Molson Coors Beverage Company (NYSE:TAP) Q3 2023 Earnings Call Transcript

Molson Coors Beverage Company (NYSE:TAP) Q3 2023 Earnings Call Transcript November 2, 2023

Molson Coors Beverage Company beats earnings expectations. Reported EPS is $1.92, expectations were $1.53.

Operator: Good day, and welcome to the Molson Coors Beverage Company Third Quarter Fiscal Year 2023 Earnings Conference Call. You can find related slides on the Investor Relations page of the Molson Coors website. Our speakers today are Gavin Hattersley, President and Chief Executive Officer; and Tracey Joubert, Chief Financial Officer. And with that, I’ll hand it over to Greg Tierney, Vice President of FP&A, Commercial Finance and Investor Relations.

Greg Tierney: All right. Thank you, Brita, 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 you to — 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-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, U.S. share data references are sourced from Circana. Further, in our remarks today, we will reference underlying pretax income, which equates to underlying income before income taxes on the condensed consolidated statement of operations. And with that, I’ll hand it over to Tracey.

Tracey Joubert: Thank you, Greg, and hello, everyone, and thank you for joining us. We will be doing things a little bit differently this quarter. I will open and address our results, our guidance and importantly, our fourth quarter expectations at the start of the call, and then Gavin will close. In the third quarter, we delivered another set of strong results. Our net sales revenue grew an impressive 11%, driven by double-digit growth in both our business units. Our continued focus on efficiencies and cost savings, combined with volume leverage, significantly offset inflationary pressures resulting in meaningful margin expansion. This led to 43.5% growth in underlying pretax income with both business units up strongly. And with free cash flow nearly doubling for the first 9 months of the year, we continue to prudently execute our capital deployment plan, investing in our business, reducing net debt and returning cash to shareholders.

This performance underscores the strong momentum in our business, which is a function of the foundation we have built to sustainably grow both the top and bottom line. And this is exactly what we have done both in 2022 and year-to-date in 2023, all while navigating a challenging and dynamic global macroeconomic environment. And while these macro conditions remain, the fundamental strength of our business, coupled with the actions we are taking to sustain the momentum we have achieved, gives us confidence for another year of growth in 2023 and beyond. For 2023, we are reaffirming our high single-digit top line growth guidance, but narrowing our expectations to the high end of that range. And we are raising our underlying pretax growth guidance to 32% to 36% as compared to 23% to 26% previously.

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Q&A Session

We are also reducing our interest expense guidance to $210 million, plus or minus 5% as compared to $225 million, plus or minus 5% previously. All other previous guidance metrics as detailed in today’s earnings release remains unchanged. There are a few key reasons for these guidance changes. First, the U.S. beer category has been healthier than we had projected when we revised guidance on August 1. In other words, its rate of decline is better than we had expected and better than it was earlier this year. Second, our brand volume growth is stronger than we had expected. In fact, we anticipate our global brand volume growth to accelerate in the fourth quarter. Third, pricing across our global markets and in particular, in Canada, has been better than we had planned.

And fourth, due to higher-than-expected cash balances, we now anticipate lower net interest expense. Okay. With that in mind, let’s discuss the fourth quarter. Our updated full year 2023 guidance implies mid-single-digit top line growth and at the midpoint, a high single-digit decline in underlying pretax income for the quarter. Now the fourth quarter growth rates do not imply a reversal in the trend for our brands in the U.S. In fact, our October brand volume performance is currently up pacing our trends in the third quarter, and we expect continued share growth roughly in line with what we saw in the third quarter. In short, we are not seeing anything that suggests that our market share gains are slowing. So let’s talk about some of the key factors driving fourth quarter performance.

First, we will experience a reduced level of pricing benefit in the U.S. and EMEA and APAC. For example, we are lapping an approximate 5% general increase in the U.S. this fall. As anticipated and is supported by the strength of our brands, we took pricing in many of our U.S. markets in the 1% to 2% historical average range. Second, we expect our U.S. brand volume to outpace financial volume growth in the fourth quarter, and this is due to a couple of reasons. We ended the third quarter with healthy U.S. inventory levels. This was due to our strong brewery performance, which enabled us to ship ahead of expectations in the quarter. And this put us in a great position in the fourth quarter, providing the opportunity to give our employees some much deserved time off around the holidays.

