Molson Coors Beverage Company (TAP) — Q3 2022 Earnings Call Transcript

Thank you, Nadia, and hello, everyone. Following prepared remarks today from Gavin and Tracey, we will take your questions. If you have technical questions on the quarter, please pick them up with our IR team in the days and 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. 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. Further, in our remarks today, we will reference underlying pretax income which equates to underlying income before income taxes on the condensed consolidated statements of operations. With that, over to you, Gavin.

Thanks, Greg, and thank you all for joining us this morning. I am pleased to report that Molson Coors grew both the top and bottom line on both the constant currency and an underlying basis in the third quarter. But I'm particularly pleased because nearly three years into our revitalization plan to turn around this business, Molson Coors' top and bottom line growth is not just the story of a quarter; it's becoming a trend, and that is important. For many years, you all knew Molson Coors is a cash-generative business that made hard cuts to meet the bottom line, but one that struggled mightily to grow the top line. When we launched our revitalization plan, the goal was to change that trajectory and position Molson Coors for sustainable long-term top and bottom line growth, and we are making progress. Going back to the beginning of last year, we have grown on a constant currency basis, the top and bottom line on an underlying basis in 4 out of 7 quarters. We've logged 6 straight quarters of net sales revenue growth. We are growing net sales revenue in both business units. And through the third quarter of the year, our global net sales revenue is above 2019 levels on a constant currency basis. Those results are also translating into strong industry share performance in our largest global markets. Across the U.S. beer industry, we earned the second highest dollar share gain and the best dollar share trend improvement in the quarter relative to the last 52 weeks. Moreover, our third quarter STR trend was the best quarterly performance we have seen in over a decade. We again gained share in the U.K. and in Canada year-to-date factoring out Quebec, which was recovering from the strike earlier this year. So it's not surprising to us that 3 quarters of the way through 2022, we are able to reiterate the key financial metrics of our full year guidance. Now I know that's in a U.S. context, but we have several tailwinds that give us confidence. We are benefiting from strong pricing in the U.S., Canada, EMEA, and APAC. In the U.S., by far our largest market, our recent actions mean pricing will be up close to 10% on average versus the fourth quarter of last year as opposed to our historical 1% to 2% annual price increase. Our U.K. and Canadian markets were heavily impacted by the Omicron variant in the fourth quarter of last year, which we will be comping. I know it's hard to remember, but the on-premise in both markets was virtually closed for a portion of the quarter in 2021, and we do not foresee this happening again. Additionally, as expected, we plan to have less marketing in the fourth quarter of this year, which relates to phasing as we think about how and when to most heavily market our brands. We expect the World Cup to be a large benefit to our EMEA APAC business. It's a major on-premise beer occasion, particularly in Europe, and it has never been this late in the year. Tracey will get into our guidance in more detail, but these are some of the factors that give us confidence to again reiterate our full year key financial guidance. I would point out that we can do so without contemplating some hockey stick trajectory for retail sales in the fourth quarter. While we don't believe that will impede our ability to deliver on our full year guidance, I do want to take a couple of minutes to discuss two challenges that impacted our third quarter results because there are some notable trends we are beginning to see. First and most obviously, while the rapid rise in input costs is not new this quarter, what is noticeable is the difference in COGS inflation rates between the two sides of the Atlantic. While it was high in all our markets, underlying COGS per hectoliter rose nearly 14% in EMEA and APAC compared to about 11% in the Americas. While we have been aggressive in taking price compared to historical benchmarks in beer, we are deploying other levers to recover as much of these costs as possible. In some markets, it has been difficult to keep up with the ramp and pace of inflation. In other markets, like Central and Eastern Europe, some consumers simply cannot withstand higher levels of pricing. And that is the second trend, which is the diverging trend among our global markets. While volumes have remained strong elsewhere, we are seeing weakened consumer demand across the beer industry in our Central and Eastern European markets. Compared to the counterparts across the continent, these consumers tend to have less disposable income and are therefore more prone to inflationary pressure, which has put strain on this portion of our business. That contrasts with what we're seeing elsewhere. The U.S. consumer remains resilient to date. The industry is continuing to trade up, and we aren't seeing significant channel shifts. The on-premise mix of total volume has remained consistent with the year-to-date trend and is above 2021 levels. These trends are visible in the strong quarterly top-line results for the Americas business unit. Consumer trends are similar in Canada, where the broader industry is seeing growth, and our portfolio is premiumizing. Volumes are even holding up in the U.K. In the third quarter, on-premise volumes in this market were flat with pre-pandemic levels, despite the very volatile and uncertain economic environment there. So again, no signs of significant channel shift in the U.K. Should consumer behavior in these other markets change, we have the right portfolio to compete in a more challenging economic environment. Thanks to the revitalization plan, we also have a business that can adjust to conditions more nimbly. We will continue to make the investments and decisions necessary to ensure this business delivers top and bottom line growth, not just for one quarter or for one year, but year after year. That consistent approach has been the determining factor in the progress we have made. When we launched the revitalization plan nearly three years ago, we told you we were working towards stronger, aggressive growth in above premium and scale beyond beer, and we continue to deliver. Our core brands have not only stabilized; they are getting stronger. In the U.S., our premium brands are holding industry share. The combination of Coors Light, Miller Lite, and Coors Banquet combined to grow over a full share point of the premium beer category. Miller Lite and Coors Banquet grew volume as well. In the U.K., Carling continues growing share of the familiar trusted lager segment and again widened its lead as the country's number one beer. In Canada, Molson Canadian continues to grow net sales revenue and share of the segment, while Miller Lite brand volumes are growing double digits with the brand achieving industry share growth. In Central and Eastern Europe, we are growing segment share with our national power brands in the majority of markets. Our global portfolio continues to premiumize rapidly. In the U.K., Madri remains on an incredible rise. It is already our number three brand in that market and has gained the most market share of any of our global brand innovations since the Molson Coors merger in 2005. Topo Chico Hard Seltzer remains the fastest-growing hard seltzer in the U.S. and was a top five industry growth brand in the quarter. Simply Spike Lemonade is the fastest-growing new FAB in the U.S. and was also a top industry growth brand finishing in the top 10. The Blue Moon family grew share of the craft segment in the U.S., while Peroni volumes were up double digits. In Canada, our hard seltzer grew double digits and continued to gain share of the seltzer category with Vizzy and Coors Seltzer now the number four and number six seltzer brands, respectively. We are also significantly expanding beyond beer. Our Beyond Beer space is about to get bigger as we recently announced our emerging growth team plans to launch Topo Chico Spirited and RTD cocktails early next year. The continued strength of our brands helped our business deliver on the top line globally. While COGS inflation globally and consumer weakness in Central and Eastern Europe hampered our bottom line results in the third quarter, today, we remain on track to grow our top line and bottom line this year for the first time in over a decade. We have made substantial progress across this business in under three years. We've done it in spite of serious challenges that no one saw coming, and we remain focused on setting up Molson Coors for long-term sustainable top and bottom line growth. Now to give you more details on the financials and outlook, I'll hand it over to our Chief Financial Officer, Tracey Joubert. Tracey?

