Good day and welcome to the Molson Coors Beverage Company in Second Quarter Fiscal Year 2021 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. With that, I'll hand it over to Greg Tierney, Vice President of FP&A and Investor Relations.

Thank you, operator, and hello everyone. Following prepared remarks from Gavin and Tracey, we will take your questions. Please limit yourself to one question and if you have more than one question, please ask the most pressing question first and then re-enter the queue for follow-up. If you have technical questions on the quarter, you can follow up with our IR team in the days and weeks to follow.

Thanks, Greg. Good morning and thank you everybody for joining us today. Nearly two years ago we laid out the Molson Coors revitalization plan, a multi-year strategy to deliver sustainable top line growth that has eluded our business for many years, while at the same time delivering sustainable bottom line growth. Under the plan we have streamlined the company, only reinvesting those savings to build on the strength of our iconic brands, aggressively grow our above premium portfolio, expand beyond the beer aisle, enhance our capabilities, and support our people and communities. We had a few doubters then, and we’ve faced some unexpected challenges since, from a global pandemic to severe winter storms in Texas to a cyber-attack on our company. But nearly two years later we can say to those doubters with confidence that Molson Coors is on a path to deliver sustainable top and bottom line growth. Our performance this quarter speaks for itself. I say that because for nearly two years, we've talked a lot about the outputs of our revitalization plan—new investments, new partnerships, new product launches, and new campaigns. So today we’re able to start talking meaningfully about the outcomes from the revitalization plan and that’s an important shift. In the second quarter, despite ongoing pandemic restrictions, we delivered the most top line growth of any quarter in over a decade and we nearly achieved 2019 net sales revenue levels on a constant currency basis despite these pandemic restrictions. I'm incredibly pleased with this progress, but it's a strong indicator of what is yet to come through our revitalization plan. Our progress was primarily driven by three things. First, it was driven by the fact that we delivered the best brand mix in the United States since the inception of the MillerCoors joint venture in 2008. This significant premiumization of our portfolio was led by the strong growth of our US hard seltzers where we doubled our share of the US hard seltzer segment in the second quarter. We took over as the global brewer with the fastest growing US seltzer portfolio and we recently passed another major brewer to become fourth in total US seltzer share as we continue to move towards our goal of achieving a 10% share in the US by year-end. Those are outcomes. We are also continuing to see strong traction with our busy innovation. With these fast turning new Lemonade variety pack helping the Vizzy brand gain almost a full point of US share in the second quarter, and we just added another new package to their family with Vizzy Watermelon, which has been a hit with retailers thus far.

Thank you, Gavin, and hello, everyone. We posted a strong second quarter which exceeded expectations. We continue to make real progress executing our revitalization plan and we are starting to see the results in our operating performance. As Gavin noted, we continue to premiumize our brands and strengthen our core business, and our improved financial flexibility has enabled us to invest in our business while continuing to strengthen our balance sheet and to reinstate a dividend. Now, let me take you through our quarterly results in more detail and provide an update on our outlook. Consolidated net sales revenue increased 13.7% in constant currency, delivering 98% of second quarter 2019 levels despite continuing to operate with varying degrees of on-premise restrictions. Consolidated financial volumes improved 5.5% with brand volume growth of 3.1% driven by higher Europe volumes and favorable US domestic shipments. Our top line performance benefited from on-premise reopenings in the quarter for most of our major markets, as well as strong global net pricing, positive channel mix and historic favorable brand mix levels in the US, as we continue to premiumize our portfolio. Net sales per hectoliter on a brand volume basis increased 5% in constant currency, driven by pricing growth coupled with positive brand and channel mix, partially offset by geographic mix, given the strong growth in Europe and Latin America. This top line growth was somewhat offset by inflationary pressures, which impacted most consumer product companies, as well as increased marketing investments as we continue to execute our revitalization plan. Underlying cost per hectoliter increased 8% on a constant currency basis, driven by cost inflation including higher freight and packaging costs. However, with robust hedging and cost savings programs, we have been able to significantly mitigate much of the inflationary pressures. Marketing, general and administrative expenses in the quarter increased 25.3% on a constant currency basis as we cycle timing shifts and targeted reductions to marketing spend in the prior year period due to the pandemic. As planned, we significantly increased marketing investments in the quarter, putting strong commercial pressure behind our key innovations and core brands. Underlying EBITDA decreased 1.3% on a constant currency basis, but increased compared to 2019 second quarter levels. Underlying free cash flow was down for the first half of the year, a decrease of $238.2 million from the prior year period. This decrease was driven by roughly $500 million in benefits in the prior year related to tax deferrals due to governmental programs, and was partially offset by favorable working capital and lower capital spending.