And it also allows us to execute planned downtime in the U.S. network for system maintenance. Overall, we expect to be well positioned to build inventory in the fourth quarter ahead of peak season. Also recall, we have a large U.S. contract brewing agreement winding down ahead of its termination at the end of 2024. We continue to expect volume declines under this contract to accelerate in the fourth quarter, resulting in a quarterly headwind of approximately 2% to 3% in Americas financial volume. Third, underlying COGS per hectoliter is expected to be a headwind in the fourth quarter. This was due to continued high inflation in EMEA and APAC and lower volume leverage than in the previous 2 quarters. And fourth, we expect total MG&A to be up approximately $90 million, which is driven by both marketing and G&A.

For marketing, this includes approximately $50 million higher spend in the fourth quarter. And this increase is particularly impactful in a lower profit quarter like the fourth quarter. G&A is expected to be up primarily due to higher incentive compensation given our strong performance this year. Okay. So now let’s talk about our third quarter performance. We delivered another quarter of strong results with net sales revenue growth supported by both rate and volume. Net sales per hectoliter grew 7.6%. This was driven by positive global net pricing, given the rollover benefits from the higher than typical increases taken in the fall of 2022 as well as favorable sales mix led by geographic mix. This geographic mix was due to particularly strong performance in the U.S. In fact, consolidated financial volume increased 3.2%, while U.S. shipments were up 7.2%.

This is a result of our strong U.S. brewery performance, which enabled us to ship ahead of our expectations, but also it was due to the continued strong momentum behind our premium brands. Consolidated brand volume increased 1.1% with results varying by market. Americas brand volume was up 3.6%. Growth was led by the U.S., where brand volume was up 4.5%. In fact, Coors Light and Coors Banquet were each up double-digits and Miller Lite was up high single digits. But there were some notable timing impacts that mark the underlying strength in the U.S. brand volume growth. First, there was one less trading day in the quarter. On a trading day adjusted basis, U.S. brand volume growth was 6.1%. In addition, we were cycling significant loading ahead of the 2022 for price increases.

And there was some shifting of calendar and holiday timing as compared to the prior year, which had an impact. Canada brand volume increased 0.2%, benefiting from growth in its above premium portfolio. While industry softness weighed on brand volume, we continue to grow share in Canada for the quarter, adding over 3 share points for the 3-month period ending August. In Latin America, while mix improved, brand volume was down 2.5%. This was largely due to industry softness and economic conditions in some of our key markets in the region. And in EMEA and APAC, brand volume declined 5.2%. The consumers in Central and Eastern Europe continued to be affected by inflationary pressures and UK demand was impacted by rainy weather. That said, our above premium portfolio continued to benefit from strong growth from Madri, which grew brand volume over 50% in the quarter.

This strong top line performance translated to even stronger bottom line results, and this was across both business units, with underlying pretax income up 32.2% in Americas and up 58.1% in EMEA and APAC. We achieved this by prudently managing costs while continuing to invest strongly behind our brands. So let’s talk about some of these drivers. Underlying COGS per hectoliter were up 2.6%. As expected, inflationary pressures continue to be a headwind, but moderated from the first half of the year. But the story differs by market. In the Americas, underlying COGS per hectoliter decreased 1% as cost savings, volume leverage and lower logistics costs more than offset the impact of direct material inflation. While in EMEA and APAC, inflationary pressures remained significant, driving underlying cost per hectoliter up 15.8%.

To break down the drivers a bit more, as you may recall, we break up COGS into 3 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 drove over 85% of the increase and was mostly due to higher materials and manufacturing costs partially offset by cost savings. The impact of volume leverage had an 80 basis point benefit in the COGS per hectoliter in the quarter. Other COGS per hectoliter drivers included mix, which accounted for the remainder of the increase and was largely due to geographic mix. Underlying marketing, general and administration expenses increased 11.6%. About half of the planned incremental $100 million in marketing spend in the second half of 2023 was in the third quarter, and it largely went to supporting the momentum of our core brands.

Our investments focused on retaining our existing printers and attracting new ones, including using addressable channels or places where we can use data to more precisely target them. And further, we continue to strongly invest behind live sports. Based on our brand health and share performance, we believe that this investment is working. Also, general and administration expenses were higher. This was primarily due to incentive compensation expenses, which is a variable expense tied to our operating performance. And as you have seen, it’s been a very strong year. Turning to capital allocation. Our priorities remain to invest in our business to drive sustainable top and bottom line growth, reduced net debt as we remain committed maintaining and, in time, improving our investment-grade rating and return cash to shareholders.