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.

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.

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. We are also reducing our interest expense guidance to $210 million, plus or minus 5% as compared…

Thank you, Tracey. In the third quarter, we continued the growth trajectory that we've been on for nearly two full years. In the quarter, each of our top 3 global markets are growing net sales revenue, volume, share or all 3. In the U.S., our shipments were up over 1 million hectoliters compared to the third quarter of 2022, and we were the top volume share gainer in the industry. Coors Light and Miller Lite are on track to collectively deliver net sales revenue growth for the third straight year, something that had not done since Miller and Coors came together in 2008. Coors Banquet volumes were up nearly 30%. Coors Light volumes were up double digits and Miller Lite volumes were up high single digits. We were the top dollar share gainer in the U.S. economy segment. In fact, our two biggest economy brands grew dollar and volume share of industry in the quarter. We have gained the second most U.S. share of flavored alcohol beverages of all major brewers. We grew share nationally in Canada in every region of the country and in every segment of our industry. Coors Light widened its position as the #1 light beer in the country, a position it has held since March. And the Molson brands grew share. Miller Lite grew volumes by 50%, and we grew more share in flavor alcohol beverages than any other company in the industry. We were the best-performing brewer in the UK in both value and volume share. Adding some very exciting news from the UK market, we are now the #2 brewer in London after ranking a distant #5 player only a few years ago. The transformation of our portfolio in the London market is a real testament to our team's commitment to a clear…

[Operator Instructions] We now have Lauren Lieberman from Barclays.

Great I was just curious if you could talk a little bit about going back to the beginning of the call, Tracey's comments and in the release on the beer category in the U.S. being stronger than what you had previously expected. So any color you can add on that would be great. Kind of what do you think some of those key drivers are? Is it around key consumer cohorts? Just color on the beer industry backdrop would be great.

Thanks, Lauren. Look, I mean, in Q1, the industry was down 2.7 and Q2 was down 2.5. And in Q3, it was down 1.3, that's in the U.S., obviously as per Circana. So an improvement and as Tracey said, that wasn't the level of improvement that we were expecting to see. And obviously, hard seltzers are still a big part of that decline. Certainly while some buyers are switching categories, and certainly, our data says that some drinkers have left within the category, we're gaining share, Miller Lite, Coors Light are healthy and growing share strongly. And that share has been stable for the last 25 weeks. It's a structural change to the industry. That is sticking, whether you look at it on a 1-week basis, a 4-week basis, a 13-week basis or a 26-week basis, it has stuck.

We now have Bryan Spillane of Bank of America.

So Tracey, I guess I had just a question -- two questions around cash flow. One is I know we took the pretax profit or the -- I'm sorry, the profit after tax guide up, but you left the free cash flow range. So I guess it's just why not, I guess, a higher conversion on free cash flow and then -- or on cash flow? And then second to that, just again, you've got some cash hanging around and the stocks performed the way it has. So just any thought -- any way we should be thinking about whether or not you put some of that cash to work to buy back shares?

Yes. Thanks, Bryan. So look, the free cash flow range that we gave was already quite wide. So we're comfortable just leaving it where it is. In terms of capital allocation, look, our priorities haven't changed. It's those 3 buckets that we speak about. It is investing in our business to drive the sustainable long-term top and bottom line growth. And that could be investment in our breweries or from an M&A point of view, the sort of spring uphill’s approach. We will continue to reduce net debt with a desire to improve our investment-grade rating. And as I remarked, we did get an upgrade from S&P and then returning cash to shareholders. So we did announce the $2 billion -- up to $2 billion share repurchase plan over the next 5 years. And we'll consider all of those things. I think the good thing is that with our strong free cash flow delivery, we do have optionality as to how we can balance the allocation of capital behind these priorities. But as always, we'll run all of the ideas through our models and make sure that we're investing where we are driving the higher return for our shareholders.

We now have Andrea Teixeira of JPMorgan.

I was just going to talk about a little bit of the share of voice. And I think you in the Analyst Day, you obviously discussed that against the incremental spend this year. Is there any KPIs you can talk about as you're tracking the development of the incremental spend? And if there is anything -- I know most of that $90 million, I believe, incremental spend for -- I'm not mistaken in the quarter, it's mostly compensation. But wondering if it's going to reaccelerate even further in the fourth quarter, so it sets you up for 2024? And on that, I was just trying to get -- Gavin, you mentioned that your market share continues to be solid. I think one of your main competitors talking about light recovering a bit. I know, obviously, from a variable base, anything you would be expecting to see and I understand, obviously, you may not count on that being -- that share gain being structurally 100%, but most of it could be. So I was wondering if you can comment a little bit more on the market share performance that is baked in your outlook next year.