Thank you. We will now begin the question and answer session. Our first question comes from Rob Ottenstein, Evercore.

Great, and thank you very much. Gavin, I'm wondering if you could talk a little bit about what you've learned so far about the hard seltzer market. Clearly, it seems that there are some issues with beer-branded trademarks, but at the same time you've got this proliferation of 700 brands or more. I understand there is competition from various ready-to-drinks, so I'd love to get your thoughts on that. And then, I also want to understand why you're not using the Vizzy trademark more in Europe and the UK, and why you feel that you need to have different sorts of trademarks there. So a lot of questions, just really love to get your thoughts on what you've learned about hard seltzers and what's going on in that segment. Thank you.

Thanks, Robert and good morning. Look, I mean, we've always said that the growth rates weren't going to continue at the elevated levels that others might have seen. You know Robert, it is really no surprise to us that stated growth is slowing because the category was starting last year with huge comps and we've said in the past that seltzers were a beneficiary of the on-premise shutdown due to such distribution exposure in the off-premise. As the on-premise reopens, there is less distribution. So this is not a surprise to us. I think we've been saying this for almost a year. We've also been saying for a while, even if it's growing at 10%, 20%, or 40%, there really isn't anything else in the beer space that's growing that quickly. So it's good for the beer category and it's good for us. In North America, in the US, we've got two very clear and differentiated winners from our point of view, and we plan to continue our focus on Vizzy and Topo Chico Hard Seltzer. Now, you referred to a Coors Seltzer. Robert, I would say to you that Coors Seltzer up in Canada is actually doing really, really well and it's already achieved double-digit share in some retailers. Between Vizzy and Coors Seltzer, they’re probably the most successful product launches that we've had for our company in 5 years up in Canada. We do believe that there will be a shakeout in the near future as many brands struggle to succeed in the crowded space, while Vizzy and Topo Chico Hard Seltzer continue to accelerate, Coors Hard Seltzer wasn’t. And so, that's why we made the decision in the US to discontinue Coors seltzer and commit our energy and resources, as well as the material supply we've got in our shelf space to Vizzy and Topo Chico. Of course, it's going to stay in Canada, as I said, it’s doing really well. The market dynamics are different there and the brand has performed well. In Europe, it's exhibiting some of the same trends as the US did in the early days. We've obviously tested all of our options from a brand point of view, and the early read was that Three Fold was the right brand to go with, and it's landed very well. We are building capacity there and I think we're well positioned in the UK to be a strong player if it takes off like it did in the US. The same applies to Central and Eastern Europe as well. That’s why Three Fold was the best brand and resonated really well with consumers there. The Central Eastern European team does a fantastic job from an execution point of view. So, the execution is really good and we actually have first mover advantage in Central and Eastern Europe. So, we feel very good about maintaining a leading position with that brand.

Yes, and thank you for that detail. The only other one was how do you look at the interaction between hard seltzers and ready-to-drinks? Some observers say that there really isn't much interaction. It's the same occasion. I'm not sure I believe that 100%, but I'd love to get your thoughts on the various ready-to-drink concoctions that are coming up and how you intend to play in that space going forward as well, I know you're doing a few things there. Thank you.

Sure, Rob. I mean, yes, RTD beverages are an emerging and fast-growing segment. In fact, RTD sales already outpaced spirits and that gap is likely to widen in the future. Competing in this space is a natural fit for companies like us that have experience packaging beverages in 12-ounce cans and bottles and working with our distributor partners to get those products out there. So, we look forward to competing in this category with Proofpoint and we’ve got Superbird as well, which is at the top end that we launched earlier this year. We have other offerings that we believe will appeal to consumers in our innovation pipeline.

And how much interaction do you see in these ready-to-drink products with hard seltzers or is it too early to say?

