Molson Coors Beverage Company (TAP) — Q2 2022 Earnings Call Transcript

Thank you, operator, and hello, everyone. Following prepared remarks today from Gavin and Tracey, we will take your questions. In an effort to address as many questions as possible, we ask that you limit yourself to 1 question. If you have more than 1 question, we'll answer your first question and then ask you to re-enter the queue for any additional or follow-up questions. If you have technical questions on the quarter, please pick them up with our IR team in the days and the weeks that follow. Today's discussion includes forward-looking statements. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in our most recent filings with the SEC. We assume no obligation to update forward-looking statements. GAAP reconciliations for any non-U.S. GAAP measures are included in our news release and also unless otherwise indicated, all financial results the company discusses are versus the comparable prior year period in U.S. dollars and in constant currency when discussing percentage changes from the prior year period. With that, over to you, Gavin.

Thanks, Greg. In the second quarter of 2022, we achieved our expectations and continued to execute our revitalization plan, despite a soft industry, global inflationary pressures, and the Quebec labor strike at our Montreal brewery. Globally, we have now recorded revenue growth on a constant currency basis. Molson Coors grew dollar share in the U.S. in the 13-week quarter, both of which have not been achieved in over a decade. What’s more, we’re one of only two major beer companies to achieve dollar share growth in the 13-week time frame. In Canada, Molson Coors grew volume and share when you factor out Quebec due to the Quebec labor strike. In the U.K., Molson Coors grew share and achieved the highest on-premise trailing 12-month average share also in over a decade. And we are currently the largest share gainer of the U.K. beer industry. So in aggregate, across our three largest markets, we are outpacing the industry and continuing to grow the top line globally. And these results are no accident. They're not a coincidence. These are the rewards of our continued commitment to and execution of the revitalization plan. So our plan is working and that fact gives us continued confidence that we are on track to deliver on our guidance for 2022. You can see it in our core brands with stronger brand fundamentals and consistent investments since we launched the revitalization plan paying off. In the second quarter, Coors Light and Miller Lite achieved the best quarterly industry share performance in the U.S. in nearly seven years. While Miller Lite grew share in the industry in the quarter, as I mentioned last quarter, these results are driven by the clear distinctive positioning of our two biggest brands and more effective marketing. We are demonstrating the power of our biggest brands, and we intend to keep investing behind them. Coors Banquet, our oldest brand in the U.S., is also one of our fastest-growing beer brands with dollar sales up double digits and growing share of the total beer industry, fueled by a new generation of drinkers. In Canada, Molson Canadian is growing share of the total beer industry for the first time in eight years. In the U.K., Carling, the largest beer brand in the U.K., managed to further solidify its number one position in the total market, in the majority of their markets. Around the world, our core brands are not just stronger than they've been in many years; our core brands are outpacing the rest of the beer industry. It’s an incredible foundation for our business to build on. We also continue to find success in premiumizing our business even in challenging economic times. Our Above Premium brands again hit a record high portion of our global portfolio net sales revenue on a trailing 12-month basis with positive progress made across the business. The net sales revenue of our U.S. Above Premium portfolio is now higher than the net sales revenue of our U.S. economy portfolio on a trailing 12-month basis. That trend was driven by the rapid growth of our Hard Seltzers, the strong launch of Simply Spiked Lemonade, and Blue Moon and Peroni's continued drivers coming out of the pandemic. Last quarter, our share of the U.S. Hard Seltzer segment grew by 25%, from just over 7% in the first quarter to over 9% in the second quarter, and our Hard Seltzers are currently growing share of the total beer industry. That growth once again makes Molson Coors the fastest-growing Hard Seltzers portfolio in the U.S. Not only has the business grown Seltzers share during this period, the Topo Chico Hard Seltzer has quickly become the fastest-growing Hard Seltzer in the U.S. and was a top five industry growth brand in the quarter. We said that Simply Spiked Lemonade would redefine the full flavor alcohol beverage segment. And today, the results back that up. In just a few weeks, we have sold over 60,000 hectoliters, achieved a 3.5 share of F&B segment in the latest four-week read from IRR, and it is already one of the top F&Bs in several major grocery retailers. In addition, brand volumes for Blue Moon were up high single digits, while Peroni was up high teens on a year-to-date basis. And our business globally continues to premiumize as well. In our Latin American business, where most of our brands sell at Above Premium price points, we continue to grow volume in the second quarter. This was driven by strong growth in Colombia, Chile, and Honduras markets. Additionally, in Mexico, Coors Light is back to healthy growth, up double digits versus the prior year, while Miller High Life earned a record sales month in June. In the U.K., Coors is