Molson Coors Beverage Company (TAP) — Q4 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 one question. 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. 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. Also, in order to better align with GAAP reported metrics in our filings and simplify reporting, references to net sales per hectoliter will now be on a financial volume basis, instead of on a brand volume basis. Further, in our remarks today, we will reference underlying pre-tax 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’m very pleased to tell you that three years after launching our Revitalization Plan to turn around this business, and three years after pledging to deliver top and bottom-line growth, we have done exactly that. We grew the top line by 7%. We grew the bottom line by almost 8%. We brought our leverage ratio under 3 times. We stuck to our strategy and our plans, and we delivered despite the fact that many people didn’t think we could. To be sure, there’s been a lot of ups and downs in the past three years. But through it all, achieving consistent top and bottom-line growth has been our North Star. We are well on the road to doing just that, and many questioned our ability to execute this plan. So, I want to take a couple of minutes to break down how we arrived at this moment. First, we streamlined our business in 2019 and early 2020 to drive significant savings. Second, we built on the strength of our core brands for the past three-plus years. The results: Coors Light and Miller Lite revenues are both well above 2019 levels in the United States. Collectively, Coors Light and Miller Lite grew both U.S. volume and dollar share in the fourth quarter. They combined to outperform the combination of Michelob Ultra and Bud Light in U.S. volume share performance for the fourth quarter. In Canada, we’re also seeing strength as Molson Canadian grew revenue and industry share in 2022. In the UK, Carling continues to be the number one brand in the market. These trends didn’t just suddenly appear; they’re the result of consistent brand messaging and more effective brand investment. Thirdly, we have aggressively premiumized our portfolio. Today, over 28% of our global net sales revenue now comes from our above-premium portfolio, up from 23% in 2019. Our U.S. above-premium portfolio gained the second most dollar share of all major U.S. brewers in 2022. While our seltzer portfolio, of course, was a contributor, our progress is driven by more than just seltzer. Peroni’s 2022 revenues were up double digits in the U.S. compared to 2019 levels, even though the brand skews heavily to the on-premise. Blue Moon’s 2022 U.S. revenues were also higher compared to 2019, aided by the successful launch of Blue Moon LightSky. Simply Spiked, which we introduced last summer, quickly became the fastest-growing new innovation in the U.S. FAB category. In Canada, our craft division grew brand volume double digits in 2022. We have the only hard seltzer portfolio gaining industry share in that market. But the standout star of our global portfolio continues to be Madrí Excepcional in the UK. I really want you to understand the tremendous growth of this brand and its size today. In less than two years, it has become one of our top five above-premium brands globally. Fourthly, we expanded beyond beer, where we have laid solid foundations in energy drinks and full-strength spirits, which are totally new spaces for us. ZOA continued to grow very strongly. Brand volumes were up triple digits in both the fourth quarter and the full year, with trend acceleration in the quarter. Our first full-strength spirit, Five Trail, is enjoying expanded distribution to more states and select international markets. Building on the continued success of Topo Chico Hard Seltzer, we are expanding our partnership with the Coca-Cola Company to release Topo Chico Spirited this spring to compete in the fast-growing ready-to-drink cocktail space. Finally, we have invested in our future. We’ve added brewery capabilities throughout our network, completing the build of two new state-of-the-art modern breweries in Canada. We’ve added hard seltzer and slim can production capabilities, and we’re in the midst of a large-scale modernization of our Golden Colorado brewery, which supports improved efficiencies and helps us deliver our sustainability goals. This work shows our 2022 results aren’t an aberration or a moment in time. Our top and bottom line growth is the product of three years of hard work under our Revitalization Plan. We are proving this company can grow profitably, and we intend to continue demonstrating that in the years ahead. Of course, we expect various ups and downs over the next few years. Just like many other consumer goods companies that have reported this year, we see reasons for caution about the consumer landscape in the immediate term, not just for beer, but for consumer goods more broadly. Beer has traditionally been very resilient during tough economic times. Yet it is true that U.S. industry-wide beer volumes fell at a much higher rate in the fourth quarter than they had earlier in the year. Much of this has been attributed to most of the beer industry taking a second price increase in the calendar year. Yet beer, as a category, has maintained its share of basket at retail. Consumers are not reducing beer purchasing in favor of other staples. Additionally, beer actually gained share of total alcohol beverage in the quarter. Consumers are not switching to other alcohol beverages. In fact, notwithstanding comments made by a large upstream supplier, we see the pricing taken in 2022 still sticking across our markets earlier this year. If pricing were the driving reason behind the softer industry trends, we would have expected it to adversely impact the beer industry relative to other consumer staples or other alcohol beverage categories, and we haven’t seen that. However, we have seen a subset of value-conscious U.S. consumers who are actively trading down into smaller pack sizes. We have also seen the economy segment continue to strengthen. The uncertainty these broad consumer trends that all companies are facing in 2023 is a driving factor in our more modest guidance for this upcoming year, despite our relatively more optimistic outlook for the medium term where we anticipate delivering higher top and bottom line growth rates than we expect in 2023. At the same time, we expect to see margin improvement over the medium term. This is supported by our goal for our above-premium portfolio to reach approximately one-third of our global net sales revenue over the medium term. Even in this challenging and uncertain economic climate, we expect to deliver against the North Star of our Revitalization Plan by achieving top and bottom line growth at Molson Coors with margin improvement on a consistent long-term basis. Our portfolio is strategically built for strength across the range of pricing tiers within the beer industry. This gives us greater stability than some of our competitors in any economic climate. Some of that is a reflection of the simple fact that Molson Coors’ revenue and profit trajectories are stronger than they have been in years, and our business is healthier today. We are a much leaner business than we were in 2019. We have powerful core brands across our global markets that are seeing renewed strength. We are premiumizing our portfolio with strong innovations around the world. We’re diversifying our offerings to consumers. We’re building the capabilities today that will power this business tomorrow. We’re investing in our people. For the first time in a while, we are delivering real results, thanks to the work of thousands of people around the world. That’s the story of Molson Coors today, and that’s what you should all expect from us consistently over the long term as well. Now, to give you more detail on the financials and outlook, I’ll hand it over to our Chief Financial Officer, Tracey Joubert.