I think it's too early to say, Rob. I mean, obviously there is some interaction. It's interesting that we've been asked this question as it relates to the beer category, and more of seltzer's volume and growth is coming from outside of the beer category than from inside the beer category. Our data would suggest that and I've seen our competitors say the same thing, and certainly it's been very positive overall for the beer category.

Terrific. Thank you very much.

Our next question comes from Bill Kirk with MKM Partners.

Hey, thank you for taking the question. So, you talked a bit about the rationale to streamline economy brands, but it also looks like there is some discontinuation of some SKUs for pack sizes on brands like Coors Light and Miller Lite. So can you talk about the decision to streamline pack sizes as it relates to your efficiency efforts?

Yes, thanks Bill, and good morning to you as well. Look, we did a thorough review of all of our SKUs and brands. I would say the majority of the SKUs and certainly all the brand reductions are in our economy space. We did identify a few SKUs that were slow moving and could be substituted with other more profitable SKUs that would make us more effective, and there would have been just a few outside of the economy space that we rationalized; the vast majority is in the economy space.

Got it. And Tracey, as a follow-up, I think you said that US brand volume declines were entirely in economy. Does that mean, excluding the discontinued economy brands, that US brand volumes are positive or do the remaining economy brands still drag that number into the negative?

No, so the SKU review is recent and I would say that it's really the prior economy portfolio that is driving that down.

And Bill, Miller Lite and Coors Light in the second quarter, as I said, I think in my prepared remarks, grew. I haven't been able to say that often over the last sort of 15 years or so, and our above premium portfolio did very well as well, with the Blue Moon franchise coming back strongly, as well as our craft brands. We are very pleased with our seltzer performance.

Thank you. I appreciate it, guys.

Thanks, Bill.

Our fourth question comes from Lauren Lieberman with Barclays.

Great, thanks. Good morning. Let's talk a little bit more about the on-premise strategy and portfolio. So, first I was curious about hard seltzer, the degree to which you're trying to expand presence of your brands in on-premise. I think that you had mentioned Vizzy as an on-premise play in Canada, if I got that wrong, I apologize. But I was curious if that was in the thought process for the U.S.? And then, also just considering the industry-wide discussion of big brands gaining more presence, such as Staropramen, as on-premise reopens, I was curious the degree to which you're starting to see that or have been positioning for that to be the case as reopening continues. Thanks.

Yes, thanks, Lauren. Look, during the pandemic, we did see increased demand for large trusted brands, and this is particularly true in the on-premise. Many on-premise owners are sticking to faster moving brands and this obviously benefits brands like Miller Lite and Coors Light, in particular for us, and we are seeing that trend persist as we move into the new normal. As I said earlier, with Miller Lite and Coors Light, we did grow segment share for the 27th quarter. We're also seeing growth in our above-premium portfolio, with for example, Blue Moon in the US up nearly 15% in the quarter and Peroni up nearly 35%, which has provided us an outstanding opportunity to sample our newer offerings like Blue Moon LightSky and Vizzy and Topo Chico Hard Seltzer, which we unfortunately missed that opportunity for last year. So certainly, I wouldn’t say it’s just Vizzy that's going on-premise; I would say both Vizzy and Topo Chico Hard Seltzer are performing well. It's important to note that Topo Chico is only in a limited number of markets—less than half of the states in the US—and in those states, the desire for its on-premise availability has been very good. In Canada, it's a little too early to say because the restrictions there have dragged on longer than in the United States, so we can't definitively tell how the Canadian on-premise will open up. In Europe, it's been very encouraging. As you know, we are significantly over-indexed to the on-premise. The on-premise recovery that’s taking place in Europe has been very positive for us. In fact, in July, we’ve seen the on-premise business in the UK start to approach 2019 levels and hold there; so that has been very encouraging for us.

And just a follow-up to clarify, within on-premise that’s opened, do you believe that you're gaining share within those outlets due to any degree of greater distribution or relative presence within the channel?

In the US, the answer is yes. In the UK, the data lags a little bit, so I’m not ready to call that yes. We have a hypothesis that we are gaining share, but I don’t have data yet to support that. In Canada, obviously the reopening is not at a place where we can determine that yet, but for our biggest market, the answer is yes, Lauren.