gaining share of the total beer industry, and Madri's growth is amazing. Madri has seen the most value growth of any brand in its first year in the U.K. on-premise, making it the most successful launch in the entire 16 years that the on-premise measurement service has been tracking the industry. There's been two years after its launch, the brand has sold over 200,000 hectoliters in the first half of 2022 alone, making it one of the top 20 U.K. beers and have only just launched in the off-premise in March. This is a brand you’d also get to know because you're going to be hearing a lot about it in the years to come. And Praha, a relatively newer Pilsner from Staropramen, has earned strong results in Central and Eastern Europe, and successfully launched this year in Romania. This will be its second largest market to date, and we believe this expansion has the potential to significantly increase Praha's volumes. Our Canadian business also continues to premiumize, of particular note in that market is our Six Pints craft beer division, which is growing at about four times the rate of the craft beer category in Canada. Premium lager specifically grew by over 30% in the second quarter. And our Canadian Hard Seltzers portfolio continues to grow. We grew share of the segment in the second quarter. Coors Seltzer is now the number seven Hard Seltzer in Canada and Vizzy is number five. Combined, there are over 12 share of the Canadian Hard Seltzer segments in the latest and that's before Topo Chico Hard Seltzer launched nationally in Canada. Now I can imagine that you're all thinking that premiumization is very nice, but how well are we prepared for a recessionary environment? First, we do continue to see trade-up in our portfolio and in the industry across our major markets, as you can see from what I just shared. But it's also true and notable that the economy segment is strengthening in the U.S., and three of our four key economy brands grew segment share in the second quarter. In fact, our economy portfolio has had its best quarterly performance versus the industry in the last three years. And excluding the discontinued brands from the SKU rationalization program, our economy brands grew share of the total industry in the quarter. We have long held at all segments in the beer industry, and it's never truer than it is in these times. The shape of our portfolio, even as we continue to premiumize it, ensures that we have strong offerings and strong brands for consumers across the range of price points. That gives us the ability to adapt our brands should the need arise regardless of the economic climate. While Tracey will go into more detail, I would be remiss if I acknowledge some of the one-off challenges we faced in the second quarter. The 11-week Quebec labor strike adversely affected our Americas and global top-line results. The Quebec labor strike ended in June, and employees returned to the brewery and distribution center just a few days later. I'm pleased with the performance as we get the facility back up and running. Out of an abundance of caution, we also conducted a voluntary withdrawal of nearly two million cases of beer due to a quality issue at one of our U.S. breweries. And importantly, there were no health or safety risks. We have taken steps to correct the problem. And because our national inventory position on new skills is stronger than it has been in years, we were also able to divert production into this market from other breweries and quickly replenish supply. So the good news in both instances, if there is any, is that both situations have been addressed, and we still met the projection that we laid out for you earlier this year. That is a testament to the health of our business. I know it is reasonable to say that three years ago, either one of these issues would have been severely damaging to our business. Now they're certainly not helpful, and we're not looking to repeat them, but they have not taken us off course. And we owe this improved health of the business to the clear progress Molson Coors has made through a consistent execution of the revitalization plan over the past few years. Our plan is working, but I'm also realistic about the challenging global macroeconomic environment in which we are operating. It’s created uncertainty for our consumers, our business, our competitors, and really all businesses in the consumer goods space. And yet the progress we have made in improving the health of our brands and our business has us well positioned to navigate the current economic climate and to deliver on our full-year guidance. Today, we have a portfolio that is well positioned to successfully compete within the entire range of consumer demands, whether that be taste or price. We have a timing benefit in the second half of this year as we gradually diminish how much of the last year's inventory rebuild we will be lapping. Additionally, by the fourth quarter, we will no longer be lapping the shipment headwind from the SKU rationalization program from last year. In Canada and Europe, some of our biggest global markets and ones in which the Christmas season is among the most important beer selling occasions, we have the prospects of a strong fourth quarter, thanks to waning coronavirus restrictions. And as Tracey will discuss in more detail, we will have the benefits of our fourth quarter U.S. price increase which will further help offset inflation. All of this, combined with the strength of our brands, gives us the continued confidence to reaffirm our guidance of top and bottom line growth for the year. And now to give you more detail on the financials and outlook, I'll hand it over to our Chief Financial Officer, Tracey Joubert. Tracey?