Thank you, Gavin, and hello, everyone. For the third quarter, we delivered another quarter of net sales revenue and underlying pretax growth. We continue to invest in our business. We reduced net debt, and we returned cash to shareholders. Despite the challenging global macro environment and overall industry softness, consumers remained resilient in our three major markets in the third quarter, while we saw softness in our Central and Eastern European business. As expected, global inflationary pressures continue to be a headwind for our bottom line performance. Taking this all into account, we are maintaining our 2022 key financial guidance but we do now expect underlying pretax income growth on a constant currency basis to be at the lower end of our high single-digit range. While we discuss our business performance on a constant currency basis, it is also relevant to consider the currency impact of the strong U.S. dollar, which was a meaningful headwind to the reported results in the quarter. On a reported basis, our third quarter net sales revenue was negatively impacted by $109 million, and our underlying pretax income was negatively impacted by $21 million. Before we discuss our quarterly performance, I wanted to provide some context on our on-premise recovery. Our third quarter on-premise has nearly fully recovered to 2019 total revenue level. However, in looking at the map on Slide 8, we can see there are variations by market. In the U.S., the on-premise reached 94% of 2019 total revenues, the highest since the pandemic. In Canada, where on-premise restrictions have been more severe, the on-premise continued to improve on a sequential basis but has not returned to 2019 levels. However, in the U.K., similar to the second quarter, the on-premise well exceeded 2019 total revenues. Now I'll take you through our quarterly performance and our outlook. Turning to Slide 9, consolidated net sales revenue grew 7.9%, driven by strong global net pricing and favorable sales mix. Consolidated financial volumes were essentially flat. Americas shipments were down due to the continued impact of the Quebec labor strike, which was resolved in June, while financial volumes were higher in EMEA and APAC on increased U.K. brand volumes. Net sales per hectoliter on a brand volume basis increased 9.2%, driven by strong global net pricing and positive sales mix across both business units. As expected, inflationary pressures continued to be a headwind in the quarter. As you can see on Slide 10, underlying COGS per hectoliter increased 12%. The two biggest drivers were cost inflation and mix. Cost inflation comprised more than two-thirds of the increase and included higher input materials, transportation, and energy costs. Our mix drove roughly 350 basis points of the increase and was due to premiumization, which is a negative in terms of COGS but a positive in terms of gross margin. While inflation remains a significant headwind, we continue to judicially deploy our multiple levers, including pricing, premiumization, and our hedging and cost savings programs to help mitigate the impact. As it pertains to our hedging program, it is worth reminding that our program is longer-term in nature as we hedge commodities over 1 to 3 years, and we operate within guardrails and take a more opportunistic rather than programmatic approach. The purpose of the hedging program is to smooth out the impact of big swings in commodity prices. So in a situation like the third quarter, where we saw some sequential easing of certain commodities, it will take time to see that impact on the P&L. Further, we are exposed to other costs that cannot be hedged, such as freight, but also material conversion costs and third-party manufactured contracts that extend over periods of time, which can be material contributors to our COGS. MG&A increased 3.5% as lower marketing spend was more than offset by higher G&A. Marketing investment decreased as we cycled higher spend in the prior year period when investments exceeded third quarter 2019 levels. We continue to provide strong commercial support behind our core brands and new innovations at the U.S. launch of Simply Spiked. G&A increased due to increased people-related costs, including travel and entertainment expenses and legal costs, as well as cycling the Yuengling company equity income, which was included in G&A in the prior year period. Now let's take a look at our results by our business units. Turning to Slide 11. The Americas net sales revenue increased 7.4%, benefiting from net pricing growth and positive brand mix, partially offset by lower financial volumes. Americas financial volumes decreased 1%, driven by Canada, while U.S. domestic shipments increased 1.4%. Americas brand volumes decreased 1.5%, driven by Quebec and U.S. brand volume declines of 0.9%, which approximated industry performance. U.S. brand volume trends were driven by high single-digit declines in the economy brands, largely due to the SKU rationalization program and, to a lesser degree, by low single-digit declines in premium brands. Conversely, the U.S. above-premium portfolio continued to grow strongly, up low double digits for the quarter. Brand volumes in Latin America also increased. Net sales per hectoliter on a brand volume basis increased 7.5% due to net pricing growth and favorable brand mix. As you can see in the slide, strong pricing and premiumization in our two largest markets in the Americas, the U.S. and Canada, drove that performance. On the cost side, Americas underlying COGS per hectoliter increased 11.4%. As with our consolidated results, the primary drivers were inflation including higher materials, energy, and transportation costs, as well as mix impacts from premiumization. MG&A decreased 1.4%, driven by lower marketing spending. As I mentioned, we strongly supported the national launch of Simply Spiked, but overall marketing investment declined due to lower U.S. national marketing and sales control spending related to alliance and media phasing. G&A increased as a result of the same drivers discussed for the consolidated G&A I mentioned earlier. As a result, Americas underlying pretax income increased 10.5%. Turning to EMEA and APAC on Slide 12, net sales revenue increased 