Okay, great. And then, with the plan to bring Vizzy and Topo Chico Hard Seltzer on-premise in the US, do you have the capacity to do that this year, or is that more of a looking into 2022 scenario?

Certainly, we have the capacity. With Vizzy, we have been able to meet all the demand that our distributors have had since the beginning of the year. Topo Chico obviously is more challenging from a supplier point of view. It continues to perform extremely well. It has only one SKU, it has distribution in 16 markets, and supply continues to be a little tight, but production is improving. That will allow us to push distribution, which will include the on-premise, but also enables us to start turning our marketing campaign on behind Topo Chico as well, Lauren. So, I guess it's a convoluted way of saying, yes.

Okay, great, thank you so much.

Next question; Steve Powers with Deutsche Bank.

Thank you very much. A couple of questions centered on brand volume dynamics. In Europe, if my numbers are correct, it looks like you're at about 91% of 2019 in the quarter, which is up from the mid-70s last quarter, which is great. As you think about the back half, do you think you'll hold steady at that mid-90s index level, or do you think your plan is for improvement? Number one. And as we pivot to North America, you're also at 91% index to '19 in the quarter. But that was down from 94% in the first quarter, presumably as the economy brands were deprioritized. As we consider the back half, similar question: do you think you'll recover that index to '19 in the back half? Number two, you mentioned that premium and above premium were at the highest percentage of the overall mix you've ever seen. I'm just curious as to how those price tiers compare to where you were in '19.

Thanks, Steve. Okay, let me see if I can get all these for you. In Europe, as I said, actually, and particularly in the UK, on-premise is really important to us and we've actually seen the on-premise approach 2019 levels for a few weeks now, in fact, a few weeks ago, it was quite substantially above 2019 levels but that was distorted by the Euro finals. We were actually in the UK for a few weeks where we were quite substantially above 2019 levels. That's settled back down now and as I said we are approaching 2019 levels. Central Eastern Europe is a little bit more impacted by tourism, and so we're probably not quite at the UK levels there. In the US, we've seen, as I think I said on the last call, more outlets opened from an on-premise point of view than we were initially expecting, and certainly volume has increased and settled down into a fairly stable level. In the back half of the year, we will have a lot more phase festivals and alliance opportunities which we didn't have in the second half of last year, primarily referring to football, which is a big drinking occasion for us. So, without wishing to put particular goals out there, we are encouraged by what we're seeing from an on-premise and volume perspective. I wasn’t totally sure I got your price tiers question, Steve, so let me try to address it. We did, as I mentioned, have the strongest share of our portfolio being above premium in the second quarter. Based on an NSR point of view it was up into the high teens level, which we haven't seen since the joint venture started, so it's working particularly well. In Q2, our NSR was actually above 2019. Very encouraging signs for sure.

Okay. No, that's helpful. If I put it back to you, it sounds like you do, in North America, expect that the total portfolio—not just the on-premise, but the total brand volume portfolio—can approach 2019 levels in the back half compared to what we saw in the second quarter. Is that a fair playback?

No, not really, Steve. Because of our decisions around the economy portfolio. The economy portfolio, as I said in my prepared remarks and as we announced to our distributors, we are taking a meaningful cut on our economy portfolio to rationalize that. That would be a negative for us, and if you look at our share performance, I think it's quoted that almost 70% of that decline in shares is the economy portfolio for us. We paused a lot of SKUs and brands; some of them, as we announced today, won't come back. Certainly from a premium and above premium point of view, which includes seltzers, we're feeling really good about our position and momentum.

Okay, that helps. Thank you very much. Appreciate it.

Our next question comes from Kevin Grundy of Jefferies.

Hey, good morning everyone. I wanted to tie together some of the topics we've discussed so far on the call, bringing it back to the revenue and EBITDA guidance. Gavin, as you’re assessing the first six months of the year and looking to the balance of the year—specifically around the major puts and takes—you spoke at the investment community in June saying that the company was running ahead of plan. The on-premise recovery certainly seems to be running ahead of plan, and performance of your seltzer portfolio is similarly running ahead of plan. However, the commodity environment seems worse, and the SKU rationalization appears to be moving at a faster pace than anticipated at the start of the year. So, can you sum all this together? I hope you could comment on anything that perhaps we are missing, to put a finer point on the puts and takes as you look back over the past six months and how this has progressed your level of confidence for the company as you consider the balance of the year. And lastly, could you confirm that given the setup here and the strategy, it sounds like the inclination will be to reinvest any top line upside if you could just confirm that?