Thank you, Gavin, and hello, everyone. In 2022, on a constant currency basis, we grew net sales revenue 7%, exceeding our guidance, and underlying pretax income 7.6%, delivering our guidance. This performance resulted in record underlying pretax income levels for a fourth quarter, which many questioned we could achieve. But we delivered with underlying pretax income up 51.1%. We did this despite the challenging global macroeconomic environment and a softer beer industry, all while continuing to invest in our business, enhancing our financial flexibility, and returning cash to shareholders. As a reminder, we discussed our business performance on a constant currency basis. However, the currency impact from the strong U.S. dollar did have a meaningful impact on our top line and resulted in a net sales revenue headwind to reported results of $89 million in the fourth quarter and $298 million for the year. Now let’s talk about some of the drivers of the fourth quarter performance. Our ability to take strong global net pricing and deliver positive sales mix across both business units led to 11.4% net sales per hectoliter growth. Financial volumes declined 6.9%. The biggest drivers were lower brand volumes in the Americas given the industry softness, as well as cycling a significant prior year distributor inventory build in the U.S. Conversely, EMEA and APAC financial volumes increased, resulting from a fairly resilient consumer in the UK and cycling Omicron-related restrictions in the prior year period. Turning to costs. As expected, inflationary pressures continued to be a headwind in the quarter, driving underlying COGS per hectoliter up 11.5%. As you can see from the slide, we bucket costs into three areas: cost inflation/other, which includes cost inflation, depreciation, cost savings, and other items; mix; and deleverage. The cost inflation bucket drove approximately two-thirds of the increase and was mostly due to higher materials, energy, and transportation costs. Cost savings provided some offset, and we are pleased to report that we completed another successful cost savings program, delivering over $600 million in targeted savings from 2020 to 2022. We also have an extensive hedging program, and it has helped to mitigate some of these cost pressures. But remember, certain costs like freight and raw material conversion costs and third-party manufacturing contracts cannot be hedged and are generally linked to inflationary indexes like PPI. These costs can be material contributors to COGS. Other COGS per hectoliter drivers were mix and volume deleverage. Mix was about 20% of the increase, and it was largely due to premiumization. While premiumization is a negative for COGS, it is a positive for gross margin per hectoliter. Turning to marketing. As planned, it was down for the quarter. That said, we continued to put strong commercial pressure behind our core brands and innovation, and the year-over-year comparison simply reflects the significantly higher spend in the prior year period when investments exceeded fourth quarter 2019 levels. Now, before I move on to our business unit performance, I wanted to call out two other items on our P&L in the quarter. We had a $15 million discrete tax benefit, which resulted in a lower-than-anticipated underlying effective tax rate for the quarter and for the full year. We do not expect this to repeat. Also, we recorded an $845 million non-cash partial impairment charge in Americas due to macroeconomic factors like rising interest rates and increased cost inflation that reduced our future expected cash flows in the near to medium term. This charge was a result of our annual goodwill impairment review and is excluded from our underlying results. Now let’s look at our quarterly results by business units. In the Americas, net sales revenue was up 0.4%, while underlying pretax income grew 29.8%. Americas’ net sales per hectoliter increased 12.1%, benefiting from strong net pricing growth and favorable U.S. brand mix. Financial volumes declined 10.5%. This was a result of lower brand volumes, which were down 6.6%. They were also down due to cycling significant distributor inventory builds in the U.S. in the prior year period, which we discussed last quarter. Taking a deeper look at brand volumes by region, the U.S. accounts for 6.8%. We had some timing items that impacted this performance. First, there was one less trading day in the quarter. So, on a trading day adjusted basis, U.S. brand volumes were down 5.4%. Additionally, as with any price increase, we experienced volume load-in from the four price increases that shifted volume out of the fourth quarter. Looking at U.S. brand volume by price segment, our economy and premium portfolios were down high single digits on a non-trading day adjusted basis, despite industry share trend improvement in economy and industry share gains in premium. But our best premium brands grew in the quarter, up low single digits. In Canada, industry softness resulted in brand volume declines of 5%, and in Latin America, they were down 6.9%. On the cost side, Americas underlying COGS per hectoliter increased 11.4%, while MG&A decreased 12.6%. The drivers were similar to those discussed for the consolidated results. Turning to EMEA and APAC. Net sales revenue increased 20.3%, and underlying pretax income increased 515% or over $23 million. Positive net pricing, favorable sales mix on record premiumization fueled by the strength of brands like Madrí and positive channel mix drove net sales per hectoliter growth of 14.9%. Financial volumes grew 4.7% on the strength of our above-premium portfolio, including the benefits of cycling Omicron-related restrictions in the prior year period. Brand volumes declined 1%. While brand