Thanks, Andrea. Look, from a marketing point of view, we're focused on the quality and effectiveness of our marketing spend versus the sort of level of spend that drive the best returns. And we certainly try and make sure that every single dollar counts. We've got great tools that we've had for a number of years, which evolve and they're designed to make sure that we get the required marketing effectiveness. We know which creative assets are working hardest and which channels are working hardest for that. So we're going to continue to put the right commercial pressure behind our brands to support the momentum. I just want to maybe correct on one thing, right? So the extra $90 million in the fourth quarter, there's about $50 million of that is the marketing. And that's part of the $100 million we said we're going to spend on extra marketing in the second half of the year. So we spent half of that in the third quarter behind really big bid drinking occasions like football, which we'll do again in the fourth quarter. And then obviously, a large component of what's left is, as Tracey said, the employee-related costs. Look, as far as share gains are concerned, our share position has been stable for the last 25 weeks. It's a structural share change to the industry that we believe is going to stick. And yes, I know there's been a lot of noise about trends changing and whether these results are sticking. So let me just share the facts and these aren't our facts, these are Circana and the fact is total share for Coors Light and Miller Lite has stuck over the past 7 months through the latest 4 weeks of track channel data on a dollar change basis, Coors…

We now have Peter Grom of UBS.

So I was hoping to get some thoughts on just kind of the underlying COGS per hectoliter, which was kind of the lowest year-on-year increase in quite some time. Maybe just first, can you just help us understand what's embedded in the guidance for the fourth quarter? I think you mentioned an increase in underlying COGS due to high inflation in EMEA and APAC. Is that just an increase year-on-year? Or is that an increase sequentially versus what we just saw in 3Q? And I know we're going to get more details on '24 in February. But maybe you can just give us some insight in terms of how you're thinking about some of the key cost buckets based on what we can see today.

I'll take that. So yes, look, we did say that we expect inflation to continue to be a headwind for us in the back half of the year, but to moderate. Now as it relates to Q4, we do expect our COGS per hectoliter to be a headwind. And this is because of the continued inflationary pressure in EMEA and APAC region, where we've seen continued inflation in the double-digit range. But the other drivers of our Q4 COGS per hectoliter would be a lower volume leverage in Q4 lower than Q3 and Q2. For those reasons that we spoke about coming out of Q3 and into Q4 and then also expecting our brand volume to outpace the financial volume growth. And also, we've got higher planned maintenance costs in the fourth quarter. So those would be the big drivers of COGS per hectoliter in Q4.

We now have Bonnie Herzog of Goldman Sachs.

I guess I wanted to ask a little bit about your MG&A expense. Could you maybe talk a little bit more about the areas where you're going to be investing incremental marketing dollars as you kind of talk through the end of the year. And then should we think about you continuing to invest at a higher rate we think about next year to support your brands and the growth that kind of Gavin, you mentioned in the stickiness. Just trying to think about or trying to hear how you're thinking about this.

Thanks, Bonnie. Yes. Look, without giving a complete look under the tent for competitive reasons, obviously, we're going to continue to drive strong pressure in the market with our very effective campaigns have made to chill with Coors Light and taste like Miller Lite. We've got significant increase is planned and already executed in the third quarter and also in the back half of this year, especially behind the high beer consumption moments like football is. We're also going to leverage our targeted media and digital tactics to retain the new drinkers, which we've got into our brands, primarily Coors Light, Miller Lite and Coors Banquet. We've also got some innovation that's coming in the fourth quarter. Blue Moon non-alc is launching in December, so that we're ahead of the dry January timeframe. And we're going to invest to make sure that we get more space in store. So whether that's continued to capitalize on the share that we've gained of displays, we've gained more than any other major brewer. We're going to invest in appropriate areas to make sure that our retailers understand that the incremental shelf space and the tap handles that we're getting, that we're going to support that with strong marketing. And then we're going to invest in our EMEA, APAC business, particularly behind brands like Madri, Carling and Ožujsko. So those would be the general directions and themes, Bonnie.

We now have Filippo Falorni of Citi.