For the second quarter, we saw continued growth in our revenue on a constant currency basis and achieved income before income tax at the favorable end of our expected range while investing in our business, reducing net debt, and returning cash to shareholders. We managed this amidst global inflation, the Quebec labor strike, and a strong shipment quarter from the previous year. Our performance and agility indicate our progress with our revitalization plan, instilling confidence to reaffirm our guidance for growth in both revenue and profit this year. Now, let's review our key performance indicators and outlook. Consolidated net sales revenue rose by 2.2%, fueled by robust growth in EMEA and APAC regions. As restrictions eased, we observed an improvement in on-premise performance, though with market variations, bringing total net sales revenue back to 99% of 2019 levels. The revenue growth was supported by strong global pricing, a favorable sales mix from premium offerings, and an advantageous channel mix, although these were somewhat offset by lower financial volumes. Consolidated financial volumes dropped by 4.6% as we compared to recovery efforts from the previous year’s distributed inventory. The impacts of the Quebec labor strike and lower brand volumes in the U.S. due to our SKU deprioritization and rationalization program also contributed to this decline. However, we saw strong financial and volume growth in EMEA and APAC from higher brand and factored volumes alongside growth in our Above Premium portfolio. Net sales per hectoliter increased by 7.1%, benefiting from global pricing and positive brand and channel mix, with premiumization evident across both business units. Costs per hectoliter rose by 11.5%, driven by inflationary pressures including higher input and transportation costs, premiumization impacts, and a mix change in EMEA and APAC, though partially offset by reduced depreciation expenses. Underlying MG&A increased by 7.5%, mainly due to higher personnel costs like travel and entertainment, along with increased marketing investments aimed at supporting our core brands and innovations. Consequently, underlying net income before taxes declined by 22.8%, falling within our forecast range of a 20% to 30% decrease. Our reported results faced challenges from a strong U.S. dollar, negatively affecting our reported net sales revenue and underlying income before income tax. Underlying free cash flow was $287 million for the first half of the year, a decrease compared to last year due to timing of capital expenditures and lower net income, albeit somewhat mitigated by lower cash taxes. Capital expenditures amounted to $389 million, an increase aimed at expanding our production capabilities. Now, focusing on our business units, in the Americas, the on-premise channel hasn't yet returned to pre-pandemic levels but is showing sequential improvement. In the second quarter, it constituted about 13% of our net sales revenue, down from around 16% in 2019. In the U.S., on-premise revenue improved to 93% of 2019 levels. In Canada, it reached 77%, up from 55% earlier this year. Overall, Americas net sales revenue dipped by 1.7% as pricing growth and a favorable brand mix were offset by expected lower financial volumes, which decreased by 8.1%. In the U.S., revenue fell by 2.1%, with domestic shipments down 8.2%, surpassing a 1.7% decline in brand volumes primarily due to the SKU rationalization program. Canada saw a 2.3% decline largely driven by an 8% drop in brand volumes due to the Montreal brewery strike, with positive pricing and premiumization partially countering this. Latin America slightly decreased in net sales revenue, although brand volume rose by 1.8%. Per hectoliter sales rose 6.2% with favorable pricing and brand mix growth, while U.S. pricing grew by 6.7%. Costs in Americas increased by 10.2% due to inflation and mix impact. Underlying MG&A rose in the mid-single digits mainly due to higher personnel and marketing spend. As a result, Americas underlying net income before income taxes dropped by 20%. In EMEA and APAC, net sales revenue surged by 20.5% thanks to increased financial volumes and net pricing growth. The improved performance was also bolstered by fewer on-premise restrictions in the U.K. compared to the previous year. For this region, net sales per hectoliter increased by 16.5% as a result of on-premise reopenings and solid growth in Above Premium brands. Overall financial volume grew by 6.2% in regions like Western and Eastern Europe. However, costs per hectoliter rose by 22% due to inflation, and MG&A availability increased by 14.2% as we invested more into marketing efforts. Consequently, underlying net income before tax in EMEA and APAC decreased by 22.7%. Looking at capital allocation, our focus remains on investing for growth, reducing net debt, and returning cash to shareholders. We concluded the quarter with net debt at $6.4 billion, including the repayment of $500 million USD notes, with most of our debt being fixed-rate. We had $250 million of commercial paper at the end of the quarter, allowing for strong borrowing capacity. Our trailing net debt to underlying EBITDA ratio stands at 3.2x, down from last year, and we are committed to achieving a target ratio below 3x by the year's end. Additionally, we declared dividends and repurchased shares under our program. Reaffirming our guidance for 2022, we expect mid-single-digit revenue growth, high single-digit income growth, and free cash flow of $1 billion, adjusted for continued dollar strength. For the second half, we anticipate volume headwinds, especially from the Economy SKU rationalization. However, we expect to have multiple growth drivers in the fourth quarter, including new pricing strategies and easing year-over-year comparisons. Inflation will affect our margins, but we have strategies to manage these pressures. Overall, we expect to spend more on marketing than in 2021, with expectations of higher investments in the third quarter but stable levels in the fourth quarter. We maintain projections on net interest, underlying depreciation, and effective tax rates. In summary, our strategy is resonating, and we trust it will continue to bolster our financial and operational performance moving forward, despite the uncertainties. We are confident in our revitalization plan and our goals for sustainable growth both in revenue and profits throughout 2022 and beyond. We look forward to your questions.