volumes grew in the UK and Central and Eastern Europe, they were more than offset by declines in our license and export business in markets impacted by the Russian war in Ukraine. On the cost side, underlying COGS per hectoliter increased 16.5%, this is largely due to cost inflation, mainly higher materials, transportation, and energy costs as well as mix from premiumization. Now, let’s look at the full year. Net sales per hectoliter were up 9.3% on strong global net pricing and positive sales mix across both business units. Financial volumes declined 2.1%, essentially in line with brand volumes, which were down 2%. Financial volume declines were due to the Americas where brand volumes declined 3.3% on the softer U.S. and Canada’s beer industry and also the Quebec labor strike that impacted the second and third quarters of 2022. Conversely, financial and brand volumes were up in the UK, given the resilience of the UK consumer in the quarter and cycling prior year on-premise restrictions. Turning to profitability. Underlying cost per hectoliter increased 11%. And when looking at our cost bucket, the biggest driver was cost inflation, which was over 60% of the increase and due to similar drivers as in the fourth quarter. This was followed by mix, which contributed to nearly 30% of the increase. Notably, underlying COGS per hectoliter increase varies significantly by business unit, with Americas up approximately 10%, and EMEA and APAC up to nearly 20%. MG&A increased 3.7%. This was mainly due to higher people-related G&A costs. Marketing spend declined for the year, but we continued to invest strongly behind our core brands and key innovation. In fact, marketing investments were up for the full year when excluding discontinued brands. We delivered underlying free cash flow of $853 million for the year. This was down $230 million, primarily due to unfavorable timing of working capital and higher cash capital expenditures, partially offset by lower cash taxes. Underlying free cash flow was below our guidance range, largely due to unfavorable movements in working capital compared to our initial expectations. We do not expect these working capital movements to impact us in 2023. Turning to capital allocation. Our priorities remain to invest in our business to drive top-line growth and efficiencies, reduce net debt, and return cash to shareholders. Capital expenditures paid were $661 million for the year, up $139 million as we continue to expand our capabilities, as Gavin discussed. We continued to improve the health of our balance sheet by reducing net debt by $562 million during the year. We ended the year with net debt of $6 billion, which is essentially all at fixed rate. Our exposure to floating rate debt is limited to our commercial paper and revolving credit facility, which had a zero balance outstanding as of year-end. We achieved our net debt to underlying EBITDA ratio guidance of under 3 times, coming in at 2.9 times at year-end. This is a dramatic improvement from the 4.8 times in 2016 at the time of the MillerCoors acquisition. We remain committed to maintaining and improving our investment-grade rating and strive towards a longer-term leverage ratio target of approximately 2.5 times. We continued our long history of returning cash to our shareholders with a quarterly cash dividend of $0.38 per share paid in the fourth quarter. On February 20th, our Board declared a quarterly cash dividend of $0.41 per share, an increase of 8%. This is our second increase since we reinstated the dividend in 2021, and it aligns with our intention to sustainably increase the dividend. Now, let’s discuss our outlook and recall that we provide year-over-year growth rate in constant currency. Our 2023 guidance anticipates continued growth despite softness in the beer industry and the impact of continued global inflationary cost pressures. We expect low-single-digit growth for both net sales revenue and underlying pretax income and underlying free cash flow of $1 billion, plus or minus 10%. Let me walk through some of the underlying assumptions. On the top line, we expect growth to be more rate than volume driven as we continue to benefit from the strong global net pricing that we took in 2022 as well as premiumization. As a reminder, in 2022 in the U.S., our largest market, we took an average 5% increase in the first quarter and another 5% beginning in September and into the fourth quarter. In terms of cost, we expect inflation to continue to be a headwind. But, with our ongoing cost savings efforts, pricing, and continued premiumization, we expect to grow gross margin per hectoliter in both business units. We also remain comfortable with our hedge commodities coverage in 2023. But again, there are certain costs, as I discussed, that cannot be hedged and can be material contributors to COGS. We expect to continue to support our core brands and key innovations and plan to increase marketing dollar investments in 2023 versus the prior year. As for our secondary guidance metrics, we expect capital expenditures incurred of $700 million, plus or minus 5%; underlying depreciation and amortization of $690 million, plus or minus 5%; net interest expense of $240 million, plus or minus 5%; and an underlying effective tax rate in the range of 21% to 23%. In closing, we are proud of our accomplishments in 2022, particularly amidst significant global inflationary pressures. We remain focused on continuing to navigate the dynamic macroeconomic environment. We are pleased to have a strong portfolio of brands that play across all price segments and the financial flexibility that enables us to continue to invest prudently in our business to support long-term growth. With that, we look forward to answering your questions.