I had a question on your U.S. brand volumes even on an adjusted basis, the 6.1 that you quoted, it still looks below what we're seeing in track channel data. So maybe can you comment on the performance in on track, on-premise and other smaller of premise retailers? And then thinking about Q4, you mentioned you expect brand volume to accelerate by your planning to ship below brand volume. It didn't seem like the over-shipment in Q3 was that large? So maybe you can comment on where inventories are in the distributor channel that will be helpful as well. And whether we should think if you don't ship over in Q4, should we see a catch-up in Q1 of next year?

Thanks, Filippo. Tracey, do you want to take the shipment question, and I'll take the sort of Circana or Molson number, difference between ours and what you're seeing in track channels. I would say there's probably three big differences between the number we disclosed and the track channels you highlighted one of them, which is the trading adjustment. But then the other one is obviously the significant load-in that took place at the end of the third quarter last year, which obviously we didn't have this year because we had a large price increase last year. And from a track channels point of view, that measures consumer behavior, whether our brand sales represent sales that our distributors put into the retail stores. So the retailers would be buying ahead of the price increase that doesn't necessarily mean that the consumer is buying ahead of the price increase. And those would be the two biggest differences between those two numbers, Filippo. From a shipments point of view, Tracey, do you want to take that?

Yes. So look, we've spoken about our expectations for our brand volume to exceed our financial volume and really that's because of the healthy inventory levels that we ended Q3 on -- which enabled us to ship ahead of our expectations. So just in terms of our inventory levels, like coming out of Q3 and even today, we are at higher inventory levels than we saw in the prior year. So again, we feel very comfortable with the inventory levels going into Q4, coming out of Q4 and being able to have inventory levels healthy to -- as we go into peak selling next year.

We now have Vivien Azer of TD Cowen.

The earnings season thus far, we've heard some cautionary from some of your peers around negative mix shift, shifting to smaller sizes, some weakness in the lower income consumer more broadly. Student debt repayments obviously came October 1. I know you guys probably hesitant to comment on intra-quarter trends. But I was just wondering, Gavin or Tracey, some perspective on whether you're seeing similar dynamics where there might be more refined in terms of spending, more choiceful spending?

Yes. Thanks, Vivien. You broke up a little bit there, but I think I got the gist of your question. From an overall consumer health point of view, we do remain cautious given the macroeconomic environment that is out there. We're particularly cautious in Central and Eastern Europe, which has been pretty consistent with our view for a while, right? I mean the tough economy, the high inflation has impacted our Central Eastern Europe business much more than our UK business, which is honestly more weather-related. We do, though, expect conditions to improve as inflation falls in Europe, and we are starting to see inflation falling there. In Canada, we are seeing softness. It's a tough economic environment out there. We're particularly pleased with our own performance in Canada, where we've really grown strongly. And actually, our share growth in Canada is higher than it is in the United States. In March, Coors Light took over as the #1 light beer and has maintained that position and even Molson's growing share of industry volume and NSR. In the U.S., we're still seeing premiumization with growth in RTDs and spirits albeit at a slower rate because of the falloff in sales consumers, to your point, are seeking more value through purchasing decisions, which they're making, either into the larger pack sizes like 30 packs or into the smaller pack sizes singles and 6 packs. The on-premise is running pretty at pace with the off-premise business. And we haven't seen any material trade down into our economy brands. if it happens, we're ready. I mean, Miller High Life and Keystone in particular, are well positioned and are showing very nice improvement given where they were. So if it comes, we believe that the portfolio that we've got is ready for it.

We now have Rob Ottenstein of Evercore.

Great. Just a few follow-ups on some of the points that have been mentioned. So Gavin, strong results. You're obviously super confident in the business and the momentum disconnect, right, in terms of what the stock is doing, I think you're trading at about a 10% free cash flow valuation. So given that, and I know your general points on capital allocation. I guess the question is, is there any impediments or any issues in terms of buying back stock now as in -- between now and the end of the year. So is there anything to stop you from doing that? So that's question number one. Question number 2 is just -- you had mentioned that the business was better in October than in Q3. Is that global? Is that U.S., Canada and Europe? Or is it just a particular region?

