Molson Coors Beverage Company (TAP) — Q2 2023 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 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-US 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 US dollars and in constant currency when discussing percentage changes from the prior year period. Also, US share data references are sourced from Circana. 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 today's call. Molson Coors has just finished the single best quarter of reported net sales revenue since the merger of Molson and Coors in 2005. That achievement is not only a measure of those three months, it's a measure of the past three years. It's about the work we've done to strengthen our business, which puts us in a position to attract consumers when they begin looking for alternatives. That's what allowed us to deliver these results today. Now, to try and remove any skepticism that you may have, I want to show you one chart in our slides that summarizes exactly what I'm talking about. Up until three years ago, our biggest brand in our biggest market was losing dollar share quarter after quarter and year after year. Shortly after we launched our revitalization plan, we changed our marketing approach on Coors Light and launched the Made to Chill campaign, and the brand's results began to improve. In the first quarter of this year, Coors Light revenue was up high single digits. In the second quarter, Coors Light grew more industry dollar share than any other beer brand and it grew industry dollar share faster than Modelo Especial and Corona Extra combined. The overlay Miller Lite's performance, it looks remarkably similar. And the reason for that is simple. Three years ago, we generated cost savings and have been reinvesting them back into our brands and back into our business. Three years ago, we completely changed our approach to marketing and media, which unlocked growth for our biggest brands. Over the past three years, we have improved our supply chain. We've diversified our network of material supplies in our shipping methods. We've adjusted our brewery and packaging operations. We've streamlined our ordering systems for customers, and we've invested in our facilities. Collectively, we believe this has made us much more nimble and much more prepared to meet elevated demand. Over the past three years, our strategy has made our brands demonstrably stronger in 2023 than they were in 2019. So while we didn't plan our largest competitor's largest brand planting volume by nearly 30% during the quarter. If this had happened in 2019, we would surely not have seen the sales benefit that we did in 2023 or even been able to meet the demand. Now a lot has been said about the US beer industry over the past few months. But I thought it would be helpful to provide a deeper level of detail than what you've seen track channel data and give more insights about what we believe the current trends mean for the future. First, Molson Coors is number one in retail display dollar gains year-to-date. This is the easiest way for retailers to adjust space on short notice. So we see it as a strong early indicator of shelf reset sentiment. And it's also worth remembering that our largest brands had already experienced a display lift in the first quarter due to our suitable retail execution. We also know a number of retailers have moved their shelf reset timing from the spring to the fall, which we expect will make some portion of the current trend structural. For the retailers who stayed with spring resets, those conversations are well underway. Currently, nearly 20 of our top retailers are updating their planograms to drive more space for our brands and keep them in stock based on the latest demand. Continuing with retail, we are seeing particularly strong growth in the convenience channel with both volume sales and dollar sales up double-digits in the quarter. In the United States, Convenience is the number one channel where we have historically under indexed. So to capitalize on this momentum, we are planning to increase our investment behind C-store shopper marketing in the second half of the year. In the on-premise, Molson Coors gained over 12,000 new tap handles in the second quarter alone, and we grew sales at double the rate of the category on leading e-commerce platforms. We're proud of this execution, and we're equally proud of the work our supply chain team has done over the past several years to really ask for this quarter. When in May and June, our US breweries had their highest levels of production since 2019. And lastly, it's important to note that the competitive pricing moves around Memorial Day and the Fourth of July did not appear to have a negative impact on our brands as our share gains continued. Given the relative size, Coors Light and Miller Lite in the United States naturally had an outsized impact on our second quarter results. To put the growth of these brands into perspective, Coors Light and Miller Lite combined are 50% bigger than Bud Light by total industry dollars and 30% bigger than Modelo Especial in the second quarter. And to put that further in perspective, in the second quarter of last year, Bud Light was bigger than Coors Light and Miller Lite combined. But the momentum we're seeing isn't confined to a specific brand, segment, channel or geography. Globally, we grew the top-line by double digits and the bottom-line by more than 50% in the second quarter. We grew volume and share in the United States. We grew volume and share in Canada. We grew volume and share in the United Kingdom and our top three brands globally; Coors Light, Miller Lite, and Miller High Life are all growing volume globally. In the US, the top dollar share gainer nationally with Coors Light, Simply Spiked, and Miller Lite representing three of the top five franchises in the quarter. Every single one of our top five US brands grew dollar share in the quarter as well. Coors banquet gained share in the US beer industry for the eighth consecutive quarter, an impressive feat for a 150-year-old brand of its size. Our economy brands grew dollar share of industry, including volume growth for High Life and Keystone. We also gained the second most dollar and volume share in total flavor in the second quarter. We now have the number three and number five Hard Seltzer brands in the United States, and Simply Peach was the best-performing new product in the quarter by dollar share. In energy drinks, ZOA is continuing its upward trajectory. Since the end of the first quarter, more than 11,000 additional retail outlets have placed the brand's new 12-ounce cans, and we believe ZOA has a bright future. And just last month, we announced a new marketing campaign, featuring some of the country's most prominent college athletes as brand ambassadors. All of the points I just shared led to our best quarterly US brand volume trends since the MillerCoors joint venture in 2008. It led to revenue growth in every channel, in every segment, and in every region. And in Canada, the story is similar. We saw double-digit brand volume growth in the quarter, led by Coors Light and the Molson brand franchise, which also grew share of the industry. These trends were actually well on their way even before the start of the second quarter. At the end of March, Coors Light became the number one light beer and number two overall beer in the country, surpassing Bud Light. While the Hard Seltzer segment in Canada was down in the second quarter, Molson Coors was the only large brewer to hold share of the segment. In EMEA and APAC, I'll start with our performance in the UK, where we grew volume, share, and revenue, and our on-premise share performance hit its highest levels in over a decade. Madri delivered triple-digit volume growth and is now the fourth largest above premium brand in our global portfolio. Based on track data in the UK, Madri is now a top five brand for on-premise value sales. What this brand has achieved in three years is incredible. Back by Madri incurs more than half of our total EMEA and APAC revenue as of the second quarter which was generated by brand volumes from the above premium segment. And Ožujsko, our second largest brand in the region, surpassed the 50% share of segment in the Croatian market and is benefiting from new enhancements we've made to our can lines in the region. So we had an incredible second quarter, the best in years by many accounts. And while our two biggest brands in our biggest market played a large role, you can see that our entire business contributed meaningfully. We're proving this business can grow the top and bottom line sustainably. We're proving we have the resilience and wherewithal to navigate macro challenges affecting our industry and the world. And we believe we're proving that when we stick to a clear strategy over the long term, results will continue to follow. That's what we've done for the past three years. That's why we are where we are today. It's what we expect will drive sustainable growth for our business moving forward, and it's why we're confident in raising our guidance for the remainder of the year. Now before I pass it over to Tracey for more detail, I wanted to share that on October 3, we will be hosting a Strategy Day in New York City. More details are to come but we look forward to providing a longer-term view of our strategy and outlook at that time.