Hi there. This is Patty Kanada on for Bonnie. Thanks for the questions. I just had a couple of them on your EMEA-APAC performance. Your financial volumes across the broader region were much better than expected. Could you break out for us how much of a tailwind the World Cup was? And any other benefits that may be one-off like the cycling of the on-premise restrictions you pointed out in terms of contribution? And then, hoping to dig a little bit more on what you’re seeing at the consumer level in Central and Eastern Europe, specifically given the pressures on demand that we were talking about last year. Did you say that volumes actually recovered in this region? And could you just give us an update on the consumer demand trends you’re seeing there? Thank you.

Thanks very much, and good morning. As far as EMEA and APAC is concerned, yes, I mean, they drove top line growth in the quarter. And yes, we did benefit from cycling Omicron-related on-premise restrictions, which we had in 2021. We benefited from strong pricing and mix as well. Our above-premium portfolio reached record levels on the strength of big success brands like Madrí. But the World Cup was a contributor, though it wasn’t frankly as much as we had expected, for a couple of reasons. One is it was out of cycle, normally played in the summer. Secondly, there were significant rail strikes in the UK around that time, which muted consumer demand due to the World Cup and also the expected demand that we were hoping for as the Christmas holiday parties and spirit came through, which didn’t happen in 2021. Both of those things were less than what we had expected. Notwithstanding that, obviously, the performance in EMEA-APAC was substantially better than 2021 and nearly where we had hoped. As far as EMEA-APAC is concerned, the inflationary impacts we’re facing are more notable in those markets. There are specific conditions affecting Europe from Russia’s war in Ukraine and challenges in the UK economy. There’s no doubt about that. So Central Eastern Europe remains a challenged market. But in the UK to date, market demand has been resilient, including demand for our above-premium brands.

This is Bryan Adams on for Peter Grom. Congrats on an awesome quarter. So just thinking through the low single-digit top line growth that you guys outlined this morning, Tracey, you just talked through the rollover benefit from pricing in 2022 along with a broader effort to continue to shift towards above premium. I know you’re targeting a third of the portfolio now, and that should probably provide some positive mix. But just thinking through that low single digits for the year, how should we think about that broader breakdown between price mix and volume? Is it still going to be mostly a price-mix driven affair in 2023? Thanks.

Yes. I mean, as Tracey said in her remarks, it’s going to be more rate than it’s going to be volume. Obviously, near term, consumer behavior and consumer impacts, as you can see in any consumer goods company, is challenging. We’re a little cautious there from a volume perspective. We’ve got the other thing going on in our top line with our contract brewing, right? It’s well known that we’re exiting a large contract brewing arrangement, which is coming to an end. I think it’s at the end of next year. And this year is a transition year. So, a decent chunk of that volume comes out, and that obviously carries a fair amount of NSR with it. Now, we are confident that it will take a lot of complexity out of our business and reduce our overall cost structure, and it’s just going to make us a whole lot more efficient. So, we’re in the transition year from that as well. So hopefully, that answers that, Bryan.

So my question is, what is the right level of ad spend? Obviously, 4Q had the year-over-year ad declines. But you’re seeing some competitors increase their spending on their core brands. So, I guess the question is, do you need to adjust your marketing strategies from 2022 levels? How should we think about maybe the response to some of the extra marketing competitors are putting in the marketplace?