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

Thank you, Kevin. You're correct. I won't repeat everything Tracey mentioned in her opening comments, but I want to highlight that in the second quarter, we accomplished exactly what we aimed for, and we did it at the better end of our provided guidance. So, where do we stand now? We experienced an 11-week strike in the second quarter, which we anticipated, and that's why we set our guidance as we did. However, we grew dollar share in the U.S. on a 13-week basis, and we are one of only two major beer companies to achieve dollar share growth in this timeframe. Our Hard Seltzer portfolio is the fastest-growing in the market, and both Coors Light and Miller Lite performed exceptionally well, achieving their best quarterly industry share performance in the U.S. Both premium brands reached record highs. Our U.S. economy beer portfolio also had its best quarterly performance against the industry in three years. Our revenue remains strong, as indicated by our positive share performance even after implementing a price increase earlier this year. This gives us confidence to implement another price increase in the latter half of the year, as Tracey mentioned. Despite everything that has happened, our brand portfolio remains robust, both in the United States and internationally, including Canada and Europe, and we are optimistic about building on that. As I said, I don't want to reiterate everything Tracey said, and I don't believe you should either, but would you like to comment on the cost environment that Kevin referred to?

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

I understand you no longer provide monthly sales trends, but Gavin, I would appreciate any qualitative insights you can share about the U.S. beer market as the summer has progressed. I've heard that July 4th was generally strong for much of the industry, but I've also received mixed reports as the month went on. I'd like to hear your perspective on this.