Thank you, Gavin, and hello, everyone. In the second quarter, on a constant currency basis, we delivered tremendous results. Net sales revenue grew 12.1% and underlying pre-tax income grew 52.6%. We achieved this while continuing to invest in our business, reduce net debt, and return cash to shareholders. As Gavin discussed, we have built our business to sustainably grow both the top and bottom line. We achieved this in 2022 and in the first quarter of 2023 before this recent period of accelerated demand in the US. And while we remain mindful of the dynamic global macroeconomic environment and recent beer industry softness, the foundation we have laid coupled with our strong second quarter performance provide us confidence to increase our full-year 2023 guidance, meaningfully accelerating growth from our prior expectations. Now before we get to that, let's talk about some of the drivers of the second quarter performance. Net sales per hectoliter grew 9% in the quarter. This was driven by positive global net pricing due to rollover pricing benefits from higher than typical increases taken in 2022 and favorable sales mix driven by geographic mix and premiumization. Financial volume increased 2.8% and consolidated brand volume increased 5%. The volume growth was driven by strength in our Americas business, partially offset by a decline in our EMEA and APAC business. Turning to costs, underlying cost per hectoliter were up 5.9%. As expected, inflationary pressures continue to be a headwind. As you may recall, we bucket COGS into three areas. First is cost inflation other which includes cost inflation, depreciation, cost savings, and other items; second is mix; and third is volume leverage or deleverage. The cost inflation bucket drove 80% of the increase and was mostly due to higher materials and manufacturing costs, partially offset by cost savings. Volume leverage had a meaningfully positive impact on COGS per hectoliter in the quarter providing a 100 basis point benefit. Other COGS per hectoliter drivers included mix, which accounted for the remainder of the increase. This was largely due to the impact of non-owned brands as well as premiumization. And while premiumization is a negative for COGS, it is a positive for gross margin per hectoliter. Underlying marketing, general, and administrative expenses increased 4.1%. The increase was driven by higher incentive compensation expense, which is a variable expense tied to our operating performance, as well as higher marketing investments. Now let's look at our quarter results by business units. In the Americas, net sales revenue grew 11.5% and underlying pre-tax income grew 40%. Americas net sales per hectoliter increased 6.2%, benefiting from positive net pricing across the region as well as favorable sales mix. The strong net pricing growth included benefits from higher than typical US and Canada pricing in 2022. As a reminder, in the US in 2022, we took two part increases, a spring and fall, each averaging approximately 5%. We lapped last year's spring increase in the third quarter and will begin to lap last year's full increase this September. Financial volume increased 5%. This was due to a 4.8% increase in US domestic shipments, driven by higher brand volumes due to a shift in consumer purchasing behavior largely within the premium segment in the quarter. In addition, Canada shipments increased in part due to cycling the impact of the Quebec labor strike in the second quarter last year. This was partially offset by lower Latin American and contract brewing volumes. Americas brand volumes were up 8%. US brand volume increased 8.7% largely due to growth in our core brands with Coors Light, Miller Lite, and Coors Banquet all up double digits. Growth was also driven by strength in our Above Premium portfolio led by flavor. In Canada, brand volume increased 11.3%. While sparking the Quebec labor strike was a driver, we also achieved growth in each of our Canadian regions. In Latin America, brand volume was down 5.9%, largely due to industry softness in some of our major markets in that region. On the cost side, Americas underlying COGS per hectoliter increased 2.5%. Inflation remained the leading driver of the increase, but the impact was partially offset by benefits of volume leverage and lower logistics costs. MG&A was up on higher incentive compensation and higher marketing investments, particularly for key innovations like Simply Spiked. Turning to EMEA and APAC. Net sales revenue increased 14.7%, and underlying pre-tax income increased 82.7%. Net sales per hectoliter grew 18.3%. This was driven by positive net pricing largely related to the rollover benefits from increases taken in 2022, favorable sales mix, and continued premiumization in the UK, fueled by the strength of brands like Madri and positive geographic mix. Financial volume declined 3%, relatively in line with brand volume, which was down 2.9%. Looking by market, financial volume grew in the UK on strong brand volume due to the resilience of the UK consumer and our strong on-premise performance as well as higher factor brand sales. But this was more than offset by the counts in Central and Eastern Europe due to industry softness, including the impact of the continued inflationary pressures on the consumer. On the cost side, underlying COGS per hectoliter increased 17.7%. This was largely due to inflation-related brewing, packaging materials, and logistics costs as well as the mix impact of premiumization and high affected brands. MG&A was relatively flat. Underlying free cash flow was $570 million for the first six months of the year, and this was an improvement of $282 million, primarily due to higher net income and lower cash capital expenditures. Turning to capital allocation. Capital expenditures paid were $335 million for the first six months of the year. This was down $54 million and was due to the timing of capital projects. Capital expenditures continue to focus on our Golden Brewery modernization and expanding our capabilities in areas that we believe drive