Thanks, Rob. To your second question, I'll take that first. It is global. It's across the spectrum, not just the U.S. To your earlier question around why I believe and why we're confident that we're going to continue to deliver. I'm not going to rehash the points I made earlier about our share position have been stable for the last 25 weeks and the gains we've made being very sticky. But I would say to you that over the last 4 years, Robert, we made a lot -- we made a number of statements when we launched our revitalization plan. We said we would streamline our company and deliver $600 million savings, and we did that. We said we would grow the top and bottom line of our business. And by the end of this year, we will have done it 2 years in a row. We said we would strengthen our core brands, and we've done exactly that. we said we will become more than just a beer company, and we have become more than a beer company, we also said we would grow more of our portfolio in above premium, and we've done exactly that, not just in beyond beer but also in beer with a brand like Madri.

Sorry, Gavin, I don't mean to interrupt you. I mean I know time's short. I wasn't challenging that. I was just saying, in the light of that, right, in the light of your progress, given where the stock is coming down here in the light of everything you're saying, which I'm not challenging. Is there any impediment? Is there anything to stop you from buying back stock between now and the end of the year? And again, sorry for interrupting.

I'm glad you agree with all my points, Robert, I had a few more I was going to make too.

I am not sure that, there's no miscommunication.

If we -- as Tracey said, if we look at our capital allocation priorities, we're where we need to be. We have an approved buyback program. And Robert, as we are required to do, we will disclose any and all shares that we may buy in a quarter when we when we release our Q, I think, in February of next year.

We now have the next question from the line of Nadine Sarwat of Bernstein.

Two questions from me. So first, with earnings clearly coming ahead of expectations today. You guys have taken a full year guidance. So that's clearly not just a timing issue. But could you perhaps give us a sense of how much of that stronger earnings are driven by temporary versus permanent factors, perhaps particularly thinking to any temporary benefit from positive operating leverage on the fixed cost base, given shipments exceeded depletions? And then secondly, circling back to the point of market share gains, sustainability, I fully appreciate your comments on the latest scanner data and when the facts are there. I believe ABI, though quoted some survey data indicating a willingness of some lost Bud Light drinkers to return to the brand? I'd be curious to hear if you have any survey data or additional consumer insights that you could share that adds to your conviction that those market share gains will continue to be sticky.

Thanks, Nadine. Do you want to talk about operating leverage, Tracey, and I'll talk about the market share gains and the stickiness.

Yes. So Nadine, in the prepared remarks, we spoke about the volume leverage, benefiting us by about 80 basis points on the COGS per hectoliter increase. So yes, that's for Q3, just in terms of operating leverage, our fixed cost comprises approximately 20% of our enterprise underlying COGS Obviously, volume leverage helps us with those fixed costs over more of the volume. And so as we saw in Q3, it does have a fairly significant impact -- and also, that does depend on -- the year-over-year does depend on the markets. In some of our markets, the fixed cost may be slightly higher. So the 20% that I've given you is really on an enterprise basis.

Thanks, Tracey. Look I don't -- I can't really comment on Anheuser-Busch's polling data, Nadine. But what I can say to you is that sales of what matter, right? And the sales are continuing as they have done since early April. As I said, the share gains are unchanged in 4 weeks, in 13-week and in 26 week. And in fact, in the latest 4-week read the big brand is actually getting worse. So that's the best indication of what's actually happening is -- the share has come to us and it is sticking and has done now for 7 months. And we've got a bunch of plans in place, which we showed our distributors, and we revealed a little bit of it at our Strategy Day, which highlights our intention to retain that share gain.

We now have Eric Serotta of Morgan Stanley.

So coming back to U.S. brand volume. You called out the double-digits for Coors Light Banquet and the high single-digit for Miller Lite. Your overall depletions were up in mid-single digits, which implies the rest of the portfolio was a lot lower. I realize a lot of those segments are not growing but bringing life to [indiscernible] now. But can you give some color as to how your -- I'd say your performance in the rest of the portfolio, either by segment or call out a couple of brands and how that is tracking versus...?