9.6% driven by higher financial volumes, net pricing growth, and favorable mix. Financial volumes grew 2% due to higher brand volumes in Western Europe, where the demand remains strong, along with higher factor brand volumes. This was partially offset by brand volume declines due to Russia's war in Ukraine and weakened demand due to inflationary pressures in Central and Eastern Europe. EMEA and APAC net sales per hectoliter on a brand volume basis was up 14.3% driven by positive net pricing as well as favorable sales mix driven by the strength in our above-premium brands like Madri and positive geographic mix. On the cost side, underlying COGS per hectoliter increased 13.8%. Similar to the Americas, the drivers were cost inflation and mix from premiumization. MG&A increased 21.7% as we accelerated market investments behind our national champion and above-premium brands, especially in the U.K., supporting Carling, Madri, and Staropramen and fueling on-premise strength. G&A also increased as we cycled lower relative spending in the prior year. As a result of these higher costs, EMEA and APAC underlying pretax income declined 38.9%. Turning to Slide 13, our underlying free cash flow was $597 million for the first 9 months of the year, a decrease of $336 million from the same period last year. This was primarily due to higher capital expenditures and lower underlying pretax income, partially offset by the prior year net repayment of various tax payment deferral programs related to the pandemic and lower cash taxes. Our capital allocation priorities remain to invest in our business to drive top line growth and efficiencies, reduce net debt, and to return cash to shareholders. Capital expenditures paid were $531 million for the first 9 months of the year, an increase of $167 million from the prior year period, and we're focused on expanding our production capacity and capabilities programs, which support improved efficiencies and help us deliver our sustainability goals. Capital expenditure levels remain in line with our expectations of approximating pre-pandemic annual levels. We ended the quarter with net debt of $6.1 billion, down nearly $500 million since December 31, 2021, and a trailing 12-month net debt to underlying EBITDA ratio of 3.13 times and approaching our target of below 3 times by the end of 2022. We ended the quarter with $125 million of commercial paper outstanding. In this rising interest rate environment, it's notable that substantially all our debt is at fixed rates. In terms of returning cash to shareholders during the third quarter, we paid a quarterly cash dividend of $0.38 per share to holders of Class A and B common stockholders. We also paid approximately $12.6 million for 250,000 shares under our share repurchase program, which is essentially an anti-dilution program for annual employee equity grants. Now let's discuss our outlook, which you can see on Slide 14. While we start year-over-year growth rates in constant currency, please note that current exchange rates will generate a headwind in our fourth quarter reported results at similar relative levels to what we experienced in the third quarter due to the strength of the U.S. dollar. For 2022, we are reaffirming our guidance of mid-single-digit net sales revenue growth, high single-digit underlying pretax income growth, and underlying free cash flow of $1 billion, plus or minus 10%. However, given increased inflationary cost pressures and weakening demand in Central and Eastern Europe, we expect underlying pretax income growth to be at the lower end of the range. Based on our annual guidance, this would imply for the fourth quarter on a constant currency basis, underlying pretax income growth in the range of approximately 45% to 60%, and we expect to be at the lower end of the range. Let me walk through some of the assumptions that will help you understand why we have reaffirmed our guidance. Gavin has already discussed some of the top line drivers like our full pricing in the U.S., easing comparisons in the U.K. and Canada, and the World Cup tournament. In the fourth quarter, we have fully lapped the shipment headwind from our economy SKU rationalization. These drivers are partially offset by weakened demand in Central and Eastern Europe. From a COGS point of view, we continue to expect margins to be impacted by inflationary pressures particularly with acceleration in commodity costs in EMEA and APAC. But offsetting some of the inflation costs, we continue to expect our cost savings program to be weighted to the fourth quarter. We now expect lower depreciation, which is due to the timing of capital projects and the impact of significant foreign exchange movements. Turning to marketing, we continue to expect overall spending to be down in the fourth quarter compared to the prior year period. We are comfortable with our planned level of marketing investment, which is comparing against a prior year period when marketing investment exceeded 2019 levels. Looking out to 2023, while we are not prepared to provide any guidance, we remain committed to putting the right commercial pressure behind our core brands and key innovations, including our first official Super Bowl ad in over 30 years. In terms of our other guidance metrics, we continue to expect net interest expense of $265 million, plus or minus 5%. However, we are lowering our underlying effective tax rate to a range of 21% to 22% from our prior guidance range of 22% to 24%. We are also lowering our underlying depreciation and amortization to $700 million, plus or minus 5% from our previous guidance of $750 million, plus or minus 5% for the reasons I just mentioned. In closing, we put up another quarter of growth and did so in a challenging macro environment. While these remain dynamic and uncertain times under our revitalization plan, we have built our business to manage through challenges with strong brands across all our segments and greatly enhanced financial and operational flexibility, we remain confident in our ability to navigate near-term macro challenges while investing in the business and staying the course towards our goal of long-term sustainable top and bottom line growth. With that, we look forward to answering your questions.