efficiencies and savings. We reduced our net debt by $308 million since December 31, 2022, ending the second quarter with net debt of $5.7 billion. And in July, we repaid our CAD500 million debt in cash upon its maturity on July 15. As a reminder, our outstanding debt is essentially all at fixed rates. Our exposure to floating rate debt is limited to our commercial paper and revolving credit facilities, both of which had a zero balance outstanding at quarter end. And we paid a quarterly cash dividend of $0.41 per share and maintain our intention to sustainably increase the dividend. Given our strong EBITDA performance and lower net debt, our net debt to underlying EBITDA ratio as of quarter end, reached our longer-term leverage ratio target of 2.5 times. Our capital allocation priorities remain to invest in our business, reduce net debt as we remain committed to maintaining and improving our investment-grade rating and returning cash to shareholders. But our greatly improved financial flexibility does provide us increased optionality among these priorities, and we will utilize our models to determine the best anticipated return for our shareholders. Now, let's discuss our outlook. But first, please recall that we cite year-over-year growth rates in constant currency. We are raising our 2023 key financial guidance to reflect the continued strength we are seeing in our core brands in the US while remaining mindful of the softness in the beer industry and continued caution around the consumer. We now expect high single-digit net sales revenue growth as compared to low single-digit growth previously. We now expect 23% to 26% underlying pre-tax income growth, as compared to low single-digit growth previously. And we also now expect underlying free cash flow of $1.2 billion, plus or minus 10% as compared to $1 billion plus or minus 10% previously. Now let me break down some of the guidance assumptions. From a top-line perspective, given the strong demand in the US, we now expect growth to be driven not only by rate but also by volume. But we continue to expect a headwind related to the large US contract brewing agreement that has begun to wind down ahead of its termination at the end of 2024. As discussed on our first quarter call, we expect volume declines under this contract to accelerate in the fourth quarter. For context, the headwind impact of this is expected to be approximately 2% to 3% of America's financial volume in the fourth quarter. We continue to view the termination of this contract as a positive, because while a headwind from a volume perspective, we believe it is positive for us in terms of freeing up capacity and enhancing margins. As for distributor inventories, we had both higher US distributor inventory levels at the end of the first quarter this year versus the prior year. However, given the strong demand, distributor inventory levels in the US declined following both the Memorial Day and Fourth of July holidays. We expect they will further decline following the Labor Day holiday. Recall that declines in distributor inventory held through the summer, and particularly post our holidays during this period, are typical. Also, as usual, we anticipate rebuilding inventory in the shoulder quarters being the first and fourth quarters. So while supply is currently tight, our brewery operations have done an excellent job of meeting the demand. As for pricing, given the strength of our brands, we continue to anticipate taking a general increase in the US this fall. At this point, we expect our pricing increase to be in line with industry average historical annual levels of 1% to 2%. In terms of costs, we continue to expect the impact of inflation on COGS to be a headwind for the year, but we expect it to moderate in the second half. While stock rates for a number of commodities have declined, we, like most CPG companies, have a hedging program, which we expect will largely smooth out the impact of swings in commodity pricing. Further, our business in EMEA and APAC is expected to continue to experience relatively high inflationary pressure. In addition, we expect favorable volume leverage to partially offset cost increases. This, combined with continued premiumization and lower contract brewing volumes are expected to drive gross margin expansion for the year. Underlying MG&A expenses are expected to be approximately $100 million higher in the second half as compared to the first half of this year, and up approximately 15% versus the second half of 2022. This is primarily due to higher marketing spend, which is expected to be up approximately $100 million, as well as higher people-related costs as compared to the same period last year. As for our secondary guidance metrics, we continue to expect capital expenditures incurred of $700 million, plus or minus 5%, underlying depreciation and amortization of $690 million, plus or minus 5% and an underlying effective tax rate in the range of 21% to 23%. However, we are reducing our net interest expense guidance of $225 million to $225 million plus or minus 5% as compared to $240 million plus or minus 5% previously. This decrease is driven by the July payoff of the Canadian debt maturity, higher interest income due to higher cash levels and higher interest rates on deposits, and lower short-term borrowings than previously anticipated. In closing, we are extremely pleased with our second quarter performance. While we could not have foreseen the shifts that we have seen in consumer behavior that began in the second quarter, our strategy has positioned us well. With a strong portfolio of brands across all price segments and the financial flexibility that enables us to continue to invest prudently in our business, we are confident in our ability to sustainably deliver top and bottom line growth not only in full year 2023, but also beyond. We look forward to sharing more details on our strategic initiatives, capital allocation and longer term outlook at our upcoming Strategy Day on October 3rd. With that, we look forward to answering your questions.