Thanks for the question, Bill. We are very pleased with the strength and effectiveness of our marketing. We have invested significantly in our core brands and key innovations, and we intend to continue this approach. I think it was mentioned in Tracey’s remarks that if you exclude discontinued brands, our marketing investments actually increased for the year. Overall marketing spend on our iconic core brands was also up for the year in constant currency. Therefore, we believe our marketing is effective. We have made some changes to our marketing investment strategy. We have completely restructured our media approach to ensure that our spending is maximized. Now, more than 50% of our media spend is in digital channels. We are leading in areas like streaming videos, podcasting, and sports predictions and betting, as evidenced by our latest Super Bowl program. We have also completely revamped our performance-based marketing strategy to ensure we achieve the best return on ad spend. So, in short, Bill, we are ensuring that every dollar we spend is working as hard as possible for us. Regarding our competitors, I feel confident about our brands compared to theirs in terms of health and market share. While increasing something five times from a relatively low base still results in a low number, as Tracey mentioned, we will continue to invest heavily in our brands and plan to increase our ad spend in 2023.

This is Drew Levine on for Andrea. Thank you for taking our question. I wanted to pick up on the discussion around the top line guidance for this year. Can you just clarify if you had additional pricing planned for 2023 given the consumer environment? And then, Gavin, obviously, kind of a tough end to the year from a volume perspective and the industry. Can you just talk about what you’re seeing year-to-date and maybe how much conservatism do you think is baked into the guidance? Were you going kind of based off of the transactions from 2022, or are you seeing something in the marketplace currently, I guess, that’s giving you some pause? Thank you.

Okay. Drew, a lot going on there. Let me make sure I can catch all that. Let’s just stand back and look at what we did from a pricing environment or pricing point of view in 2022. We took a reasonably strong price increase in the spring of last year, and we took another strong price increase in the fall. In fact, it was at the higher end of the guidance that we put out there from a pricing point of view. The price elasticities that we saw in the spring were actually well below historical levels. I mean, it was still elasticity, but they were less than what we’d expected. Since our four price increases, which is really a couple of months of data, that is, it has elevated a bit, but it's still below historical levels. So, it’s only been a couple of months. We continue to keep a close eye on how consumers are reacting. The price promotion environment hasn’t elevated, as I said in my remarks. From a pricing point of view this year, well, we put large price increases, as you know, in most of the country in the fall, but there were some markets where we didn’t take price in the fall. So, in the spring, you’ll see a few price increases there. It will be fairly localized, not a broad sway. As we look to the balance of the year, I would expect our price increases in the fall to be closer to historical levels, around 1% to 2%. Your other question was around volume and how we’re feeling about that. Obviously, the fourth quarter volume was down. From a consumer spend perspective, just like every other consumer goods company, we did see changed behavior from a consumer point of view, which impacted our fourth quarter retail sales or brand volumes. There was one less trading day in the fourth quarter, which we don’t adjust for in the reported results. So, that had a meaningful impact. And there was a little bit of pull forward from Q3 into Q4 as we anticipated the big price increase. Year-to-date this year, I’m not going to give you an absolute number because we’re not that far into the year, but I would tell you that our trading performance has improved from a volume perspective as we’ve gone through, which is not terribly dissimilar behavior than we saw after the spring price increase, where we saw some muted volume after that, and we saw muted volume after the fall increase and bouncing back. So, that kind of summarizes for you, and I hope I captured all your questions.

Great. Thanks. Good afternoon. And congrats everyone on a good year. Two for me, if I could. Gavin, one just a comment you made on the longer-term outlook, wanted to drill down on that; and then Tracey, just on the return of capital. So first one, Gavin, for you. I noted with interest your comment that you expect higher top and bottom line growth going forward relative to what the Company expects in 2023. I’d argue that’s not much to get on your share price, I guess, number one. Number two, does that imply mid-single-digit top line and EBITDA growth longer-term? Maybe just sort of drill down, Gavin, if you wouldn’t mind a little bit on some of the optimism around the outlook. Also just sort of reconcile that with the impairment charge. We all get that it’s non-cash. We understand that there’s a higher discount rate being used. But maybe just sort of reconcile those two things.

Okay, Kevin. Yes. From a midterm guidance point of view, obviously, we look at the total basket of our P&L and what we expect from a pricing point of view, what we expect from our brand performance as the plans and the additional ad spend that we’re putting in place in 2023 impacts our innovation pipeline and how our brands are performing in EMEA, APAC, Canada rebounding as we increase investment in Canada as well. All of this gives us confidence to provide medium-term guidance that is higher than what we currently have for the near term, where I think things are a little more uncertain and cautious. There was a second part to that question? How does the impairment? Well, you can handle the impairment, Tracey. Obviously, the interest rate environment had a meaningful role...