Thanks, Kevin. A lot going on there. The two things which I would say when we talked to the investment community in Q1 didn't transpire as we were expecting: first, Canada, the reopening of the on-premise and the continuation of the lockdown went on longer than we anticipated; and second, in the UK, we were expecting so-called Freedom Day to be back in June, and that was delayed into July. Those are the two things that we didn't know at that time. From a revitalization plan point of view, yes, the whole rationale for the revitalization plan is to drive both top line and bottom line growth, and the first year was always going to be a reinvestment year. That was supposed to be last year, but we’ve been through all the reasons why that didn’t make sense. We are reinvesting behind our brands this year; we increased our marketing spend meaningfully in the second quarter. There were a couple of things that didn’t make sense for us to do, like investing significantly in marketing in Canada while the market was closed, and delaying the UK rollout by a month. That was likely marketing spend we would have allocated in Q2 and it will now move into the back half. Our supply situation has improved significantly since the cyber-security attack, and our fast-moving brands and SKUs, with the exception of a few, our inventory levels are higher than at the same time last year. This improvement allows us to emphasize our brands better. We’re now working with our partners to increase supply in the third quarter and beyond, which will be reflected in our marketing efforts. I hope that answers your question, Kevin.

No, thanks, Gavin. It's extremely helpful. If I could squeeze in one quick follow-up with Tracey on the cadence of the margin profile for this company. A lot of discussion is on the ability for the company to reach pre-pandemic levels as you look at, I understand there’s volatility still in the environment. How should investors think about balancing the need to reinvest and getting investment levels back to pre-pandemic levels? Is there any reason to think that over the next couple of years, at the total company level, margins should not reach where they were in 2019? Then I'll pass it on.

Yes, we have not given guidance beyond this year, but as Gavin says, the revitalization plan is focused on premiumization, which obviously comes with higher margins. It also includes cost-saving initiatives in our breweries and from a G&A point of view, so that should help our margins. Beyond that, we haven’t provided specific guidance, but I would just consider those items, specifically related to revitalization.

Very good, I'll leave it there. Thank you. Good luck.

Thanks, Kevin.

Thank you.

Our next question comes from Nadine Sarwat with Bernstein.

Yes, good morning everybody. Thank you for taking my question. I want to zoom in a little bit more on Europe. I mean, how much of the volume growth that you saw in Europe came from restocking at distributor or retailer levels, especially given the trade? As you said, Freedom Day was meant to be in June, then it was moved to July. Also, any update on the state of the inventories now and how that can help us think about Q3? Thank you.

Thanks, Nadine. As far as inventory levels, is that a question for Europe or the U.S.?

Maybe we can kick off with Europe and then that would actually be my follow-up on the U.S.?

Okay. Well, in Europe, we experienced gradual increases as the market reopened. As you know, we have been for outdoor consumption on April 12, then moved indoors on May 17, and then obviously fully opened on July 19. We saw on-premise volumes in Q2 average around 70% of pre-pandemic levels and as I said in July, we’ve seen the on-premise really start to approach 2019 levels. There wasn’t one week or two-week buildup of inventory in the on-premise; I would say that was quite progressive. Frankly, we don’t hold significant inventories in the UK at all, so it’s not going to be materially impactful one way or another. As far as inventories in the U.S. are concerned, we said we wanted to be in a better place by Memorial Day and we wanted to be in good shape by July 4th with our big brands and our fast-moving SKUs, and certainly cans were always the biggest challenge. We delivered what we set out to do with cans for our major brands and large packs. The inventory levels for those SKUs have been above the levels we had in 2020, so we’re making good progress there.

Great, that's very helpful. And then, if I could squeeze in one more follow-up: a lot of questions so far on Topo Chico. Can you give us any indication as to the consumer data you’re getting, how much of that performance is coming from new trials versus repeat buys? Any additional color would be helpful.