Thank you, Eric. You're correct that we don't provide monthly guidance anymore. You can track our performance through publicly available data from Nielsen or IRR. I want to emphasize that our brands are gaining market share not only in the United States but also in Canada and the U.K. We are building on the momentum we achieved in Q2 and have introduced several promising innovations to the market. For example, Simply Spiked has seen remarkable success, surpassing our business projections for the year, and we are increasing supply to meet the unexpected demand. We expedited the in-housing of Simply production to our Fort Worth brewery, which we weren't scheduled to do until next year, but due to strong demand, we completed it in about six weeks, resulting in cost savings and higher supply levels. I expect our share performance in the flavored malt beverage category to continue improving moving forward. Additionally, while I don't want to repeat everything I mentioned about Miller Lite, Coors Light, and our Above Premium segment, we are in a strong share position. Tracey highlighted some of the headwinds that will diminish in the second half of the year. We lost significant sales last Christmas in the U.K. and Europe, crucial periods for our business, and we faced another setback this year due to the Canadian Montreal strike. All the volume lost in Canada during the second quarter came from Quebec. Without the strike, we would have seen volume growth outside of Quebec. As we increase supply in the third and fourth quarters, I anticipate improvement. Overall, we had a strong quarter despite a challenging industry climate, global inflation, and the labor strike, achieving better results than we projected.

So first question, you mentioned 3% to 5% in certain markets in Q4. Can I just confirm that this is incremental, so in addition to pricing taken year to date? What is the pricing impact at a national level? Not just certain markets but national? And is this fully baked into your mid-single-digit top line guidance? And then one very quick follow-up. I appreciate you already gave some comments on COGS, and you touched on your hedging strategy, should imply you do have good visibility into next year. So are you expecting your COGS headwinds from input costs in 2023 to be smaller or greater than the headwinds you're expecting to face in full year 2022?

Thank you, Nadine. I'll let Tracey address the COGS question, but I want to clarify some of your comments regarding pricing. The 3% to 5% increase is based on a national average, and we anticipate implementing pricing changes within that range primarily in the fourth quarter, with some impact likely occurring towards the end of the third quarter. This means that in certain markets, we may increase prices by more than 5%, while in others, the increase may be less than 3%, but overall, we expect to fall within that range. Additionally, this increment is on top of the pricing adjustments we made earlier this year, and it is factored into our expectations for the entire year. Tracey, would you like to take the COGS question?

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

So, looking at the second half of the year, if I review what we've discussed on the call today, there are some incremental pricing changes that will take effect in the fourth quarter. We're also dealing with the residual effects from the Canadian strike, which needs to be accounted for. Another point that has changed is Gavin's mention of expectations for a potential market moderation. I'm unsure of the magnitude of the Canadian residual, but it seems like the pricing adjustments still provide a bit more cushion. As for how the market may behave—whether it slows down or not—I want to ensure I'm framing this correctly. As Kevin Grundy highlighted, there are ongoing concerns about the second half of the year, but it appears that Q2 has landed well. Historically, a lot of the leverage in the second half was anticipated to be significant. Now, it seems there's a bit more cushion from the pricing changes than there was earlier, even considering some incremental challenges ahead.

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

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

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

I just wanted to confirm one quick thing and then follow up on Bryan's question about pricing. Regarding the Economy SKU exit, did you always anticipate that those would extend into the second half of the year? I initially thought they would mostly be completed by Q2, but perhaps it's just taking longer to clear them from the system. As for pricing in Q4, it seems like the category you expect to be slightly weaker in terms of volume in the latter half of the year is influencing the cost per hectoliter. It appears you're being strategic with pricing, setting some areas above 5% and others below. This indicates confidence that certain brands can handle the higher rates. However, I would appreciate more context on your assurance that the pricing won't lead to increased price sensitivity. Thank you for the clarification on the SKU exit and additional thoughts on pricing.