Yes. So, Kevin, I’m sure you’re aware that we’re required to do an annual impairment exercise. It’s really a mathematical equation of future cash flow. The big driver, as you mentioned, the big input is the rise in the interest cost, and I think you’re seeing that everywhere, and then, the inflationary impact that we are seeing on our costs. But we remain optimistic about the growth outlook for our company and, in particular, our optimism around our Americas business units. We’re committed to achieving the top line and bottom line growth.

To tie both, Kevin, obviously, when we started our Revitalization Plan, the goal was to achieve both top and bottom line growth. We did that in 2022 and we’re guiding for that in 2023. We expect to deliver that on a consistent basis moving forward, given where we are from a company point of view with our brands and overall cost structure. I think you mentioned you had a second question.

Yes, I’ll follow up. Yes. No, that makes sense. Just the cross currents between better delivery over the past few years, I would say, and then, Gavin, your optimism going forward with the higher discount rate. But I can chat with Greg and Tracey offline. Tracey, for you real quick, not to monopolize time. But I think it’s important, you guys have made tremendous progress with debt leverage in an extremely volatile environment. So now down to 2.9 times debt leverage, the target is 2.5 times, can you comment on the Board’s interest in returning even greater cash to shareholders, which would seem to be near and would be very accretive, particularly from an EPS perspective, given where your stock is trading? Maybe comment a bit on the timeline for a return to a much greater share repurchase than we’ve seen recently while the Company expends its leverage.

Yes, thanks, Kevin. Our capital allocation priorities remain the same. We want to invest in our business to drive sustainable top and bottom line growth. As Gavin mentioned, we’re investing in our breweries, modernizing them. We’ve got some upgrades going into our breweries, which always help deliver cost savings and efficiencies. The second bucket is reducing the debt. We have a desire to maintain and improve our investment-grade rating. We’ve made tremendous progress, and we’ve now given this so-called leverage target ratio of 2.5 times, which will give us much more flexibility from a capital allocation point of view. The third bucket, to your point, is returning cash to shareholders. We’ve raised our dividend twice since reinstating it in 2021, with the intention to sustainably increase that dividend. Now we do have a small buyback program that you’re aware of, essentially an anti-dilution program for employee equity grants. Regarding anything larger, we run all our capital allocation decisions through our models that influence us, and we would provide the greatest return for our shareholders. We’ll continue to have those conversations with our Board.

Hey Gavin, I was hoping you could expand on your medium-term aspiration for continued positive mix shift. Certainly, your beyond beer would seemingly be a key contributor to that. But could you perhaps dimensionalize the contributions that you would expect from alcoholic beyond beer this year versus non-alcoholic?

Thanks, Vivien. Yes. Look, I mean, we’ve made tremendous progress on our above-premium and beyond-beer pillars of our Revitalization Plan. It was a core tenet of our plan to aggressively premiumize the portfolio. We’ve now taken that to a record level of 28%, compared to 23% when we started this process. Our continued efforts in this space will continue. We’ve got brands like Topo Chico, Blue Moon, Peroni, Simply Spiked, and emerging growth brands like ZOA in Europe. I mentioned Madrí. Above premium certainly is an area we expect to continue to grow. We put out a number there of almost a third of our NSR in the medium term is expected to come from above premium. This will certainly improve our overall mix. On top of that, we’ve laid a solid foundation in the spirits space, both in large bottles and with our exciting innovation coming with Topo Chico Spirited this year, which we have high expectations for. You can expect our above-premium portfolio to become an ever larger part of our offerings, which obviously has benefits through the entire P&L.

This is Greg on for Robert. Just a quick question, then maybe a follow-up after that. But you just went through the $600 million and you delivered above that on your cost savings, which is great. Any color on kind of what the cost-saving outlook is from here, any new targets to just kind of how we should think through that? And then, just one quick follow-up after that, please. Thanks.

Yes, we were very happy that we could slightly over-deliver on that $600 million of cost savings. We haven’t implemented a new formal cost savings program that we’re communicating externally. However, we obviously do have internal targets. We continue to expect cost savings, but it’s just a way of life at Molson Coors. We’re always seeking ways to improve our efficiencies, whether that be in terms of production or other areas like marketing that Gavin just mentioned. We’ll continue to look for ways to deliver cost savings but have no formal program at this stage.

Great. That makes sense. I have a quick follow-up regarding your emerging growth portfolio. Could you discuss the recent changes with La Colombe and others over the past few months? How are you approaching the sales target for that? Has it changed from the previous $1 billion? Additionally, which of the core brands do you anticipate will contribute most to the growth moving forward? Thanks.