Yes, Nadine. The demand for Topo Chico is incredibly strong. It only has one SKU, and we've only got distribution in 16 markets. It's already the number three new item in the segment. It's quickly become the fastest trading seltzer brand in Texas, the number three fastest turning seltzer overall, right behind White Claw and Truly. Our supply continues to be tight, but our production has improved. That is going to allow us to push distribution, and our distributors and retail partners have strong belief in this brand. We're seeing that from a consumer point of view as well. It is a top 10 growth brand in the country and, as I said, it's in less than half of the states. Regarding the source of our volume, it’s coming from across all demographic groups; there is no one particular demographic dominating. I'm sure it's taking share from some of our competitors, yes, for sure.

Okay, thank you. I'll turn it over.

Thanks, Nadine.

Our next question comes from Laurent Grandet with Guggenheim.

Thank you and good afternoon, everyone. I have a set of questions, the first one is really about seltzers. You mentioned that Coors Seltzer has been stopped, but your goal to reach 10% of this seltzer category by year-end remains. Can you provide some insight on how you would bridge the gap from where you are right now to 10%? With the loss of Coors Seltzer, would you be pushing for Vizzy in the short term to gain more shelf space, and how comfortable are you with that assessment? Additionally, do you have enough manufacturing capacity to launch Topo Chico to be done in-house sooner? Has that stoppage impacted the timeline for Topo Chico to roll out into more states?

Thanks, Laurent. Regarding our 10% share goal, as I mentioned, I think we have two clear and differentiated winners with Vizzy and Topo Chico. With Vizzy, we are seeing strong traction with the innovation we brought, particularly with the variety pack and Vizzy Lemonade. We're observing almost a two-third increase in the velocity of each of those SKUs with retailers. We will continue to fuel Vizzy's momentum; we have more innovation coming. We have had innovation LTOs like a June pride pack and we've just recently launched the Watermelon variety pack. So, it's carved out a unique point of difference in the category, and so much so that we're well on our way to becoming the number four spot in the segment despite all the new entrants in 2021. I’m not going to disclose which brands will take Coors Hard Seltzer's space, but you can assume that we’re going to utilize Coors Hard Seltzer's space to introduce innovations for Vizzy. So, we feel good about Vizzy being a big part of reaching our 10% share goal—as will Topo Chico. As I said to Nadine, I am not going to repeat that, but it does remain incredibly strong. Our supply is improving. We have worked with our third-party suppliers to ramp up their supply, and we will go national when we believe we can adequately supply the markets we are currently in. I mean, our highest demand is still not quite clear for Topo Chico, as we haven’t been able to meet all the demand in Texas, but we're doing equally well in other states. As for bringing the production in-house, we've always said we're planning to bring that in-house in 2022, and that plan is on track. When we do, it will improve our margins, and it's a slightly different process than perhaps Vizzy or Coors Seltzer. But we have the capacity and that’s ready. Happy to take one more question, operator.

Our next question comes from Sean King with UBS.

All right, thanks for getting me in here. One question I have is, what was the cadence of depletions from, I guess we heard in the US it was like a positive mid-single digits back into the back in April to negative 4% for the quarter. Any insights, maybe you could provide on what you're seeing in July?

Thanks, Sean. Look, I mean from the second quarter point of view, most of the decline would have been in the economy space. If you look at our share, I think I said almost approaching 70% of our share loss is in the economy. It's a very intentional decision we've made. It doesn’t mean we don’t think all segments matter; we do believe all segments are important, but we’ve chosen to ensure that we meet the demands of the largest segment of our consumers at this point in time. Most of that decline is driven by our strategic choice around the economy. As for volume guidance into the second half, Sean, we no longer do that as a matter of principle and I know we used to provide that in years past, but we’re not going to give specifics now.

All right. It was worth a shot, but I appreciate the color. Thank you.

Thanks, Sean.

This concludes our question-and-answer session. I would like to turn the conference back to the speakers for any closing remarks.

Thanks very much, operator. Look, I understand there were more questions that we weren't able to get to today due to time constraints. So, please follow up with our Investor Relations team, and we look forward to talking with many of you as the year progresses. Thank you everybody for participating in today's call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.