All right. Thank you. Hi, everyone. I had a question on your guidance. You raised your underlying pre-tax income growth guidance a fair amount, but given the Q2 beat, it does imply a healthy deceleration in the second half. So I guess I wanted to better understand the drivers of this, and really ultimately how much of the top line strength you now plan to reinvest versus maybe letting it flow to the bottom line. Also, are there any other headwinds we should be aware of for the second half, or is there maybe some level of conservatism baked into your updated full year guide? Thanks.

Thanks, Bonnie. Let me start with just a couple of facts, and then I'll pass it over to Tracey. Firstly, I would tell you that the momentum behind our brands in the third quarter has not slowed down. It is maintained. And then secondly, we intend to invest very strongly behind the momentum that we've got, hence the $100 million extra marketing, which Tracey referred to in her remarks. Our job is to maintain those gains that we've got. We've gained, as I said, 12,000 new tap handles, we're working closely with our retailers to change the shelf sets to meet this new reality. We're the number one share gainer in dollars in displays. And we're going to invest behind the momentum that we've got, mostly in the Americas business unit, but also in our EMEA and APAC business unit behind brands such as Madri. So I'll make those two points. Tracey, is there anything more you want to add to that?

Yes. Bonnie, the one thing that I would add is the PEP contract that's winding down. So as I mentioned in the prepared remarks, we will see a headwind in terms of volume and revenue from that contract. We expect on a book volume basis for that to have a headwind in Q4 of around 2% to 3% of our American volumes. And then just also, don't forget the sort of pricing as we lap the larger price increases that we took supplier in 2022. So we'll see that impact declining through the back half of the year as well.