Thanks, Greg. Our $1 billion NSR target remains our ambition. We could be a little challenged to achieve that mark in 2023 because we’re mindful of the challenging economic environment in Latin America, both from a political and economic perspective, that is fairly volatile. There is industry softness in U.S. craft, to be sure, which has impacted our Tenth and Blake business. You rightly pointed out the discontinuation of La Colombe and our Truss U.S. CBD drinks business. These are only slight headwinds to our NSR goal. Not all our efforts will be successful in this space, and we won’t deliver NSR targets at any costs. We try to balance our top line aspirations with an objective to improve overall margins from the emerging growth division as a whole. In terms of brands where we see strong performance, I mentioned ZOA in my opening remarks; we’ve got Topo Chico Spirited, which is coming this year. We’ve made some changes to how we’re bringing ZOA to the market. We’ve learned a lot over the last three years, and we’re moving to scale in energy drinks, both full-strength bottle spirits and ready-to-drink. Not a short-term play for us, the progress we’ve made in beyond beer has laid a nice foundation for us.

First for Tracey. Any color you could give us in terms of the phasing of revenue and profit delivery versus the guidance for the year? The last few years were clearly nothing but nowhere close to normal. So, it’s a little tough to judge where you stand versus some of these really unusual comparisons. And then, for Gavin, the past year, you had some really outsized great contribution from innovation, particularly Topo Chico. How are you looking at incremental innovation contribution this year, particularly as you cycle the Topo Chico national launch and, of course, the hard seltzer category has been soft? How are you thinking about incremental innovation this year?

Thanks, Eric. I’ll take the second question first. We’ve still got lots of upside with the innovations that we launched last year. We launched Simply Spiked in the middle of the year, and the reception for that was amazingly positive, and we weren’t able to meet demand, as I think we were very packed about it. We’ve got process in place where we will be able to meet demand this year. So there’s lots of upside in Simply Spiked, and we’ve got great innovation coming with that brand as well, right, with the Peach coming. We’re looking at our innovations broadly, including seltzers, but also FMBs and RTDs. When you look at those segments together, we grew more share than any other supplier in the last 52 weeks. We’ve got the number four and five seltzers with Topo Chico and Vizzy. We’ve got the second-fastest growing hard seltzer in Topo Chico. In Canada, we’re the only large brewer growing share of hard seltzer. So, we’ve got lots of upside with our existing innovations that we launched just last year. We’re launching Topo Chico Spirited this year. We’ve got a nice line extension with Peach on Simply Spiked. The awareness for Topo Chico is still a lot less than its largest competitor. We think we’ve got a lot of opportunity to drive more awareness for Topo Chico and improve the momentum there.

Yes. I mean, in terms of phasing, look, Eric, we’re always going to have quarter-to-quarter swings in our shipments and inventory levels. We don’t expect to have the same magnitude of shipment swings as we have seen over the past several years. Regarding the top line, we still expect cost pressure from inflation, which we do expect to moderate in the back half of the year. We don’t give quarter-by-quarter guidance, but hopefully, that helps you.

Two questions for me, please. The first on your 2023 underlying profit guidance. Are you anticipating that the 2023 pricing that you spoke about earlier will be able to fully offset the input cost headwinds this year? And then, my second question, in your prepared remarks, you called out consumers actively downtrading to smaller pack sizes. Could you provide a little bit more color on this type of consumer behavior? Are you seeing consumers also downtrade from one brand to another or at the moment, is it just on the pack sizes? What assumptions about the health of the consumer and downtrading have you baked into your full-year guidance?

Thanks, Nadine. Tracey, do you want to take the guidance question?

Yes. We expect the top line to be rate-driven, benefiting from the pricing and mix in 2022. We’re mindful of both inflationary impact to both our consumers and costs and we’ve considered that. We do expect to grow our gross margin per hectoliter in both business units.

The other side of your question, Nadine, was around consumers and consumer behavior. Overall, we’re not seeing anything terribly different than any other fast-moving consumer good. The beer industry is no different there. We’re not observing significant trade down across our portfolio or in the industry. Of course, if that comes, we think we’ve got the ideal portfolio to deal with that, but we haven’t actually seen it at this point in time. We’re seeing consumers trading down maybe from a 30-pack to a 24 or a 24 to a 12 or a 12 to a 6. Obviously, that is negative from a volume perspective, that contraction, but it’s actually positive from a mix point of view for our organization. Hopefully, that answers your question.