Great. Two questions, if I could, Gavin. The first long-term oriented. The second, more near-term. The first, just regarding your outlook for the U.S. beer industry. Jim Cook recently grew some attention with his comments at Boston Beer's wholesaler meeting that traditional beer may never grow again in our lifetimes in the U.S. ABI's leadership was recently asked to react to Jim's comments on their earnings call. I'd like to get your reaction to Jim's comments as well. And then the second, more near-term oriented, what adjustments are you making here, if any, to the playbook over the next 12 months given the more challenging inflationary backdrop and weaker consumer environment, particularly in your European business?

Thanks, Kevin, and good morning. Yes, look, to your first question, I mean, I personally thought that was quite a self-serving statement from Jim. And I guess what you would expect to hear from the leader of a business that has only about 10% of their portfolio in beer. I also thought it was interesting that they would make on the same call a comment that they were truly losing share to premium lights, which is obviously beer. Look, I mean, beer has been around for 1,000 years, Kevin. It's the most popular alcoholic beverage in the world. In fact, outside of water and tea, beer is the third most popular beverage of any kind globally. So I don't think it's going anywhere. Our results over the past few years suggest as much. If you go back a few years, people were speculating that light beer was dead because of Celsis, and I could show you the headlines of all those comments. I don't think you hear a lot about that anymore today. In fact, you hear quite the opposite. From our perspective, Coors Light and Miller Lite are growing NSR. Miller Lite just grew volume in Q3. So are we going to find a way to leverage our competitive strengths and take advantage of growth opportunities beyond beer? Absolutely, we are. But make no mistake, Kevin, beer is always going to be the heartbeat of our business, and beer, I think, is always going to be a favorite of consumers as the moderate choice of alcohol compared with hard liquor. So yes, that's my comments on Jim's comments. As far as the adjustments we're making to our business, look, our revitalization plan we launched three years ago focused on our core brands, growing our above-premium brands, and building capabilities in our business and driving beyond beer. I think we've made tremendous progress against those. I think during that time, we have shown that we are nimble and can make adjustments when we need to make them. I'd point to the most high-profile adjustment we made was when the pandemic hit; our marketing department almost overnight changed their campaigns for both Miller Lite and Coors Light and shifted our media into the digital space where the consumer was and no longer necessarily on the traditional side. Make no mistake, we'll make adjustments where we think we need to in Europe. It's interesting, though, that there's a bifurcation in Europe. Western Europe is continuing as it was. Consumer demand is holding up strongly. We've also put in strong price increases in Western Europe, particularly the U.K., and so far, we're not seeing any negative price elasticity because of that. The challenge we've had has come in Central and Eastern Europe, where the consumers have less disposable income, and energy costs and inflation are impacting those markets more meaningfully. Notwithstanding that, as you saw, we grew our marketing spend in APAC in the third quarter, putting money behind our new innovation, Madri, and some of our vibrant brands in local markets.