Thanks, Bonnie.

Thank you. I just wanted to follow-up and try to be super clear. So the guidance in the U.S. includes U.S. volume increases and rate. Has that changed just for what you've experienced year-to-date, or is your guidance now including those market share shifts that you've seen for them to continue in the back half of the year?

Thanks for the question, Bill. I don’t think we will provide a detailed breakdown of our guidance, but I want to emphasize that we have not observed any slowdown in the momentum for our brands. A significant factor is the additional $100 million compared to the first half of this year and also relative to the second half of last year. Regarding pricing, we have already processed one of the substantial price increases from last year, and the other was completed in the fall. We've consistently mentioned that we expect pricing to return to more typical levels, around 1% to 2%. Additionally, there are some employment-related costs we mentioned in our script. These are the four main points I wanted to highlight. Next question, operator.

Thank you. Good morning. Gavin, it appears that you're predicting a notable slowdown in the second half, even considering the 2% to 3% headwind you mentioned for the fourth quarter. Can you discuss the underlying assumptions for depletions as we approach the second half? Additionally, you mentioned a 5% increase in cost per act. I understand, Tracey, that you stated inflation will actually decelerate in the second half, which makes sense. If possible, could you elaborate on the margins? I believe this is related not only to the slowdown in the top line but also to more cautious assumptions for reinvestment. Thank you.

Look, Andrea. As I mentioned, our momentum has not slowed down at all, and we're now nearing the end of July. Our guidance assumes growth in US brand volume for the second half of the year, which suggests continued market share growth based on current industry trends. It does take into account ongoing consumer caution and the competitive landscape. Additionally, Tracey referred to the winding down of the PEPs and the price increases. Of course, we also have the extra $100 million allocated for marketing. We have considered all of these factors in our guidance.

We anticipate that the impact of cost inflation will persist throughout this year, though we expect it to moderate in the latter half. Currently, our expectations are informed by hedging our contract prices and anticipated cost savings. However, we foresee ongoing inflationary pressures, especially in the EMEA and APAC regions. From a margin expansion perspective, these factors, along with the advantages from our efficiency initiatives where we have increased investments, suggest that we are moving towards a more normalized cost of goods sold environment. In the medium term, we expect an expansion in margins.

As capacity increases, I want to ensure we all acknowledge that. The 2% to 3% headwind regarding volumes mentioned in this contract also provides more capacity. Considering what you mentioned earlier about having some of the top 12 retailers in the US adjusting their shop space for you, will we see that capacity redirected toward your own brands, or should we wait for things to stabilize before we can rely on that as we move through the rest of the year? Thank you.

Thanks, Andrea. We have 20 retailers making changes in the fall resets, and some have already implemented those changes. The number is actually increasing every week as I speak with our head of sales. From a supply chain perspective, our team has done an excellent job managing this situation on short notice. We typically operate near full capacity in the summer, so we're experiencing tighter conditions than usual. This has resulted in some distributors facing stock shortages, particularly where demand is strong, with growth rates of 30%, 40%, or even 50%. We have rebuilt inventory after Memorial Day and are doing the same as we prepare for Labor Day. We entered the second quarter with healthy inventories, so I believe we are effectively responding to this unexpected demand. We are capable of handling it, and once PEPs are released, we can replace that volume with our own brands, which will create additional capacity for us as we approach 2024.

Hi. Good morning. Thank you. Gavin and Tracey, I'm hearing some concern from investors that there seems to be perhaps a disconnect in terms of what would have been expected from a depletion standpoint, just using the publicly available data. I have Nielsen, you guys are obviously citing Sircana relative to the shipments. I think we've certainly covered the capacity point pretty well at this point. But were there any other timing factors to consider in terms of understanding why your Americas shipments fell below what we would have seen in Nielsen track channels from a volume growth perspective?

I want to highlight a couple of key points. We entered the second quarter with higher inventories than usual because we wanted to ensure we could meet the needs of our consumers and distributors throughout the summer. While we didn't anticipate the current situation, we did have increased shipments coming into Q2. We typically operate close to full capacity during the summer, so there isn't much room for a significant increase in shipments during this time. Nonetheless, our breweries achieved record production in May and June since 2019 and are performing exceptionally well. These are the main factors I wanted to share, Vivien. While we don’t have unlimited capacity, we are managing to keep up remarkably well given the sudden change in demand. We plan to rebuild our inventory leading up to Labor Day and will continue to do so as we progress through the latter part of the year.