I just wanted to follow up just quickly there and then ask you a question. But, Tracey, you made a comment about your COGS per hectoliter inflation running at this level into the front half and then fading. Can you maybe be a bit more specific about what you meant there? Did you mean that COGS per hectoliter inflation will stay at this kind of level and then trail down in the back half? So, you’re really looking for mid- to high single-digit underlying, or just any perspective there? And just what you think is going to be driving that between commodities and some of these non-commodity costs like conversion and freight.

We don’t give COGS per hectoliter guidance. I just want to clarify, I didn’t say at this level. But what I did say is that we expect inflation to moderate in the back half of the year. We still sit in an inflationary period, and we do expect headwinds for the year. However, the impact from cost inflation and our COGS should slightly moderate in the back half of the year, driven by the forward curves for commodities.

When you said gross margin expansion, did you mean total enterprise for the year next year?

Yes. I’m talking gross margin per hectoliter growth in both of our business units.

And that would lead to total company gross margin expansion?

Yes.

First question on the U.S. beer industry. You mentioned soft industry performance in Q4, and it sounded like volume improved in January. So, can you talk about your expectations for the balance of the year? And then, the second question on market share, you’ve done a lot of progress in improving the market share performance of both Coors Light and Miller Lite. Are you assuming share gains for those two brands in 2023? Thank you.

Thanks, Filippo. Yes, we have seen a rebound in volume performance in the first part of this year compared to what we experienced in the fourth quarter of last year. As far as the full year is concerned, I’d point you to Tracey’s comments around the fact that our top line guidance is more rate-driven than volume driven. Yes, you rightly point out that Miller Lite and Coors Light are healthier than they’ve been in years. They grew combined NSR in the U.S. in the second half, and that continues to be a strong upward trajectory that we saw in 2021. We grew NSR for both Coors Light and Miller Lite in Canada and they posted their strongest dollar share performance in over a decade. We’ve done an excellent job ensuring that Coors Light and Miller Lite have had a very clear differentiated brand position, Coors Light obviously owns refreshment, while Miller Lite owns beer taste. We’ve built on those foundations with very strong consistent marketing programs, Made to Chill for Coors Light and Miller Lite’s Beer Point of You. We’ve actually outpaced Bud Light for seven of our largest chain retailers in feature and display. All of that translates into good share gains versus our competitors. I think we've got really strong programs for 2023, starting with the Super Bowl, which wasn’t just a point in time. It was a buildup for several months before that, and we’ll continue to leverage that post the Super Bowl. We don’t shy away from being in the challenger position versus our competitors, and we’re going to make the dollars we’ve got work pretty hard for us. How that translates into share gains, well, let’s wait and see.

Can you talk a bit about capacity and your thoughts on capacity utilization in light of the current volume observations?

Kaumil, I missed the first part of it, but it sounded like you were complimenting me, so I think I’m going to take that and run with it. As far as capacity is concerned, from a capacity point of view, we’re expanding where we need it, right? So, in terms of seltzers, flavored malt beverages, and our variety packing capability. We don’t provide specifics on utilization, but we feel good about our current capacity and its utilization. We closed two breweries in the U.S. over the last few years, and that improved our capacity utilization significantly. We’ve just built two new state-of-the-art breweries in Canada, and we’re doing a multiyear modernization project at our Golden brewery. We’re happy with our brewery footprint. Within that, we’re always looking for ways to be more efficient from a line perspective and looking for optimization.

You have Christian on for Bryan Spillane. It would be helpful if you could share your outlook for the hard seltzer and ready-to-drink cocktail category for 2023. Thanks for taking our question.

Thank you, Christian. We have been cautious about providing specific projections for hard seltzers due to the challenges in new categories. However, we believe hard seltzers are here to stay and are now a key part of the overall beer market. We are aware of the trends we're observing, which is why our premiumization strategy encompasses a wider range of flavors. This includes seltzers, FMBs, and RTDs. We will continue to focus on Topo Chico, which is the fourth largest brand in the country, and Vizzy, which is fifth. In Canada, we are gaining market share with Vizzy and Coors Seltzer, and we just launched Topo Chico there as well. Since its introduction in the summer of 2022, Simply Spiked has been a significant success for us. We have a promising hot tea offering with Arnold Palmer Spiked, and we will also be introducing Topo Chico Spirited in the first quarter of this year. We are confident that our varied flavor approach will adapt to evolving consumer preferences. We saw positive momentum in 2022, and we plan to further increase this in 2023.

I will hand it over to Greg.

Very good. All right. Thanks, Gavin. Thanks, operator. I appreciate you all spending time with us. If you did have additional questions that we were not able to ask today, please follow up with our Investor Relations team over the next days and weeks to come. But look forward to talking with many of you as the year progresses. With that, thanks everybody for participating in today’s call. Have a great day.