So Gavin, I know you don't talk about the upcoming quarter, but it's kind of out there that in the U.S., October was really weak. We're hearing from some distributors down double digits. Wondering if you can make any comments on that at all? And then just give us some sort of a sense about how you're looking at pricing in the U.S. and in Europe and why the levels that you're looking to get, which are historically high and clearly justified by the commodity increases, but whether those are levels that the consumer is going to be able to absorb, particularly with some tightening in the economy?

Look, I mean, if you look at pricing, we obviously took a fairly meaningful price increase in the spring of this year. It was higher than our normal average. So 3% to 5% in the spring. Then we put a pretty similar price increase through in the fall. So it's a little soon to determine the impact of the second price increase that we put into the marketplace. In some instances, we're actually still putting price there. Some of it went to the backend of September, some in October, and we've got some going in November. So there isn't data to show what that price increase has done to the consumer or will do. The price increase we took in the spring, the price elasticities were not as elastic as they have been historically. I think the consumer has been quite resilient to the price increases we've put into the market, given that they're actually quite substantially lower than many other fast-moving goods that consumers have been exposed to. We've seen the same effect in Canada and the same effect in the U.K. Only really EMEA APAC, Central Eastern Europe business is where I think the head space and disposable income hasn't proven to be as strong as the rest of our businesses. As far as... sorry, Robert?

I didn't mean to interrupt, but is the price increase range the same in the U.K. and Europe, or is it slightly lower?

We've actually taken different price increases by market, Robert. So in some Central and Eastern European markets, we've taken double digits; in the United Kingdom, not as much as that. The United Kingdom price increases are closer to what we've done in the U.S., again, by brand, by country. If you look at the first...

Has it been two price increases, sorry, in Europe, so a spring one and a fall one also?

We operate on a different pricing schedule in the UK compared to the U.S. To my recollection, we have implemented more than one price increase, but the timing differs from the U.S. Now you have asked four questions, Robert, so I will respond briefly and then move on. Regarding October, it's still too early to determine the impact since we had some carryover from our price increases at the end of September. This likely affected the initial weeks of October, as every price increase creates an adjustment period. In several markets, the sell-through has already occurred, and we have returned to previous trends. However, in other markets, the sell-through process is ongoing. We should have a clearer evaluation in the coming weeks. Additionally, keep in mind that October of last year was when we restored our inventory levels following the cybersecurity incident. Throughout the second and third quarters, we were primarily focused on catching up and managing our shipments. We indeed improved our shipping situation in the fourth quarter of last year. We finished the third quarter this year with our inventory in a solid position, which may present a slight challenge in the fourth quarter as we prepare shipments to meet annual consumption.

