really helpful. And just Tracey, if you could just— I guess, if you could just give us a sense of just how much incremental savings or productivity efficiencies, just how much more we could expect incrementally from here?

Yes. I mean I’d refer you to our cost savings program. We communicated about $450 million in cost-savings primarily directed toward the COGS line. That would include our Montreal brewery developments—efficiencies that we’re implementing. The other portion of that, $150 million, is mainly around G&A areas. So we have delivered $490 million of that $600 million target, and we expect to bring in the balance this year. Most of that will relate to the COGS line from improved efficiency and productivity as we bring new technologies online.

The only other thing I’d add is that as we bring in seltzers into our own facilities, the financial margin impact is positive for us as we are controlling those costs in-house and driving efficiencies as we move forward. It really enhances our ability to manage profitability across the board this year.

All right. That’s really helpful. Yes. Thank you. Thank you both.

Hi, this is actually Eric Serotta in for Dara. Good morning. The first– main question is I wanted to circle back on shelf space. It seems there may be a lot of shelf space up for grabs if the expected cutting of hard seltzer SKUs occurs. What is your perspective on this, and how are you looking at opportunities for Molson Coors regarding that shelf space? Additionally, who do you think will pick up the vacant space besides Topo Chico? Lastly, in the broader context of spirits having one of their best years last year with the ready-to-drink category being particularly hot, what risks do you see for your core brands regarding shelf space and retailers transitioning towards spirits and RTDs?

Thanks, Eric. Yes, you’re spot on about spring being a crucial time for shelf resets, most of which involve significant changes. We're aligning our purpose-driven category management strategy, focusing on occasions—this guide our decisions as we engage with retailers. We value innovation as you can see from our compelling pipeline featuring brands like Topo Chico Hard Seltzer, Vizzy Mimosa, and simply various new product offerings. As for our core brands, we're actively working to promote products like Coors Light, Miller Lite, Blue Moon Belgian White, and Leinenkugel’s, specifically Summer Shandy. In regard to innovation, we believe our strong performance in core products, coupled with our exciting upcoming offerings, positions us well for expanded shelf space in the spring, and that’s what we’re targeting. So, it’s an exciting time for us.

Thank you, Greg.

All right. So thank you very much, everyone, for joining us today. Thanks, Gavin and Tracey, and we appreciate all of those who were able to ask questions. Tracey Mangini and I are very happy to follow up on any additional questions that you may have over the next couple of days. So with that, thanks, everybody, and have a great day.