Thank you, Chris. Regarding the SKU rationalization and the discontinuation of some of our economy brands, there are two aspects to consider. From an STW standpoint, the impact is quicker than from an STR or brand volume perspective. Distributors and retailers still had inventory of the discontinued brands, so they continued selling those until they ran out, which will happen more towards the end of the third quarter and into the fourth. After the cybersecurity attack, we halted shipments of several economy brands and gradually resumed them towards the end of Q2, with most resuming in Q3. Consequently, the shipment benefits will be realized sooner than the STR benefits. I hope that makes sense. In terms of pricing, we are confident in implementing price changes for our brands. When comparing our peer CPI to the national average CPI, even after our price increases, we remain lower and significantly less than other essential products like eggs, bread, milk, and gas. Our brands have performed well over the last four to five months since we implemented the overall price increase. It's no coincidence that we're gaining market share. We are one of only two major beer companies in the U.S. to achieve dollar share growth in the last 13-week period. Therefore, we feel optimistic about the strength of our brands and their capacity to accommodate further price increases this fall.

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

You're asking about the industry shipment decline, Kaumil. The overall decline in North American shipments was primarily due to two factors. First, there was a strike in Canada, which accounted for the entire volume loss there. Second, as I mentioned in the previous call, we made significant efforts in the second quarter of last year to recover from a serious cybersecurity attack. During that time, we were shipping beer across the country, and our team was putting in long hours to ensure we delivered as much beer to distributors as possible. This approach was inefficient and incurred considerable costs last year. Fortunately, this year we are operating in a more normal environment thanks to our inventory levels. Our service levels are where they should be, meaning we don’t need to incur additional shipping costs to meet demand like we did in the second and third quarters. As a result, our shipments have decreased significantly. The largest impact from a deleverage perspective is due to this situation, and the second biggest impact is our Canadian volumes. Our overall plan for the year is to ship based on consumption, which is our strategy. We have shipped less than what retail requires so far, and we expect to see the benefits of deleverage going forward. I don't anticipate deleverage to negatively affect us in the second quarter, and it won't be a drawback for us in the second half of the year.

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

Our plan for the full year is to shift to consumption. We need to address the situation in Canada to recover from the strike. Having an 11-week strike at such a large plant is certainly not beneficial for us, and we will require all of Q3 and part of Q4 to bounce back from it. From a Canadian perspective, I expect that we will be shipping more than we were selling. In the U.S., we shipped below STRs in the first half, and we plan to adjust that to align over the full year.

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

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

Gavin, I wanted to get your perspective on the interaction that you're seeing in some of the important subcategories that you participate. In the U.S., we've heard from one of your key competitors in the Hard Seltzer category that they believe that there is some heightened interaction between Hard Seltzers and Premium Lights. I'd love to get your perspective on that.

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

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

I'll ask one just to keep it going. I wanted to follow up on the marketing comments, Gavin. You explained the two key dynamics clearly. Tracey mentioned at the start your overall comfort with the marketing plans for the second half. What I'm curious about is whether there have been any changes to the marketing intentions or plans for the full year compared to what we discussed after the first quarter, either in overall magnitude or focus, especially considering some of the market softness you highlighted. That’s really my main question. Additionally, if things trend a bit better than your base case in the second half, particularly in areas where you have momentum like Simply or Topo Chico, would you consider investing some of that upside into those momentum areas, or is the marketing plan mostly fixed at this point?

I think one positive outcome of the pandemic is that it has made us much more flexible and agile than we were about three years ago. Our marketing team exemplifies this flexibility. They are quite adaptive in how and where they allocate their budget, supporting efforts that are effective and pulling back on those that are underperforming. We are certainly flexible and eager to invest in initiatives that are yielding results. For instance, Simply is performing significantly better than we anticipated, and I expect we will invest more in that as we move forward. While we do start the year with a plan, the team is adept at adjusting as necessary. Their collaboration with finance and other teams has improved our return on investment continuously, and the teams are well aware of what works and what doesn’t, allowing us to make changes quickly.

I have two questions, possibly borrowing one from Lauren. First, could you provide some insights into the U.S. business, particularly regarding the adjustments made to the Economy SKUs and the new seltzers? I'm curious if you could give us an idea of how the core traditional beer segment performed on an apples-to-apples basis in terms of volumes. Is that something you could estimate for us?