Gavin, can I confirm what you just said? Did you mention that inventories are now in a good place, which might create some challenges, and that you plan to focus on consumption in the fourth quarter? I also want to check if the recent challenges related to the Quebec strike and SKU reductions are now behind us. Once I receive confirmation, I'll proceed with my question.

Yes, Chris, my comment related to the U.S. So the U.S. inventory, I would say, with a few minor exceptions with some SKUs is where we want it to be. We had got it to a really good place at the end of the third quarter. Remember last year, in the U.S., we were still rebuilding our inventories following the cybersecurity attack all the way through the fourth quarter. So yes, headwind from a shipments point of view in the U.S. In Quebec, we are still recovering from that, right? It just takes time for us to get our inventories back to the level that we want to have them at. We had a 12-week strike essentially, and it's taking time to get back to where we need it to be. So that would still be a relative tailwind in the fourth quarter from a Quebec point of view.

Gavin, can you update us on how you anticipate the portfolio will evolve over the next year in terms of mix percentage? You mentioned some targets for the share of emerging growth and premium segments. Could you also discuss the craft business and any strategies for evolving this portfolio over time? Additionally, Tracey, could you clarify if you mentioned that non-commodity inflation is expected to rise as commodity inflation declines?

Chris, look, I'll take them by each of our revitalization plan strategies. So our core brands, strengthening our core brands, we're seeing that globally. If you just look at the United States, Coors Light and Miller Lite continuing their share trend improvement, Miller Lite holding share for the second consecutive quarter. Coors Light and Miller Lite gaining more than 100 points of premium light space, and they're both growing dollar sales. Coors Light is up mid-single digits in NSR, Miller Lite was up double digits. So we're obviously going to continue pushing both of those brands in the U.S. They're in really good shape from a brand health point of view and reacting really well to the differentiated marketing components that we've got behind them. You're seeing the same impact in Canada. We've got Coors Light strengthening; Miller Lite growing double digits and Molson Canadian even starting to show performance trend improvements. And in the U.K., Carling is doing well. Ozujsko is doing well in Croatia. So we feel that our core brand portfolio is in good shape, reacting really well to our marketing investments, and we will continue to push that. From an above-premium point of view, I don't believe we've had a target we specifically put out there from a share of our portfolio point of view, but we had another record share of our portfolio for above premium. We have had some extremely successful innovations in both our North America business unit, such as Simply Spiked and Topo Chico, and also in our EMEA, APAC business unit, where Madri is shaping up to be the best innovation that market has ever launched, continuing to grow share at a rapid pace. Blue Moon is the number one craft brand; Blue Moon LightSky is the number one light craft. Peroni is growing very strongly in double digits. We expect our above-premium portfolio to continue to grow from strength to strength. From the economy point of view, not really a player in our EMEA, APAC business unit; it's more relevant in the U.S. There, I think it's safe to say we are now through the SKU rationalization process in the fourth quarter. Certainly, there were no more shipment comparisons that we're going up against. Our focus on our four core economy brands is pretty beneficial, both from a marketing point of view, a sales point of view, and a distributor point of view. Our brands and our portfolio are really well positioned to take advantage of whatever happens. Right now, we're not seeing trade down in our U.S. market, albeit premiumization has slowed down, but we're not seeing trade down. If it happens, we've got the perfect portfolio for that. We've always said that all segments matter, and we've got brands that are now strong and ready to take advantage of that.

So Chris, from what I just said from a COGS point of view, we expect our margins to continue to be impacted by inflationary pressures, particularly in EMEA and APAC. We are exposed to other costs that cannot be hedged. So again, we're comfortable with our hedge coverage levels for the balance of 2022 and into 2023. But there are costs that can be material contributors to our COGS, such as freight and also material conversion costs I mentioned, and our third-party co-manufacturing costs, which also cannot be hedged. That’s from the COGS side.

Gavin, Tracey, I apologize, I dropped off the call momentarily, so I hope this hasn't been repeated. But I wanted to follow up on Robert's question around October. It seems like with the beer purchasers index being remarkably low in the quarter, that might be a function of the fact that you overshipped to your inventory squared away. But just a follow-up on that theme: in your discussions with wholesalers and distributors, whether there's been any shift in your alignment around perspective on price elasticity given the price increase?