Hi. Thank you. Good morning, guys. So last time we spoke, I know you mentioned your expectations at the time where the shelf resets could be more modest in the fall than some other brewers were expecting, but it sounds from your prepared remarks that you believe these are going to be bigger than initially expected. So could you provide a bit more color based on what you're seeing? I know you touched on it, but the puts and takes of those fall resets and then how you're thinking of going into the spring next year? And then one more, if I may ask, in the U.S., where your on-trade and off-trade trends meaningfully different or broadly in line? And if so, a little color on that as well. Thank you.

Thanks, Nadine. I'll take your second question first. Yes, our on-premise trends were better than our off-premise trends in the U.S. As far as your shelf reset question is concerned, yes, we are in a better place now than we were necessarily thinking at the end of the first quarter. A lot more retailers have, a, already moved some of their shelf resets and are planning to move their shelf resets than we had initially expected. As I said, nearly 20 of our retailers are updating the planograms right now. That number grows every week, every time, as I said, I'll talk to head of sales, that number grows. We're working really closely with our retailers to recommend space and assortment solutions to just drive sustained category growth for the retailers. And given those recent trends, we have seen a number of retailers make interim adjustments to displays and space this summer. And we do expect that to continue into the fall and also next spring. And as I said, I think in my prepared remarks and maybe in Q&A, I can't remember. But was Molson Coors is the number one in retail dollar display gains year-to-date. So, we're working hard at making sure that shelf resets reflect the current reality in the marketplace, which shows that there is a strong momentum behind all of our core brands.

Looks like we may have lost Filippo from Citi, Nadine. Not Nadine, operator.

Sounds like Eric's there either, operator.

Hello. Can you hear me?

Now, we can hear you.

Great. Sorry about that. I just wanted to revisit the topic of shipments versus depletions. Is it correct to say that shipments are expected to lag behind depletions for the third quarter and that the inventory rebuild will primarily occur in the fourth quarter? Also, do you anticipate that shipments and depletions will generally align for the full year? Will it be necessary to wait until the first quarter or early next year for the two to converge?

Yes. Hi Eric, it's Tracey here. So, look, we're going to monitor this very closely. Obviously, our distributor inventory levels, as Gavin mentioned, over the sort of holiday period will fall and then we'll grow it again. Typically, we grow on the shoulder quarters, the first quarter and the fourth quarter. But we're monitoring it very carefully. I mean, right now, we focus on making sure that we have enough inventory to meet the demand and that our distributors have enough inventory to meet their demand. So, as we get further into the year, we'll continue to balance that. And again, just really focused on making sure we've got there on the floor.

Thanks, Eric. The US industry in 2023 has been softer than we anticipated, with several factors contributing to this. In California, a major beer market on the West Coast, we faced challenging weather conditions early in the year, which impacted the entire industry. Additionally, we've experienced higher-than-expected declines in the overall Seltzer segment. However, data from Circana indicates a slight improvement in Q2 compared to Q1 and a better performance from an industry perspective than in the second half of last year. Some key drivers of these trends appear to be lifestyle choices and some consumers shifting to other categories. Nonetheless, core beer drinkers remain incredibly loyal, maintaining their share of spending and volume in beer. We've observed significant shifts within the industry, driven by the ongoing growth in Mexican imports and flavored beverages. Our brands, Coors Light and Miller Lite, are gaining industry share. Ultimately, what matters most is that more consumers are choosing our beers over those of our competitors, regardless of the segment. These are my overall observations about the industry, Eric.

Thanks, operator. Good morning, everyone. So Gavin, this may be a hard question to answer, as we're still really only halfway through this year. But I would love to get your perspective on how you see the company's growth algorithm evolving in light of the share shifts we're seeing. Obviously, great to see the share gains, but you're also kind of increasing your exposure to an area of the industry where growth has been challenged for some time. And I know, you had previously communicated that you expect to exit this year with stronger bottom-line growth versus the low-single digits originally targeted for this year. So I would just be curious, how do you think about the ability to kind of grow off of this elevated base especially if some of these share gains prove to be less durable? Thanks.

Thank you, Peter. We'll provide more details during our Strategy Day in October, but I want to highlight a few points beforehand. When we began implementing our revitalization plan, our goal was to achieve consistent top and bottom-line growth, rather than sporadic gains. This is how we assess our progress. Additionally, we are seeing improvements in both share and brand performance across all markets where we operate, not just in the United States. Canada and the United Kingdom are also showing positive trends. In the US, we gained the highest dollar share in the second quarter. In Canada, our volume increased by 1.5 points through May. Our premium light dollar share grew by nearly 11%, while premium beer in Canada rose by 2.4%. We experienced growth across all our core brands in both the US and Canada, and we're continuing to improve our economy segment performance. Our focus is on retaining and attracting even more consumers to our brands, which is why we are investing $100 million in the latter half of the year. This substantial investment reflects our commitment to maintaining the momentum we are seeing, as indicated by the data, including new tap handles and display dollar share gains. We'll continue to strive for further growth, Peter. I'll stop here until our strategy day, but we will share more insights in early October.