From an overall perspective, I think Miller Lite and Coors Light, which represent two-thirds of our U.S. business, both showed growth in the top line during the quarter. They gained market share and are in a strong position. However, we do not have plans to disclose individual brand volumes at this time.

I understand that, but in general, regarding the core beer volumes, we can adjust for the impact of the economy brands and all the seltzers.

I'm not going to provide you with individual brand volume performance. We don't do that, and I don't plan to.

You're gaining market share, which you mentioned was a key objective of the utilization strategy. Looking at the revitalization plan from a broader perspective, do you feel you are mostly finished with it? Is it more about maintaining the initiatives already implemented, or are there specific final steps in the revitalization that still need completion? Over the past few years, you have significantly reduced costs, and it seems much of the program is nearing completion. I'm trying to understand the current status of the revitalization plan, especially considering the turnaround of Coors Light and the increase in market share.

Our brand volume declines in the U.S. have primarily been due to the Economy brands, which suggests that everything else has seen growth. Regarding the revitalization plan, we are nearly finished from a cost perspective, with only minimal additional costs expected. We are constantly exploring more efficient operational methods and investing capital in various ways to achieve this. For instance, our initiative to bring certain processes in-house has allowed us to reduce costs with minimal additional investment. The revitalization costs are mostly complete, but we will always seek efficiencies moving forward. The main objective of the revitalization plan remains to drive growth in both revenue and profits consistently, and we have set guidance indicating our commitment to this goal. Ensuring the health and strength of our core brands is an ongoing effort; we have made significant progress but must remain vigilant. We still have considerable work ahead in the Above Premium and Beyond beer segments, where Above Premium is currently outperforming our economy segment. Our ambitions in this area are strong, and we will continue to invest in innovations and foster growth in our emerging brands, with ZOA being a key example.

Terrific. Congratulations on the progress.

So Tracey, I know last quarter was a bit of an anomaly in terms of providing a quarterly outlook. But I guess a lot of the commentary from the call today seems to suggest a much stronger fourth quarter versus third quarter. You mentioned pricing, fully lapping the economy headwinds, kind of the brewery disruption in the rearview. So is there any way to kind of frame how we should be thinking about the weighting of growth in the third quarter versus the fourth quarter?

Yes, let me reiterate our guidance for the full year and provide some details for the third and fourth quarters. In Q3, we will still be experiencing the effects of the Economy SKU rationalization. Additionally, although the Quebec labor strike ended in June, it will take time to return the brewery to normal operations, with regular shipments not expected until Q4. Moving to Q4, there are several positive factors that will help offset the challenges faced in Q3. We have talked about incremental pricing, and the top-line comparisons will start to normalize in the fourth quarter, especially considering the on-premise restrictions from last year. The upcoming World Cup in November is also a significant event for beer consumption. From an investment perspective, we plan to invest more in 2022 compared to 2021. While we anticipate a decrease in marketing investment in the second half of the year, we will see higher year-over-year investments in Q3, with no expected increases in Q4. Lastly, we do not expect the deleverage impact that we experienced in Q2 to affect us in the second half of the year. That summarizes my insights for now.

That's helpful. Okay. Yes. No. Maybe just a follow-up on the fourth quarter: what are you factoring in regarding the on-premise COVID-related restrictions? Are you expecting a return to a normal or pre-pandemic environment, or is that comment merely an expectation for stronger performance compared to last year?

I think what we're trying to convey is that we do not expect a repeat of what happened in the fourth quarter of last year. Reflecting on Q4 of 2021, the Omicron variant was widespread, leading us to lose the Christmas season in the U.K., which is a significant time for us. We do not anticipate the same circumstances this year. We're not setting unrealistic expectations; if the U.S. is at 85%, we're expecting something close to that. However, we do expect improved performance from Canada and the U.K. compared to last year. Now, I'll pass it over to you, Greg.

Thank you all for being here today. I appreciate your time. We did go a bit over, and there may be some questions we didn't get to answer. If you have any additional inquiries, please feel free to reach out to me or the Investor Relations team. We look forward to connecting with many of you as the year continues. Thanks again, and have a wonderful day.