Yes, from a price increase point of view, as I said, we don't have any data at this point in time to suggest anything around our price increase that we took in the fall. We do have data for our price increase we took in the spring, which was pretty much double what we normally have taken in a year for a fairly long period, probably the last decade. The price elasticities were less than what we would have historically expected. The price increase that we put in the market seems to have been well received by consumers. Certainly, the retailers understand the cost pressures that we're facing and are supportive. It is too soon to have any perspective on the recent price increase. As I said, we're still actually putting some price increases into the market in some states. In some states, we put it in early October, some in mid-October. There's always a loading that takes place, and there's always a bit of a payback after that. When you couple that with the fact that we were still building inventories heavily in Q4 of last year, we don't have to do that this year because our inventories are in a really good shape. Our stocks are as low as they've been for quite some time with only some very, very few SKUs where we have issues. I think we're in good shape from that perspective. But again, I'm reiterating that is a headwind in our U.S. market in the fourth quarter.

I wanted to clarify the pricing aspect. You mentioned the nearly 10% increase in the fourth quarter, and I'm curious if we have a similar figure for the third quarter. Does that 10% account for mix or is it purely based on rate? A little clarification on that would be helpful. Additionally, I wanted to ask about the lower depreciation and amortization. Throughout the year, you've maintained a run rate just above $170 million. I'm assuming that's a good benchmark for the fourth quarter, but I'd like to know if there are any reasons it might change. You noted foreign exchange as a factor, which makes sense, but I'm also interested in the timing of certain capital projects. Could you elaborate on which capital projects may have been postponed and whether we should consider them as part of fiscal '23 initiatives if they're longer-term? Some additional context on the factors contributing to the lower depreciation and amortization and how they might affect the future would be appreciated.

Tracey, if you can take the second and third, I'll take one. From a comparable point of view in the third quarter, Steve, I'd say around 5% was in the third quarter. So that lines up well with the sort of 3% to 5% that we put in at the back end of September and then into October, which is a North American number. The U.S. number is not terribly dissimilar from that. So call it 5% is the comparable number. Tracey?

And on the D&A, that run rate is reasonable, again, depending on ForEx. There's nothing that we have pulled back on. Really, a lot is about timing. As I said, we expect our CapEx spend to sort of equate to the sort of pre-pandemic levels, and nothing has changed from that.

I have a question regarding the bridge, Tracey. You just helped us understand the pricing and how it affects gross margin. If my calculations are right, it suggests that profit before tax could increase by over 40%. Could you explain how you assessed the mix impact from the economy's changes and the lab aspect? Also, considering the pricing you mentioned, how does it relate to COGS and the hedge rollover into 2023? Can you assist us in reconciling these figures? Additionally, does the 48% implied upside you've included in your guidance primarily relate to the reduction in marketing spend you discussed? Do you anticipate an expansion in gross margin for the fourth quarter?

Thanks, Andrea. I’ll address that. Let me revisit the reasons for our confidence in our guidance for the fourth quarter and the full year. To clarify, your calculations are accurate; they suggest an income before income tax growth of approximately 40% to 60%, and we anticipate being at the lower end of that range. Looking at the top line, we have several positive factors supporting us in the fourth quarter. We're experiencing strong pricing in the U.S., Canada, and the United Kingdom. In Q4, when combined with the price increases we implemented earlier this year, we're expecting about a 10% price increase per hectoliter. We are comparing against the Omicron impact from the previous year in Q4, which significantly affected the U.K. and Canada. Last year, we lost the Christmas holidays in the U.K., a major selling season for the market, but we do not expect a repeat of that. Given the challenges we faced last year, which resulted in only $5 million in profit from the EMEA and APAC business unit, even a small improvement can lead to significant profit percentage increases in that sector. Additionally, we are anticipating the World Cup in November, a major beer-drinking event, particularly in the U.K., which is notably occurring later than usual this year. On the cost of goods sold front, that remains a challenge for us and for the industry as a whole. Tracy has mentioned this as well. We expect to see savings from our cost-saving initiatives materialize in the fourth quarter, which, if I recall correctly, were intended to be more impactful in this period. Tracey has also pointed out the reduction in depreciation. Moreover, we expect marketing costs to decrease compared to last year, as we have indicated from the start; we planned our marketing spend to be heavier in the first half and lighter in the second half, which is a positive factor. We're also seeing a beneficial mix resulting from our above-premiumization strategy globally, not just in the U.S. This is what gives us the assurance to maintain our guidance.

As we consider hedging for next year, I realize that the hedges will continue and there are also other costs to keep in mind. I know that cans are becoming slightly cheaper and more accessible now. I would like to understand how we should view transportation costs and everything associated with your guidance.

Tracey, can you give any more color without giving guidance?