Great. Thanks. I was curious if you could talk a little bit about operating leverage because I know a couple of times, Gavin and Tracey, both referenced that 2Q is normally a time when you're producing pretty close to full capacity. So as we think about the balance of the year and starting to see the structural share shifts in market share persist. If the higher volume growth if we start to see more operating leverage kind of on a year-over-year basis because the delta is bigger in the so-called shoulder quarters than would have been, for example, in 2Q, meaning the upside in your production volume is actually higher later in the year versus 2Q because this is already a seasonally very strong volume production period.

Yes. Let me provide some insight and additional details regarding our leverage and operating leverage. On an enterprise level, about 20% of our underlying cost of goods sold is made up of fixed costs. This varies by geography and is influenced by changes in year-over-year volume. On average, fixed costs represent about 20% of our enterprise cost of goods sold. Furthermore, our marketing strategy facilitates flexibility, allowing us to effectively apply commercial pressure to our brands. As Gavin highlighted, we will be increasing our marketing spend by $100 million in the latter half of the year. From a broader perspective on margin drivers, we have noted that the end of the PET contract will benefit our margins despite it resulting in a revenue loss. Overall margin expansion, along with various efficiency projects and ongoing cost-saving initiatives, will significantly contribute to margin growth in both the medium term and this year.

Thank you very much. I have a couple of follow-up questions, Gavin. First, you mentioned that on-premise performance was stronger than off-premise, but I didn't catch by how much it improved. You also mentioned winning 12,000 tap handles in Q2; could you provide an idea of what percentage that represents of total tap handles? Additionally, we are noticing some weakness in the overall market, particularly in the below premium segment. Is this something you're experiencing too, not just within your business but in the broader market? Thank you.

Thanks, Rob. Lots of questions there. I'll take your last one first. No, we're not seeing any slowdown in our economy portfolio. As far as on versus off-premise, you didn't hear it because I didn't say it. And we're not going to get into that level of detail, but suffice it to say that on-premise grew, I would say maybe low single digits better than the off-premise. What was your second question? The tap handles. It's a meaningful number, Rob, and that's only Miller Lite and Coors Light and Blue Moon, which I referenced. Let's say around 10% higher. Meaningful for us.

Hi, everyone. One quick question just on the investment plan for the back half of the year, just given the year-to-date strength makes total sense. I'm trying to understand the tight capacity relative to the investment. It sounds like you're keeping up with demand, but just have you contemplated a dynamic where this accelerated investment into the back half of the year accelerates demand, but you're not able to keep up with the demand. I totally understand the brand building for the medium to longer term, which makes complete sense. But it does sound like this is going to be supportive of perhaps even higher demand. I'm just trying to frame how much excess capacity you might see in the system. If indeed, you do see a step-up with this increased investment activity in the back half? So thanks very much for that.

Thanks, Chris. Look, our tightest period obviously is always during the summer. And we always see a fall off after major holidays, just like we did in July 4th and we are currently rebuilding the inventory as we speak, and we'll continue to rebuild it in August. And then we'll have a fall off coming out of September. Overall consumer takeoff traditionally does fall off in the fourth quarter. So it provides us a good opportunity to get inventories back to where we would like to have them going into next year. Our marketing activities, as I said, is not just limited to the United States. We are putting more money into our other markets as well behind the momentum of a brand like Madri, behind the Coors Light and Molson trademark brands up in Canada behind some strength in certain territories in our Latin America business. But it's also true to say the lion's share is in the United States. And frankly, at a very, very high level, two kinds of marketing right in selling expenses, some drive shorter term behavior, which we're investing behind, and some drives longer-term brand health, and we're going to be doing both. So as I said, we don't have unlimited capacity, but certainly perhaps coming out of our system and then the shoulder quarters, as I think Lauren referenced in the fourth quarter and the first quarter, give us ample opportunity to maintain inventory and supplies where we want them to be.