Yes, Eric, that was tough to catch the total drift of your question. Let me try. Obviously, there is the trading day adjustment we talked about, there is the timing of holidays, and there is the timing of the price increases that come into that. We obviously do have some total brands, which impact us. We are seeing some of the same trends as everybody else is seeing from a seltzer point of view, in particular. And that's why we've taken a much more broader approach to flavor. The total flavor segment seltzers, FABs and RTDs was about 5% of the category. That number has tripled to about 13% now. It's a $9 billion business. But there's no question that seltzer within the flavor category is declining fairly meaningfully. You've seen that with our brands, and you've seen that with our competitors' brand. The data that we've looked at from a hard seltzer point of view, shows that it provided an entry point into flavor for consumers. And once they discovered flavor, they started to experiment and trade into FABs and RTDs and so on. And that's why we built a diversified portfolio of brands. And from a performance point of view, we're very pleased with the performance in the flavor space. We're got #2 share gainer for major brewers in FABs. We've got the #3 and the #5 hard seltzer in the category or admittedly a declining category. We've got the top innovation in flavor in 2021, 2022, in the summer of 2023. We've got Simply Spiked within that space, which is on fire. It's got nearly 5% of the FAB segment. And we're bringing new bold and better brands to the space with the Peace Hard Tea and the launch of Happy Thursday. From a premiumization point of view, Peroni doing well. Blue Moon is operating in a challenged segment, as you've seen from a craft point of view, it's still the #1 brand in the craft segment. But we've experienced softness with Blue Moon largely due to those the craft category challenges. We've got a really clear plan in place of how we're going to change that. We're already starting to see positive display trends. And we've got a big year plan for Blue Moon in 2024, which we unveiled for our distributors in September in which they like to like, and that includes new innovation, which is coming, as I said, in December. And then finally, in economy, yes, it's a challenged segment, but we're the top dollar share gainer in the economy space that we -- we're pleased with the performance of our two big brands there, Miller High Life and Keystone. So that's a walk around the park for you, Eric.

We have our final question from Chris Carey of Wells Fargo Securities.

One on the EMEA, APAC segment and then just a high-level question. The price mix tailwinds that we're seeing right now, how much of that is our premiumization within the business versus on-premise versus just straight less pricing? I'm trying to determine how much of this tailwind that we're seeing right now is perhaps sustainable structural versus maybe just a cyclical recovery of the business. And then I was wondering if you could just comment on competitive activity as we get closer to spring and spring resets. Are you seeing any notable shift in the market?

Sorry, what was the second question, Chris?

Competitive activity on spring resets.

Competitive activity, are you -- sorry, yes, I should have been more clear. Competitive activity for the total business, specifically in the U.S. as we get closer to spring resets as competitors are jostling for space. So are you starting to see any changes? Obviously, you're stepping up marketing spending in Q4 I don't know if that's why, but just a broader comment on whether you're seeing any developments from a competitive activity, specifically in the U.S.? And then the other question was on the pricing in EMEA and APAC and how much of this is sort of durable because of premiumization and or how much is perhaps just list pricing that all that will normalize and some cyclical recovery of your channel mix.

Chris, look, it's a bit of everything there, right? So I mean, obviously, we did get strong pricing in our EMEA, APAC business. Obviously, it varies by country and is driven largely by whatever the inflation environment is in those countries. But from a mix point of view, we're getting strong benefits from particularly the continued very strong growth in Madri, which is an above premium brand and as I confirm it was me or train that said it, but it's up 50% in the quarter and is continuing to grow strongly. It's one of the primary reasons why we're the #2 brewer in London, which was somewhat unthinkable a few years ago. So a large part of the overall UK business is now in the above medium space, and it is accelerating. So that's part of it. Hard to tell where pricing is going to land out in EMEA, APAC and it does vary by country. And it is driven largely by the local dynamics. I do think it's safe to say that it's not going to be at the historical levels that we've experienced over the last few years. From a U.S. point of view, from a price realization point of view, we put price into the markets that we were expecting to put it into in the fall. And as we've said before, I would expect pricing to fall back to more historical levels in the new year, the ones that go in spring. And from a shelf reset point of view, yes, I guess everybody is fighting for space. The beauty of our position at the moment is that we've got the facts and data to support meaningful increases in space for our brands. And the retailers that have gone in fall have given us tens of thousands of extra cubic feet of space. And we're going to fight for every square foot of space based on those trends as we head into the spring reset. So thanks, Chris.

Thank you. I would like to turn it back to Greg Tierney for any final remarks.

Okay. Very good. Thank you, operator, and I appreciate everyone joining us today. I know there may be additional questions we weren't able to answer, so please follow up with our Investor Relations team, and we look forward to talking with many of you as the year progresses. So with that, thanks, everybody, for participating, and we'll talk soon. Cheers.

I can confirm that does conclude today's call. Thank you all for joining. Please have lovely rest of your day, and you may now disconnect your lines.