One of the key aspects of our hedging program is it is designed to help us smooth the volatility as we see in commodity price fluctuations. We're comfortable with the coverage level for the balance of the year and in 2023. The way that we hedge is it's not programmatic, so it allows us to be opportunistic. Typically, we have the highest hedges in year 1, then less in year 2, and even less in year 3. It's a tight program. We operate within guardrails, but it's really there to smooth out the commodity price fluctuations.

Do you have any insight into the timing or trends in Western Europe? The summer performance was quite strong, especially in the U.K., but are there any signs of weakness as we come out of the quarter or head into the fourth quarter, particularly in light of recent comments from one of your competitors?

Thanks, Eric. Look, I mean, as I said, if you look at the U.K., market demand has been resilient. The consumer is holding up, and we haven't seen any change in that post the end of the quarter. We have started to see a tightening in the Central Eastern Europe market. The disposable income perspective is a lot tighter in Central and Eastern Europe and the impact of energy and inflation has been a lot stronger in our Central and Eastern European markets. We certainly have seen a softening in demand from our Central European business, but in the U.K., the consumer has remained resilient.

Two quick questions for me, please. First, could you walk us exactly through what changed between the last results and today such that you're guiding the earnings growth guidance to the bottom end? So just working through what you thought last quarter versus what actually happened. Then secondly, can you give us any indication of how you plan to approach pricing next year, especially given that input cost headwinds will still be present with the hedging programs Tracey flagged?

From what changed to drive us to the lower end would be consumer demand in our Central and Eastern European businesses plus some slightly higher cost of goods sold in those markets for unhedged areas. That would apply probably across the board, but more meaningfully in our Central and Eastern European business. As for pricing, I think it's a little too soon to tell. We've just put in historic price increases in 2022 of almost 10%, as I said, and we need to let that play out a little bit. We don't have any data for our latest price increase showing what, if any, impact it's had on the consumer from a price elasticity point of view. We have several months to make that decision on how much or if at all we need to put a price increase into the marketplace. Given the benefits of the 10% we put in this year, that will flow through into next year from a positive point of view, not only in the U.S., but also in the price increases we put in Canada, U.K., and Central and Eastern Europe.

Can you clarify some of your responses to Nadine's question about the pressures in Eastern Europe and what has led to the guidance being at the lower end of the range? Shouldn't that be more than compensated for by the $50 million change in your depreciation expectations?

Our guidance, Kaumil, is in constant currency; we eliminate the impact of foreign exchange flow-throughs in our guidance. So it's a constant currency basis.

Yes. But the question on depreciation, if the depreciation ends up being $50 million less than you thought, I'm just thinking about the amount of cushion that gives you, given the magnitude of that change. Shouldn't that be able to offset quite a change in the areas where you were negatively impacted? Is that not the case?

The $50 million reduction is for the full year. It has been running lower for the first 9 months of the year, so I don't expect like if the full $50 million in Q4.

Our guidance was $750 million, plus or minus. Remember this.

From the perspective of the World Cup and marketing, it is interesting to note our approach to marketing is constantly to optimize our media spend to reach drinkers with the right brands at the right moment. With the World Cup, while it is less of a thing in our North American business, it is a big deal with our Latino consumer. We will be present during the World Cup with Topo Chico Hard Seltzer, advertising on 50 games in Spanish language TV. This gives us a perfect opportunity to showcase Topo Chico, which has a notable presence among Latino consumers. In the U.K., with markets where soccer is a big deal, we will also be putting more money behind brands like Carling.

Gavin, as we continue to see non-elite advertiser position itself against Ultra, I have to assume that you're finding success in recruiting or winning consumers relative to a competing brand, but I was hoping that you could speak to the interaction between brands and your success. This is a backward-looking question, considering where we are today, but how cognizant are you of the competition that's coming into light beer from large brands in 2023?

You're right; we've had fantastic momentum behind Miller Lite right now. It grew NSR in 2021 and it's growing NSR year-to-date in 2022. We continue to believe that Miller Lite's brand positioning as the beer for people who love the taste of a great beer is resonating really well. It has come to life across all of Miller Lite's marketing, showcasing its superior taste compared to other light beers. Our marketing effectiveness for this brand has increased meaningfully over the summer, and that's paying off with strong retail performance. We will keep investing in Miller Lite to capture opportunities against competitors like Mich Ultra and Bud Light.

Thank you. We have no further questions. I’ll hand back to Greg for any closing remarks. Very good. Thanks, Nadia. I appreciate everyone's time today. I know there may be some questions we weren't able to get to, but please follow up with our Investor Relations team in the days and weeks that follow. We will look forward to talking with you as the year progresses. Thanks, everybody, for joining us on today's call.