Hi. Thanks, operator. Good morning, Gavin. Good morning, Tracey. I just had two sort of related questions about free cash flow. One, Tracey, if you could just talk about the two and a half times leverage target and just why that's kind of a desirable target just given how much cash flow tap the company throws off, and it just seems a little bit conservative. So just kind of what the thinking was there in terms of getting to the two and a half times? And then I just had one other related follow-up.

Yeah. So look, we did a lot of analysis, what was the desirable leverage target for us to have, and we got to the two and half times. And remember, we've been very vocal and make sure that we maintain our investment-grade rating. And over time, we want to improve our investment grade rating. And so it makes sense for us to continue to look at that leverage ratio, reduce our net debt that drives us towards that upgrade in terms of investment grade. So, yeah, it's just really important to us. And so we'll continue to look at that, Bryan.

The guidance for free cash flow this year is approximately $1.2 billion, with a margin of plus or minus 10%. A question we are receiving is whether maintaining this year's benefits would result in a typical cash flow, or if factors like reduced capital spending or other influences on free cash flow conversion would lead to higher levels if we adjusted our base. In other words, would free cash flow still be elevated this year even without any unusual expenses affecting cash?

No. I mean, look, obviously, capital expenditure is one of the things that we look at. But I think we've been quite consistent with our capital expenditure. And we've also said that any investments we make are not going to drive our capital expenditure up significantly. Even the investments that we've made in new breweries in Canada, we built those two new modern breweries in Canada, we're busy modernizing our G150 Brewery in Colorado. We built capabilities in our breweries, whether that's the flavor capabilities or a variety of packing capabilities. All of that is within that range of around $700 million, which is the guidance that we've given for this year as well. So I don't see a significant uptick in anything CapEx related or anything unusual. I mean the one thing is, at the end of the year, obviously, working capital will be a driver of our free cash flow but yes, nothing out of the ordinary.

Thank you and good morning. I wanted to revisit the capacity question in the US from a different perspective. It appears that the financial volumes you shipped in the Americas for both the quarter and year-to-date are lower than what you shipped in the first half of 2020 and 2021. Is there a specific reason for this? Does it reflect the capacity that has been removed from the system? As I consider the second half of the year, I'm trying to determine a theoretical maximum for what you could ship. In the second half of both 2020 and 2021, you managed to ship around 32 to 33 million hectoliters. Is this achievable in 2023, or is the capacity simply not available?

Yes. Steve, look, we don't have unlimited capacity, as I said. But obviously, we had a strong May and June shipments, well above anything that you would have seen in 2020, 2021, 2022. And obviously, I think I've made the point we had higher inventories coming into the second quarter at the end of March, and that might have affected some of our shipments in the sort of first part of April. So there is that as well. We have long had a very robust program of seasonal workers and some are temporary workers which, frankly, if we needed to, we could continue even into the shoulder quarters. We traditionally haven't found that to be necessary. But in the event that it did, we could extend our summer brewery performance into the shoulder quarters. I'd also think, Steve, just to remind you that we are seeing pets come out, and that will free up a lot of capacity for us. And it will free up and simplify our breweries. There won't be so many changeovers. There will be longer runs, much more effective and efficient. And as Tracey said, we start to see the benefit of that coming through at a faster rate in the second half of this year in the fourth quarter than we did in the first half, and then obviously, that will accelerate even further into 2024. So based on what we know now, we've got the capacity to supply the market demand.

You guys, can hear me okay now?

Yes. We can Filippo.

I want to revisit your guidance for net sales growth on a constant currency basis of high single digits. It seems, Gavin, that you mentioned the momentum continued in Q3 for Coors Light and Miller Lite at the consumer level. There should be a slight recovery in financial volume as you ship ahead of depletions to replenish inventories. Can you share what other headwinds, aside from the PABs volume in Q4, you anticipate might slow momentum in the second half? Is there anything else we should be aware of? Thank you.

So the other thing also just to note is the pricing. So recall, the impact of our pricing increases stepped down in the second half of this year as compared to the first half because of the pricing that we took in 2022. And then as we mentioned, we expect the pricing for this year to be more in the historical average of around 1% to 2% in the U.S. We also are a little bit cautious around the consumer particularly in Central and Eastern Europe, as Gavin mentioned in his remarks as well, looking at the competitive environment and then you mentioned the contract going volume coming out as well. So, I would say those are the big things to consider.

Okay. Thank you, operator, and thanks, everybody, for joining us today. I know if you do have additional questions or may have additional questions that we weren't able to answer today, please follow up with our IR team. We look forward to talking with you, many of you as the year progresses and certainly looking forward to seeing you at our Strategy Day in October. So with that, thank you all for participating in today's call. Have a great day.